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 (doublesided) of notes.
You may
not
use a calculator.
Problem 3
/ 25
Problem 4
/ 25
TOTAL PART 2
/ 50
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Problem 3:
TwoPeriod Economy (25 points).
Consider a twoperiod 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 period1 consumption is
1
100
P
, the nominal price of period2 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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 Spring '08
 chugh
 Economics, Government, Inflation, Debt, Interest, Nominal Interest Rate, representative consumer

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