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Final Practice 2011

# Final Practice 2011 - Econ 352 Intermediate Macroeconomics...

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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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