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 (doublesided) 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.
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 (oneperiod) consumptionleisure 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
(16810)=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 consumptionleisure 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 '08
 chugh
 Economics, Inflation, Interest Rates, Monetary Policy, Foreign exchange market

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