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PracticeFinal2004-2 - Practice Final 2 Econ 102 Question 1...

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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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