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prelims_Macro Prelim June 2004

# prelims_Macro Prelim June 2004 - University of California...

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University of California, Davis Date: June 28, 2004 Department of Economics Time: Four Hours Macroeconomics Reading Time: 20 minutes Preliminary Examination for the Ph. D. Degree Directions: Answer all questions. Note that, while you have four hours for the exam, the test is designed to be finished in 3 hours. 1. Briefly discuss the following statements (keep your answers short and concise): (a) The consumption-based capital asset pricing model is inconsistent with high volatility of stock prices. (b) In real business cycles, the MPK is highly procyclical. This implies that interest rates (i.e. real) will be as well. (c) In the standard Overlapping Generations Model with no technological growth the competitive equilibrium is dynamically inefficient when the growth rate of population is large. (d) The Solow model assumes that all countries converge to their own balanced growth path. Therefore, in the long run, differences in income per capita across countries should be fully explained by differences in their saving rates. 2. Consider the standard set up of the Ramsey model modified to include capital depreciation, taxation of investment and lump sum transfers in the way described below. The representative household maximizes her lifetime utility: () 0 max ( ( )) nt ct uct e d t ρ −− , 0 n >> Subject to the dynamic constraint: () (1 )() () at wt rtat nat Tt τ =+ + And to the transversality condition: 0 lim ( ) 0 t rsd s t ate →∞ ⎛⎞ ⎜⎟ = ⎝⎠ ( ) t c is consumption per capita, ( ) t a are assets per capita, n is the growth rate of the population, is the inter-temporal discount rate, ( ) t w denotes wage and ( ) t r denotes the return to capital. The tax rate on the return to assets is 0 > while ( ) t T is a lump-sum transfer per capita from the government to the families.

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prelims_Macro Prelim June 2004 - University of California...

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