Practice Final 2
Econ 102
Question 1. Short Answer 5 points each
(A) What are the shortcomings of CPI. State and explain two of them.
(B) Suppose GDP = 100, consumption = 65, investment = 20, government
spending = 15, and imports = 10. How much is exports equal to? How
much is Net Exports Equal to?
(C) How does money make transactions smooth? Compare an economy
with money to a barter economy.
(D) Explain two possible sources of the hyperinflation in post WWI
Germany. (You can assume that output was fixed)
(E) Compute the profit for a firm with a production function
θ
θ
−
=
1
t
t
t
L
AK
Y
.
(F) Calculate the price of an asset that pays off $5 tomorrow for sure, $5
with probability 0.5 and $10 with probability 0.5 two periods ahead
and $1 with probability 0.5, $5 with probability 0.4 and $10 with
probability 0.1 three periods ahead and zero otherwise where the
interest rate is zero.
Question 2. Government Debt 20 points
Consider an economy that lasts two periods.
a. The government can tax people and/or issue bonds in order to finance
his fixed expenditure. What are the government budget constraints for
both periods? What is the present value government budget constraint?
(You can assume
0
2
=
=
+
t
t
B
B
)
Suppose that the consumer’s utility is given by:
)
ln(
)
ln(
)
,
(
1
1
+
+
+
=
t
t
t
t
C
C
C
C
U
1
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b. The consumer receives income, pays tax and consumes in both periods.
He can also deposit in the bank and/or buy government bonds in the
first period that yields the same interest rate in the second period. What
are the consumer’s budget constraints in both periods? What is the
present value consumer budget constraint?
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 Spring '08
 Serra
 Economics, Steady State, Inflation, steady state capital, Crusoe

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