Fall 2008 Final Exam Solutions

Fall 2008 Final Exam Solutions - Department of Economics...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Final Exam Professor Sanjay Chugh Fall 2008 December 18, 2008 NAME: The Exam has a total of five (5) questions and pages numbered one (1) through eleven (11). Each question’s total number of points is shown below. Your solutions should consist of some appropriate combination of mathematical analysis, graphical analysis, logical analysis, and economic intuition, but in no case do solutions need to be exceptionally long. Your solutions should get straight to the point – solutions with irrelevant discussions and derivations will be penalized. You are to answer all questions in the spaces provided. You may use two pages (double-sided) of notes. You may NOT use a calculator. Question 1 / 15 Question 2 / 20 Question 3 / 35 Question 4 / 20 Question 5 / 10 TOTAL /100
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1 1. A National Service Program (15 points) . Consider the following radical policy proposal: rather than taxes being levied on individuals and the proceeds of those taxes being used by the government to fund various programs, suppose that every individual pays no taxes of any kind but must give ten hours of his time every week to national service. Here you will analyze this national service program in the context of the (one-period) consumption-leisure model we have studied. Thus, there are now three uses of the individual’s time: work, leisure, and national service (the mandatory 10 hours). Assume the following: - Instituting the national service program has no effect on any prices or wages in the economy. - Any time spent voluntarily performing national service beyond the required 10 hours is considered leisure. a. (8 points) Using the notation we developed in Chapter 2 (i.e., c to denote consumption, n to denote hours of work per week, l to denote hours of leisure per week, P to denote the nominal price of consumption, and W to denote the nominal hourly wage), construct the representative agent’s (weekly) budget constraint in this model with a national service program. Recall that there are 168 hours in one calendar week. Provide brief economic justification for your work. Solution: The individual is required to give 10 hours per week to national service. Thus he has (168-10)=158 hours per week left to allocate to either labor or leisure. Proceeding completely analogously as in the standard model, then, we finally arrive at the budget constraint 158 Pc Wl W ! " . (Refer to Chapter 2 of the Recitation Notes for the full algebraic derivation: the derivation here is identical except that 0 t " by assumption and 168 is replaced by 158). b. (7 points) Now recall the standard consumption-leisure model with no national service program and suppose that both the consumption tax rate is zero and the labor tax rate is zero. How does the slope of the budget constraint in this economy compare with the slope of the budget constraint in the economy with the national service program in part a? Provide brief economic explanation.
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Fall 2008 Final Exam Solutions - Department of Economics...

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