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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