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 tPfor the price for asset iin period t, ,1i tP+for the price for asset iin period t+1,,1i tD+for the cash payment for asset iin period t+1 and rfor the interest rate between period tand 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 yearwith 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?
has intentionally blurred sections.
Sign up to view the full version.