prelims_Macro Prelim July 2007

prelims_Macro Prelim July 2007 - University of California...

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University of California, Davis Date: July 2, 2007 Department of Economics Time: 5 hours Macroeconomics Reading Time: 20 minutes PRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all questions. SHORT QUESTIONS (Each question is worth 10 points.) 1. What is dynamic e¢ ciency? Can the steady-state equilibrium in the Ramsey model be dynamically ine¢ cient? Why or why not? 2. Assume that consumption growth is random and has the following representa- tion: c t +1 c t = (1 + g c ) " t +1 where it is assumed that ln " t is distributed normally with E (ln " t ) = ° ° 2 c = 2 and V ar (ln " t ) = ° 2 c : In an economy populated by identical agents with con- stant relative risk aversion utility, use the Euler equation associated with real bonds to derive an expression for the equilibrium real interest rate. Use the approximation that ln (1 + x ) ± x to simplify the expression. Discuss the im- plications of this expression and, in particular, discuss the impact that uncer- tainty has on the real interest rate. Also discuss the implications that your result has for the risk-free rate puzzle. (Recall that if
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