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# Please answer all questions. You must show all work or points will be taken off. 1.

(50 points total) Suppose we have Dagwoo ! who has a "urrent in"ome of #\$00% an e&pe"te future in"ome of #100%. 'e has (ero in "urrent wealth but plans to inherit #50% of wealth in the future so his e&pe"te wealth is #50%. Dagwoo )s behavior is "onsistent with the life*"+"le theor+ of "onsumption. ,or one! he perfe"tl+ smoothes "onsumption an two! sin"e he is in his peak earning +ears! he is saving now so that he "an maintain his "urrent level of "onsumption in the future. -iven that Dagwoo fa"es a real interest rate of negative 3% (* 0. 0.). Please answer the following questions. a) (5 points) /al"ulate Dagwoo )s optimal "onsumption bun le showing all work. 0hen raw a completely labeled graph (the two perio "onsumption mo el) epi"ting this initial optimal "onsumption bun le as point /12

(10 points for a completely labeled graph be sure to label the no lending / no borrowing point(s) = !/ " and the slope of the budget constraint(s)) b) (5 points) 3ow Dagwoo goes to the o"tor an fin s out that he is not as health+ as he thought (too man+ eating binges4). 0he o"tor tells him that he is fine now but ne&t perio he is likel+ to be ill an that if +ou ha an+thing in life that +ou reall+ wante to o (as in leisure)! +ou shoul o it now. 2s a result! Dagwoo 5s preferen"es "hange so that he prefers to "onsume like our frien 'omer! that is! Dagwoo prefers to "onsume twi"e as mu"h to a+ relative to ne&t perio . 6esolve for Dagwoo 5s optimal "onsumption bun le! given these new preferen"es! an label as point /17.

") ( 5 poiints) 7en 7ernanke an the ,e are finall+ happ+ with the wa+ the e"onom+ is hea e an to be honest! is now fearful of overheating. 2s su"h! the ,e tightens an the real rate of interest rises to 108 (0.10). -iven his "hange in preferen"es as above in part b)! re"al"ulate the optimal bun le for Dagwoo an a this point to +our graph an label as point /1/.

) (5 points) 9s Dagwoo better off or worse off ue to the rise in the real rate of interest: ;&plain the intuition using the in"ome an substitution effe"ts. e) (5 points) 9n the spa"e below! erive an raw Dagwoo 5s savings fun"tion (this is after Dagwoo went to the o"tor. i.e.! use the information from parts b) an ") onl+.

f) (5 points) -iven +our results from part ) an e) above! i this "ontra"tionar+ monetar+ poli"+ work in terms of "ooling off the e"onom+ (2ssume the e"onom+ is full of other <Dagwoo s< that went to the o"tor like this Dagwoo i ): g) (10 points) 'ow woul +our answers in part ) an e) "hange if Dagwoo woul have never gone to the o"tor an maintaine his perfe"t smoothing preferen"es as in part a): You nee not o the "al"ulations! =ust e&plain with wor s. 7e spe"ifi" an refer to the in"ome an substitution effe"ts an whether or not the+ work in the same or opposite ire"tions an wh+ (for full "re it). 2lso! be sure to "omment on how the savings fun"tion for Dagwoo woul "hange given that he never went to the o"tor. 3ote! this answer is worth 10 points.

\$. (#\$ points total) You own a fleet of offshore fishing boats an +ou nee to etermine how man+ fishing poles +ou nee to bu+ to ma&imi(e profits. Please answer the following questions given the information below. Please be sure to S'>? all work4 2 bran new fishing pole "osts 500 fishing hours (this is +our output) an the rate of epre"iation is 58 (0.05). 0he real interest rate is 108 (.10). 2n the e&pe"te marginal pro u"t of "apital is given b+ @P%f A .00 B 5%.

