exam_two - Exam No. 2 Econ 100A, Spring 2008 Thomas Koch...

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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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exam_two - Exam No. 2 Econ 100A, Spring 2008 Thomas Koch...

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