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# Homework%203 - and the real interest rate is 5% across all...

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Econ 3080-003 Homework Assignment 3 April 18, 2011 Due: Monday, April 25, 2011 From Chapter 15: 1. Using the IS-LM model, determine the impact on stock prices of the following policy changes, at the time the policy is enacted . (a) An unexpected expansionary monetary policy with no change in ﬁscal policy. (b) A fully expected expansionary monetary policy with no change in ﬁscal policy. (c) A fully expected expansionary monetary policy with unexpected expansionary ﬁscal policy. 1

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2. From Chapter 16: Consider a consumer who lives for three periods: youth, middle age, and old age. When young he earns \$20,000 in labor income. Earnings in middle age are uncertain: there’s a 50% of earning \$40,000 and a 50% chance of earning \$100,000. When old, he spends the savings from earlier periods and has no labor income. Assume inﬂation and expected inﬂation are 0,
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Unformatted text preview: and the real interest rate is 5% across all periods. (a) What is the expected value of earnings in middle age? Given this number, what is the present value of lifetime labor earnings? If the consumer wants to have constant expected consumption over his entire life, how much will he consume in each period? How much will he save in each period? (b) Suppose the consumer wants consumption of at least \$20,000 in each period. This means considering the worst outcome for income in middle age. If income is only \$40,000 in middle age how much should he consume when young to guarantee consumption of at least \$20,000 in each period? (c) What eﬀect does uncertainty about income have on saving (or borrowing) by young consumers? 2...
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## This note was uploaded on 04/30/2011 for the course ECON 234 taught by Professor Koki during the Spring '11 term at Punjab Engineering College.

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Homework%203 - and the real interest rate is 5% across all...

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