0he firm also fa"es an effe"tive ta& rate on "apital! what we "all tao (C) A \$58 (.\$5) a) ?hat is the (ta& a =uste ) user "ost of "apital an what is this user "ost e&presse in: (Show work) (\$ points) b) 'ow man+ fishing poles shoul +ou bu+ to ma&imi(e profits: Show work (\$ points) Draw a u"D% graph epi"ting the state of affairs an label this initial profit ma&imi(ing "on ition as point 2.

% correctly drawn and completely labeled diagram is worth 10 points ") 3ow "on itions "hange as the value of the ES ollar epre"iates ( arn F; b+ the ,e 4) an sin"e +ou pur"hase +our fishing poles from abroa ! the real pri"e of bran new fishing poles rises to G00 hours of fishing 6esolve for %1 an show as point 7 on +our u"D% iagram ( \$ points). . ) ;&plain the intuition un erl+ing the "hange in the profit ma&imi(ing level of fishing poles (i.e.! wh+ oes the firm "hange its behavior:)! making sure +ou refer to the firm)s profit ma&imi'ing condition (write it out4). 7e spe"ifi" an write this like +ou were a professional e"onomist4 (use some =argon4)( \$ points)(

3ow suppose we e&perien"e two more "hanges simultaneously (in addition to the change in the real price fishing poles above). 9n parti"ular! +ou "hange +our e&pe"tations on the marginal pro u"tivit+ of "apital! sin"e +ou feel that we are going to go into another re"ession (negative animal spirits) an as a result! +our new e&pe"te marginal pro u"t of "apital fun"tion isI @P%f A \$J0 B 5%. 0he ,e feels the same (in terms of pre i"ting another re"ession) an lowers the real rate own to 58 (0.05). f) 6esolve for the profit ma&imi(ing level of fishing poles given these two (simultaneous) a itional "hanges an a this point to +our iagram as point /.(show work) (\$ points) g) ,inall+! raw a esire investment iagram ("ompletel+ labele with the relevant shift variables note ne&t to the fun"tion in parentheses) epi"ting the initial equilibrium as point 2 (simpl+ raw a negativel+ slope 9D "urve going through point 2). Kabel the initial level of esire investment as 9 2. 3ote importantl+ that we o not have numbers for esire investment! but that)s ok! we are fo"using on the "hange in esire investment. 0hen show! as point 7! the new level of esire investment as 9 7. ,inall+! show how the e&pansionar+ ,e poli"+ along with +our "hange in the @P%f maps to +our investment iagram an label as point / with the "orrespon ing level of investment labele as 9 /.

% completely labeled and correct diagram is worth 10 points (ma)e sure you include the relevant shift variables in parentheses or points will be ta)en off)( .. P260 1 (3\$ points total for this part) 0his problem is broken into two parts that are totall+
"onne"te to ea"h other. 9n this first part of the question! +ou appl+ /hapter . (labor mkt.! et") material an in P260 \$! +ou get to use /hapter H (goo s market equilibrium) material. Please take all "al"ulations to two e"imal pla"es where appropriate e&"ept with real interest rate "al"ulations (P260 \$)! where +ou nee to take the "al"ulation to three e"imal pla"es! if appropriate. PK;2S; S'>? 2KK ?>6% 23D />@PK;0;KY K27;K 2KK D92-62@S. 0he following equations "hara"teri(e a "ountr+)s "lose e"onom+. Pro u"tion fun"tionI Y A 2L%L3 B 3\$D\$

@arginal pro u"t of laborI @P3 A 2L% B 3. where the initial values of 2 A G an % A 10. 0he initial labor suppl+ "urve is given asI 3S A \$0 M Nw. a) (10 points) ,in the equilibrium levels of the real wage! emplo+ment an output (show work).

(10 points for completely labeled and correct diagrams) ?e now have numerous "hanges to our e"onomi" "on itions (all is not "onstant). 0hink of all these "hanges happening together! that is! we go from one state of e"onomi" affairs to a ifferent state of e"onomi" affairs. 7elow are the "hanges. 0he labor suppl+ "hanges an is nowI 3S A \$J M Nw % goes own from 10 to J

b) (5 points) ?hat "oul "ause su"h a "hange in labor suppl+: Please give two spe"ifi" an well supporte reasons.

