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Unformatted text preview: Practice Final 1 Econ 102 Question 1. Short Answer- 5 points each (A) Suppose that the government doesnt increase the money supply today but the people expect that he will in the future. Explain what will happen to the price level today. (You can assume that output and real interest rate is constant.) What happens to the velocity? (B) Suppose that people believe the price level will go up by 5 percent. If the real interest rate is 2 percent, what should the nominal interest be. (C) Explain what will happen to the steady state unemployment rate when the job separation rate increases. Use the steady state unemployment rate formula to explain. (D) The Bushs seem to like tax cuts. They think that a tax cut will give people more money to spend and stimulate the economy. What are your thoughts? (You can assume that the tax is lump-sum) (E) Explain why GDP is not a perfect measure for national wealth. (F) What is the basic formula for asset pricing? Explain the intuition of this formula. Question 2. Consumption- 20 points Suppose that the consumers utility function is given by, 1 ln ln + + = t t C C u If his period by period budget constraints are S r Y C S Y C t t t t ) 1 ( 1 1 + + = = + + a. What is the present value budget constraint? b. Solve for the optimal consumption and saving. 1 c. For Y , , 1 = t 10 1 = + t Y = r , what are the optimal consumption and savings? Draw the equilibrium in a graph. d. Draw in the same graph the case when the consumer cannot borrow at all in period 1. Will the consumer be better off or worse off?...
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- Spring '08