Econ 352
YiLi Chien
Intermediate Macroeconomics
Spring 2011
Practice Final Exam
Part One (25pts)
Instruction:
answer the following questions using analytical frameworks. Depict
appropriate diagrams if needed.
1.
(10 pts)
Use
,
i t
P
for the price for asset
i
in period
t
,
,
1
i t
P
+
for the price for asset
i
in period
t+1,
,
1
i t
D
+
for the cash payment for asset
i
in period
t+1
and
r
for the interest rate between period
t
and
t+1
.
a)
(6 pts) Write down the basic asset pricing formula. Describe the economic intuition
behind the formula.
b)
(4 pts) Suppose
the interest rate is 10 percent per year, and there is an asset that
pays off $100 next year
with 80% probability, and pays off $1,000 with 20%
probability.
Use the asset pricing formula to price this asset.
2.
(15 pts)
In a two period consumption model, what is the impact of consumption choices for a
saver
, when the interest rate goes up?
a)
(7 pts) Discuss the income effect and substitute effects on consumption choices in
both periods.
Does a higher interest rate stimulate saving?
b)
(8 pts) Draw a figure with an indifference curve, a budget line, and an endowment
point that shows the consumer’s choices before and after interest rate changes. Does
a higher interest rate benefit the saver?

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