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mc4_revised_4_18_11

mc4_revised_4_18_11 - Mock Multiple Choice 2-Period Model...

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Unformatted text preview: Mock Multiple Choice, 2-Period Model Kyle F. Herkenhoff * UCLA Department of Economics April 18, 2011 1 2-Period Model Which of the following are true? (a) If you are a saver, and r ↑ , then savings must increase. (b) If you are a saver, and r ↑ , then the saver is better off. (c) If you are a borrower, and r ↑ , then borrowing must increase. (d) If you are a borrower, and r ↑ , then c 2 must increase. (e) Two of the above (f) None of the above * Correspondence: [email protected] 1 Note: With any budget constraint, the coefficients of the variables can be read as prices. c 1 + c 2 1 + r = Y 1 + Y 2 1 + r 1 |{z} Price c 1 · c 1 + 1 1 + r | {z } Price c 2 · c 2 = Y 1 + Y 2 1 + r (a) If you are a saver, and r ↑ , then savings must increase. FALSE – Substitution Effect: For a saver r ↑ , the price of c 2 is 1 1+ r and this decreases, so we substitute away from c 1 toward c 2 ... this tends to increase savings because we must split our endowment Y 1 ( Y 1 doesnt change) between c...
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mc4_revised_4_18_11 - Mock Multiple Choice 2-Period Model...

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