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Spring 2009 Midterm Exam Part 1

# Spring 2009 Midterm Exam Part 1 - Department of Economics...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Midterm Exam – Part 1 Professor Sanjay Chugh Spring 2009 March 9, 2009 NAME: TA’S NAME: Part 1 of the Exam has a total of two (2) problems and pages numbered one (1) through six (6). Each problem’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 one page (double-sided) of notes. You may not use a calculator. Problem 1 / 20 Problem 2 / 30 TOTAL PART 1 / 50 TOTAL PART 2 / 50 TOTAL / 100

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1 Problem 1: Consumption and Savings in the Two-Period Economy (20 points). Consider a two-period economy (with no government and hence no taxes), in which the representative consumer has no control over his income. The lifetime utility function of the representative consumer is ! " 1 2 1 2 , ln ln u c c c c # \$ , where ln stands for the natural logarithm. We will work here in nominal terms: suppose the consumer’s present discounted value of ALL lifetime NOMINAL income is 52. For part a of this problem, suppose also the following: 1. The nominal interest rate between period 1 and period 2 is zero (i.e., i = 0, which is roughly what the nominal Federal Funds interest rate is currently).
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