Fall 06 Midterm II

Fall 06 Midterm II - Midterm II Econ 110 Fall 2006 100...

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1 Midterm II Econ 110 Fall 2006 100 points USE DIFFERENT BLUE BOOKS FOR PARTS I AND II Good luck. PART I: 50 POINTS 1. ( 6 points ) Is it true that higher real interest rates are always associated with lower equilibrium levels of investment? Explain why it is so, if true, or give a counterexample, if false. 2. ( 36 points ) Suppose there is a temporary negative productivity shock in a closed economy in the Classical Model. Assume fixed labor supply . a) ( 6 points ) Explain what happens to equilibrium consumption, output, interest rate and price level. b) ( 8 points ) Compare your answer with what would happen in a model without capital and investment. In particular, how does the presence of investment affect consumption in this example of a temporary shock? Would investment affect consumption in the same way if this were a permanent shock? c) ( 8 points ) Now suppose this is a small open economy which is currently experiencing a balanced current account (CA). In that case, again with fixed labor, what happens with a temporary negative productivity shock (the shock does
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Fall 06 Midterm II - Midterm II Econ 110 Fall 2006 100...

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