Problem_set_2_sol

# Problem_set_2_sol - PROBLEM SET#2 SOLUTIONS EC202 FALL...

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P ROBLEM S ET #2 - S OLUTIONS EC202 – F ALL 2010 (I NSTRUCTOR : O LIVETTI ) ****************************************** S ECTION 1 – M ULTIPLE C HOICE , 30 POINTS TOTAL 1 POINT FOR EACH QUESTION ****************************************** 1. In the rental market in the Barro model, households buy and sell: a. real estate. c. the use of capital for one period. b. consumer durables like cars. d. all of the above. ANS: C 2. A bond that is traded in the bond market in the Barro model is piece of paper that: a. is the lenders claim to the amount owed by the borrower. c. is the lenders claim to ownership in the company. b. is the borrowers claim to the amount owed by the lender. d. assures the person is who they say they are. ANS: A 3. If the rental price of a capital good is \$100 and the price level is 25, then when renting the capital the owner’s real earnings are: a. 4 units of output per period. c. seventy five units of output per period. b. 2,500 units of output per period. d. one-forth unit of output per period. ANS: A 4. Over all households bonds, B, must total zero because: a. there are no bonds in the model. c. bonds are not important in the model. b. for every dollar loaned a dollar is borrowed in the bond market. d. bonds are illegal in most economies. ANS: B 5. If the principal of a bond is \$1000, it matures in a year and the interest rate is 6%, then at the end of the year the lender will receive: a. \$1000. c. \$60. b. \$1060. d. \$940. ANS: B

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6. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK), households can use their income to: a. acquire more money. c. pay more wages. b. acquire more bonds. d. all of the above. ANS: B 7. If a household this week produces 20 of its product at a cost of 50 cents each, sells them for \$1, works 40 hours at \$10 per hour, must pay \$10 in interest owed on its borrowing and rents out 10 units of capital at \$100 for the week, the household’s, nominal income is: a. \$1,440 this week. c. \$1,420 this week. b. \$1,400 this week. d. none of the above. ANS: B 8 .The household real budget constraint C + ( B/P) + K = ( /P)+ (w/P)•L + i•((B/P) + K). shows that in our model: a. households get income only from labor. c. households can spend their income only on consumption. b. households can spend their income on consumption or acquiring more capital and bonds. d. households view bonds as riskier than capital. ANS: B 9. In the market clearing model, nominal saving is: a. the change in money + the change in bonds + the change in the nominal value of capital. c. + wL + i(B + PK) - PC. b. nominal income less nominal consumption. d. all of the above. ANS: D 10. Figure 6.1
Real C Real S In Figure 6.1 an increase in real income is shown by: a. a shift of the curve up and to the right. c. a shift of the curve inward and to the left.

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Problem_set_2_sol - PROBLEM SET#2 SOLUTIONS EC202 FALL...

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