325_PracticePS3

325_PracticePS3 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 3 Professor Sanjay Chugh Spring 2011 1. The Wealth Effect on Consumption. Consider the two-period consumption-savings model we have been developing in class. a. As in class, maintain the simplifying assumption that 0 0 A . Show graphically how a rise in the period-1 nominal price of consumption can lead to a decrease in optimal consumption in period 1. b. Now suppose that 0 0 A z . Show graphically how a decrease in 0 A can lead to a decrease in optimal consumption in period 1. c. The two effects you analyzed in parts a and b work through seemingly different channels. Actually, they are usefully thought of as operating through the same broadly-defined channel. Explain this broadly-defined channel. 2. A Three-Period Economy. Rather than the two-period consumption-savings model economy we have been developing in class, consider a three-period model that is analogous to the two-period model. a. Derive a relation similar to expression 11 on page 48 in the Lecture Text for the
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_PracticePS3 - Department of Economics University of...

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