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ECO202Y-m07 - UNIVERSITY OF TORONTO Faculty of Art and...

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Unformatted text preview: UNIVERSITY OF TORONTO Faculty of Art and Science April-May Examinations 2007 ECOZOZYIY Duration: 2 hours Total Points: 100 points Examination Aid: Only Regular Calculators. Instructions: 0 This test consists of 6 questions in 13 pages, single-sided, including the cover page. 0 Answers must be organized, legible, brief, and to the point, otherwise you may lose points. 0 You need to write the answers only in provided space for each question. Last Name: First Name: Student Number: Circle Your Section: L0101 (R 1:00-3:00) L5101 (T 6:00-8:00) 1)- [Total 15 points] a)- [10 points] Briefly explain the Life Cycle Hypothesis of consumption. b)- [5 points] Consider a consumer Whose consumption behavior follows the Life cycle Hypothesis. She lives and works like the graph in below. She prefers the same consumption every year. Find her consumption. $ Income 120,000 .......................................................................... / ypfion 2 out of 13 3 out of 13 2)- [15 marks] Suppose in a given economy, people live for only two periods, can lend and borrow at 25% per period, and have preferences such that the optimal consumption pattern is equal consumption levels in both periods: CC = G; a)- [10 marks] Suppose Jack has $300 income in period 1, and $183 in period 2. Find his optimal consumption levels for both periods, and optimal lending/borrowing. Draw a complete graph including the budget constraint, indifference curve, and fl related values and labels. b)- [5 mark] Suppose Jack is a borrowing constrained person. Find his optimal consumption levels for both periods, and optimal lending/borrowing. Draw a new graph. 4 out of 13 5 out of 13 3)- [Total 20 points] a)- [5 points] If price of a 15-year zero coupon bond is $555.26. Find the yield of the bond. For following questions, suppose the required rate of return is 8% a year. b)- [5 marks] What is the price of a perpetuity, which pays $2000 a year, starting 12 years from now. c)- [5 marks] What is the value of an investment, which pays $2000 a year for 30 years, starting 8 years from now. d)- [5 marks] A project needs $120,000 initial investment. Then it will pay back $4,000 next year, which will be growing 1% a year, every year forever. Is this project profitable? —- . —N PV =A. _1_Q_+_1)_ 6 out of 13 7 out of 13 4)- [Total 20 points] Consider an open economy with a credible pegged exchange rate regime. Suppose, while the economy is in its medium run equilibrium, the foreign price level increases. a)- [6 points] Draw a graph, showing the status of the economy in its short run equilibrium. Just write how these variables change compare to the initial medium run equilibrium: investment, capital flow, trade balance, real exchange rates, and money supply. [No explanation] b)- [5 points] In a new graph, repeat your graphs in part a, and add the new medium run equilibrium, if the government and Central Bank do not do anming. Just write how these variables change compare to the initial medium run equilibrium: capital flow, trade balance, and real exchange rate. [No explanation] c)- [5 points] In a new graph, repeat your ggaphs in part a, and add the new medium run equilibrium, if the Central Bank revalues the exchange rate. Just write how these variables change compare to the initial medium run equilibrium: trade balance, and real exchange rate. [No explanation] d)- [4 points] In a new graph, repeat your graphs in part a, and add the new medium run equilibrium, if the government cuts its expenditure. Just write how these variables change compare to the initial medium run equilibrium: trade balance, and real exchange rate. [No explanation] 8 out of 13 9 out of 13 5)- [15 points] Consider an economy with AK technology: Yt= AKt Where A is a constant. In this economy labor force growth rate is n, and depreciation rate is 6, and saving rate is s. a)- [7 points] Using some calculations, verify if this economy has a steady state equilibrium. b)- [5 points] If for a poor country, A= l, s = 0.15, n= 1%, 5 = 5%; and for a rich country, A= 1.1, s = 0.16, n= 3%, 5 = 6%. What would be the status of these two economies after a long time? Why? c)- [3 points] Comment on convergence properties of this model in general. 10 out of 13 11 out of 13 6)- [15 marks] Use a set of WS/PS, AS/AD, and LM/IS curves to show the short run and medium rum equilibrium impact of a government policy to enhance the competition level in goods market. [No explanation is necessary. Only an organized and complete graph receives the full mark] 12 out of 13 13 out of 13 ...
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