Exam No. 2
Econ 100A, Spring 2008
Thomas Koch
Write your name here:
Part I: Short Answer
Answer each question listed below. Partial credit will be awarded,
so
show all work
. The points available per question are indicated at the beginning of each
question.
Question 1
Suppose that you are facing an intertemporal consumption problem—you earn
m
1
today, and
m
2
tomorrow. You can borrow or lend overnight at interest rate
r
. Unfor
tunately, because of rising gas prices, there is going to be inflation. Consuming a good that
costs $1 today is going to cost (1 +
π
) tomorrow, where
π
is the inflation rate.
•
3 points
Write down your present value budget constraint. Plot out your budget con
straint, with today’s consumption on the horizontal axis, and tomorrow’s consumption
on the vertical axis. Write out the slope of the budget constraint, and mark where it
intercepts the axes.
•
1 point
Suppose that
r
= 0
.
1 and
π
= 0
.
05.
How much will you consume in each
period if consumption today is a perfect substitute for consumption tomorrow—i.e.,
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 Winter '08
 Staff
 Economics, vertical axis, Ditch Diggers International, ditch diggers

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