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1st Midterm Exam

# 1st Midterm Exam - Econ 352 Intermediate Macroeconomics...

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1 Econ 352 YiLi Chien Intermediate Macroeconomics Spring 2011 1 st Midterm Exam Feb 9, 2009 Name:________________________

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2 Part One (40 pts) Instruction: answer the following questions using analytical frameworks. Depict appropriate diagrams if needed. 1. (15 pts) Consider the decision of the competitive, profit- maximizing firm. a) (10 pts) Explain the intuition why the competitive, profit-maximizing firm chooses the optimal labor allocation according to the following equation L W MP P = , meaning that the marginal product of labor is equal to the real wage rate. b) (5 pts) In addition, what the profit- maximizing firm should do if ? L W MP P > Explain your answer. 2. (25 pts) Consider an economy just like the one we’ve seen in class or in the chapter 3. Stocks of labor and capital are fixed. Output is therefore constant (,) Y FKL = Consumption is an increasing function of disposable income Y – T and investment is a decreasing function of the real interest rate r : () ( ), MPC = 0 ( ), 0 dC Y T C CY T dY T dI r I Ir dr = −> = < Government expenditures and taxes are exogenously given: T T G G = = Given that the economy is closed: G I C Y + + = Finally, assume that the marginal propensity to consume (MPC) is between zero and one:
3 1 0 < < MPC (It is not necessary, but you may assume ( ), 0 1 C YT αβ β = +× − < < ) a) (6 pts) Define total saving, private saving and public saving. b) (7 pts) In a graph, describe the equilibrium of financial market (loanable funds market). c) (12 pts) Suppose the government cut the tax (T) by T . What happens to total saving and real interest rate? Use a figure to show your answer. What happens to private saving and public saving? Explain.

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1st Midterm Exam - Econ 352 Intermediate Macroeconomics...

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