tutorial2questions - at the end of period 2. Their lifetime...

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EC2102 Macroeconomic Analysis I Tutorial 2, Week 5 (February 7-11, 2011) Question 1 (This is a continuation of Question 1 of Tutorial 1) ( v ) What is the equilibrium real rate of interest at which the credit market clears? Express your solution as a function of , and show that dr =d& < 0 : What is the economic interpretation of dr 0? ( vi ) Let = 0 : 8 . Explicitly solve for Mr A and B and savings. Who is a saver? And who is a lender? Explain why Mr A and Mr B both have a ±at consumption pro²le (they consume the same amount each period). ( vii ) Now illustrate your solution to Mr A using graphs, and in particular, where is the endowment point relative to their optimal consumption bundles? ( viii ) De²ne a competitive equilibrium in this economy. ( ix ) Why is the equilibrium ³competitive´? Explain why we only need to check that either the credit or goods market clears. Question 2 Consider an economy with only 2 individuals, Mr A and Mr B . They each live for 2 periods only; they are both young in period 1 and old in period 2, and they die
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Unformatted text preview: at the end of period 2. Their lifetime utility function is U ( c 1 ; c 2 ) = u ( c 1 ) + &amp;u ( c 2 ) ; where subscript t; t = 1 ; 2 ; denotes period t: Further suppose that u ( c 1 ) = ln ( c 1 ) and u ( c 2 ) = ln ( c 2 ) : Both Mr A and B can borrow and lend freely at a real interest rate of r . They are each endowed with 50 units of consumption goods in both the ²rst and second periods. ( i ) Show that u ( c t ) &gt; and u 00 ( c t ) &lt; , t = 1 ; 2 , for c t &gt; : ( ii ) Draw the ²rst period utility function u ( c 1 ) . Does it matter that for values of c 1 from 0 to 1 that the utility function takes on negative values? Why? 1 ( iii ) Without any computation, tell me what Mr A and B &amp;s optimal consumption and savings choices ( c &amp; 1 ; c &amp; 2 ; s &amp; 1 ; s &amp; 2 ) are. ( iv ) Explain the intuition for your result in part ( iii ) . 2...
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tutorial2questions - at the end of period 2. Their lifetime...

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