answers mid-term - Department of Economics Queen's...

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Department of Economics Queen's University ECON320: Macroeconomic Theory II Instructor: Khazri Afifa mid-term exam Wednesday, October 18, 2004 Section A (40percent) : Read the following statements and indicate whether they are True , False or Uncertain . Briefly explain your answer. All questions have equal value. NO MARKS WILL BE GIVEN FOR UNSUPPORTED ANSWERS. 1 ) In the Solow model, both capital growth and population growth have an effect on the steady state rate of growth in income per worker. False In the Solow model, we find that only technological progress can affect the steady state rate of growth in income per worker. Growth in the capital stock(through high saving) has no effect on the steady state growth rate of income per worker; neither does population growth. But technological progress can lead to sustained growth. 2) Changes in consumption are predictable if consumers obey the permanent-income hypothesis and have rational expectations. False According to Hall 1976, the combination of the permanent income hypothesis and rational expectations implies that consumption follows a random walk: 1 1 + + + = t t t C C ε Changes in consumption reflect “surprises” about lifetime income. If consumers are optimally using all available information, then they should be surprised only by events that were entirely unpredictable. Therefore, changes in their consumption should be unpredictable as well. The rational expectations approach to consumption has implications not only for forecasting but also for the analysis of economic policies. If consumers obey the permanent income hypothesis and have rational expectations, then only unexpected policy changes influence consumption. Hence, if consumers have rational expectations, policymakers influence the economy not only through their actions but also through the public’s expectation of their actions. Expectations, however, cannot be observed directly. Therefore, it is pften hard to know how and when changes fiscal policy alter aggregate demand. 3)
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This note was uploaded on 09/22/2011 for the course ECON 183544 at Pennsylvania State University, University Park.

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answers mid-term - Department of Economics Queen's...

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