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2008FALL-Example-Midterm2

2008FALL-Example-Midterm2 - Total Exam Grade/100pts...

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Unformatted text preview: Total Exam Grade: ( ......... /100pts) Multiple Choice Quest-ions ( ......... /40pts) (Bpts each) 1. The Ricardian equivalence theorem implies that a government debt policy must be handled correctly for the economy to prosper. b the amounts of government spending are neutral. c an increase in government spending has no effect on the economy, as long as there is an equal change ' in taxes. , . @the timing of taxes collected by the government is neutral. 2'. lntertemporal decisions involve economic decisions - (a) made within a given period of time. (13) made in between two periods of time. @involving trade-offs across periods of time. (cl) that ignore concerns about the future. 3. If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving, then'a rise in the real interest rate leads to a mmmmm in “current” consumption and a _____ in saving, for someone who’s a borrower. a fall; fall fall; rise c rise; rise cl rise; fall 4. If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved of the extra income. more than $200 (b) less than $200 (e) exactly $200 (d) none 5. The assumption that current—period consumption demand is negatively related to the real interest rate is justified as long as the (i) income effect dominates the substitution effect. (ii) substitution effect dominates the income effect. (iii) representative consumer is a borrower. (iv) representative consumer is a lender. (a) i (b) ii Q ii and iii (a) iand it 6. Why do consumers benefit from pay«asuyou~go social security? (a) It keeps inflation in check as money is redistributed. (b) It is a better way than taxes to finance the government. (0) It forces people to save more than they would otherwise. Q With sufficiently high population growth, many young contribute to the benefits of the old. 7. When drawn against the real interest rate, the optimal investment schedule; shifts to the right if (a) current total factor productivity 2 increases. (b) current total factor productivity 2 decreases. Q future total factor productivity 2’ increases. (d) future total factor productivity 2’ decreases. 8. Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock? a raises it, because the future marginal productivity of capital is higher b lowers it, because the future marginal productivity of capital is lower, @aises it, because the opportunity cost of capital is new lower d lowers it, because the opportunity cost of capital is now higher % Longer Questions 1. (........./25pts) Consider an economy where a consumer lives for two periods. The consumer’s current income is 100 and future income is 60. The current government expenditure is 30 and future government expenditure is 30. The consumer pays lumpusum taxes of 20 in the period. The equilibrium real interest rate is zero. The consumer wants to have equal amount of consumption in each period. - , 3 Calculate the government deficit/surplus. What is the future tax paid by the consumer? is Calculate the current consumption of the consumer. What is the private saving? What is national saving? - 7 0 Assume that the government expenditures are fixed. But the government increases current taxes by 10. How does this tax change affect the future taxes, current consumption, private saving, and national saving? 3O ,‘ Sblucf sari (b) ajam/ we get 109” o and o'. I I - P‘s-9'? :20 19’ [OD / (LT—Clz'go 7) SP”! C T 7 s B! i E ga- EH 2. ( ......... /25pts) Consider the problem of a consumer who lives for two periods. The consumer earns 8 ' coconuts per hour in the current period and 10 coconuts per hour in the second period.The real interest rate is 100%. Consumer’s utility function is 111(0) +1n(l) +.1n(C”) + 1110’). The consumer does not receive any profits from the firm and does not pay any taxes to the government. _The consumer'stotal time endowment is 5000 hours in each period. (a) Write down the first period and second period budget constraint for the consumer. (1)) Write down the lifetime budget constraint. (c) Write down the optimality conditions. (d) Using the Optirnality'condition and the lifetime budget constraint, solve the optimal C, C", l, l’,VNS and N 5’ for the consumer. to m s :. Moos—Us we {met WOW MW} é'etot50mi-i6’liflis ,5 mm.) (was) tvagwt comiNMi I C' {6 60091706" 55 K 3. ( .......... /10pts) Consider the problem of a-firrn that lives for two periods. The managers of the firm is trying to decide how many machines they need to buy in the current period. If they buy K machines in the current period, they will be able to produce Y : 100K m [(2 units of goods in the future. The price of one machine is $1000 in the current period. Each good will be sold at $22 in. the future period.‘ The firm currently has no machines and the current output is zero. - The machine will be scrapped after the production takes place in the second period. Assuming that the nominal interest rate R is 10%, formulate the investment problem of the firm and calculate the optimal number of machines the firm‘should buy. :5 133—9 -_.— \4.(Ooo Hr - W W ' Curren’l' COQl’ Q’F- ()qu PV 01C L machMX/J MM 9th Max - K L (lQOlL‘ Ll) 21' lOooxza‘Lor/c L 4-1 L JmLL Ha all/naive wflh reveal )0 L lo Maxamkp moo -» 40K e0 3) he” L . . _ ()de 7i?" a; MO’CA’W- ...
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