Practice MT2 Spring 2011

Practice MT2 Spring 2011 - Practice Questions for Midterm...

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Practice Questions for Midterm 2, Spring 2011 Part 1: Short Answer Problems 1. The following tables contain historical data on the US unemployment rate and labor force participation rate, and the most recent information about the number of people employed, unemployed and the size of the adult civilian non-institutional population. April 2009: a. (4 points) Calculate the unemployment rate and the labor force participation rate in April 2009. b. (2 points) Does it seem like that some unemployed workers have gotten discouraged about their chances of finding a job? Explain. Page 1 5.8% 66.1% Oct 08 6.6% 66.0% Jan 09 7.5% 65.5% Millions of people Employed 141.0 Unemployed 13.7 Population (adult civilian) 235.2 unemployment rate labor force participation rate Jan 08 4.9% 66.1% Apr 08 5.0% 66.0% Jul 08
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2. (8 points) Consider the following two statements. 1. Over the course of the 20 th century average weekly hours in manufacturing in th United States decreased from about 52 to about 42. Economists believe that this secular decline in labor hours is largely due to total factor productivity rising steadily over the period. 2. During a typical business cycle expansion labor hours increase while during a recession they fall. Advocates of the real business cycle theory believe that these fluctuations in labor are driven by fluctuations in total factor productivity. In particular, in an expansion total factor productivity is relatively high, which leads to more labor being hired. These two arguments appear to be inconsistent with each other. (The first asserts that higher TFP leads to lower labor hours, the second asserts that higher TFP leads to higher labor hours.) Explain how both arguments can be correct. Use the graph of the labor market to illustrate your answer. Make sure that you label everything carefully in your graphs. 3. (_____ of 6 points) Let a consumer's marginal propensity to consume be 0.3, and the real interest rate be 20%. Assume that the consumer's current income falls by 60 units and future income increases by 120 units. a. (_____ of 2 points) Calculate the change in the consumer's PVLR. b. (_____ of 4 points) By how much do the consumer's consumption and saving change? 4. Rosa and Karl both obey the two-period Fisher model of consumption. Rosa earns y R =10 in the first period and y R f =36 in the second period. Karl earns y K =40 in the first period and nothing in the second period ( y K f =0) . Both of them can borrow or lend at the net real interest rate r . a. (3 points) You observe that Karl consumes c K =20 in the first period and c K f =24 in the second period. Use Karl’s intertemporal budget constraint to prove that the real interest rate must be r =20%. b. (4 points) At r =20%, calculate the present value of Rosa’s lifetime resources. Assume that Karl and Rosa have identical utility functions. What is Rosa’s optimal consumption plan? Explain.
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This note was uploaded on 06/09/2011 for the course ECON 320 taught by Professor Azzamonti during the Spring '08 term at University of Texas at Austin.

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Practice MT2 Spring 2011 - Practice Questions for Midterm...

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