Econ 304 Sonoma State University Dr. Robert Eyler Fall 2007 Homework #2: Due September 20, 2007 Please answer the questions fully and draw graphs or use equations when needed. Show all your work and remember that these are practice for the midterm questions, so try your best here. It will pay off later. 1. Explain the consumption-saving tradeoff of the consumer by using the following methods: a. The microeconomic foundations analogous to the utility maximizing consumer; and b. The macroeconomic ideas of intertemporal consumption. c. State and explain the optimal condition for intertemporal consumption, and discuss how the elasticity of intertemporal substitution and the interest rate are connected in terms of “consumption smoothing” 2. The financial markets link households that save and both firms and governments that borrow. a. Explain the role of the real interest rate and how it motivates planned purchases of capital by firms. b.
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