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325_Fall2010_MidtermExamPart2 - Department of Economics...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Midterm Exam – Part 2 Professor Sanjay Chugh Fall 2010 October 14, 2010 NAME: Part 2 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 3 / 25 Problem 4 / 25 TOTAL PART 2 / 50
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1 Problem 3: Two-Period Economy (25 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 ±² 12 1 2 ,l n ucc c c ³ , where ln stands for the natural logarithm (that is not a typo – it is only 1 c that is inside a ln(.) function, c 2 is not inside a ln(.) function). Suppose the following numerical values: the nominal interest rate is 0.05 i , the nominal price of period-1 consumption is 1 100 P , the nominal price of period-2 consumption is 2 105 P , and the consumer begins period 1 with zero net assets. a. (3 points) Is it possible to numerically compute the real interest rate ( r ) between period one and period two? If so, compute it; if not, explain why not.
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325_Fall2010_MidtermExamPart2 - Department of Economics...

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