") (10 points) -iven the "hange in 3S an %! repeat part a) (i.e.! fin the equilibrium levels of the real wage! emplo+ment an output). 2 these results to +our labor market an pro u"tion fun"tion iagrams respe"tivel+ an label as point(s) 7. "e sure to label the diagram completely with the relevant shift variables in parentheses ne&t to the function( 3( *%+, - ( ./ 0+%1.+ #0 points total for *%+, -) 7efore we start this problem! put the initial Y as "ompute in part a) here OOOOOOOOOOOO. 2n the new Y (after the "hange in "on itions) here OOOOOOOOOOO. 2nitial conditions in the goods mar)et / A 100 M .50(Y*0) B 500r 9 A J00 B 500r - A 100 0A 100 ) (10 points) -iven the initial conditions! solve for the equilibrium real rate of interest (that "lears the goo s market) an the asso"iate levels of esire savings an esire investment. Draw a S A 9 iagram in the spa"e below lo"ating this initial equilibrium as point 2.

10 points for correct and completely labeled diagram (be sure to put relevant shift variables in parentheses ne&t to each function)( 3>? ?; 02%; 930> 2//>E30 0'; /'23-;S ,6>@ P260 1 2K>3- ?90' 2 /'23-; 93 D;S96;D 93Q;S0@;30. 0he esire investment fun"tion "hanges an is now 9 A 500 B 500r

e) (5 points) ?hat "oul "ause su"h a "hange in the esire investment fun"tion: Please give two spe"ifi" an well supporte reasons. f) (10 points) -iven these "hanges (i.e.! "hanges in %! Y! an 9 ! note! the new 9 A 500 B 500r)! "al"ulate the new equilibrium levels of the real interest rate! esire savings an investment. Please a this new equilibrium point to +our iagram an label as point 7.

g) (5 points) /onsi ering this entire problem! are +our results "onsistent with the -reat 6e"ession * wh+ or wh+ not: Please be a spe"ifi" as possible with regar to the "hanges in output! +our savings fun"tion! investment fun"tion! an the "hange in labor suppl+ (please refer to ea"h for full "re it4)

H. (H0 points total) ?e assume that the worl "onsists of two large open e"onomies! ES2 an /hina. 9nitial /on itions in the ES2 / A .H0 M .H(Y B 0) B \$00rw 9 A .50 B \$00rw Y A 1\$00 0 A .00 - A \$00 9nitial /on itions in /hina / A .00 M 0.H(Y*0) B .00rw 9 A \$50 B .00rw Y A 1000 0 A .00 - A\$00 a) ?hat is the equilibrium interest rate that "lears the international goo s market: Show all work (5 points). b) 3ow "al"ulate the levels of esire savings an investment for ea"h "ountr+ at this equilibrium worl real interest rate (5 points). ") ?hi"h "ountr+ is Rspen ing be+on its means) an what e&a"tl+ o we mean b+ the phrase Rspen ing be+on its means) in this "onte&t. 7e sure to define an use the wor absorption in +our answer. ;&plain (5 points). Draw two iagrams si e b+ si e! with the 'ome "ountr+ on the left an the ,oreign "ountr+ on right. Ko"ate this initial equilibrium as points 2 on both iagrams . 7e sure to label iagram "ompletel+.

10 points for correct and completely labeled diagram 3ow "on itions "hange in the ES. ,irst! gri lo"k in ?ashington has for"e the ES up against the ebt "eiling an man ates a "ut in government pur"hases of \$0 so - in the ES is now 1J0 (it use to be \$00). Se"on ! the "onsumption fun"tion in the ES is now I / A ..0 M .H(Y B 0) B \$00rw

e) 3ame an support two reasons the "onsumption fun"tion woul "hange like this (5 points). f) -iven the "hange in - an / in the ES! 6e*solve for the worl real interest rate that "lears the international goo s markets an a these results to +our iagram labeling this new equilibrium as points 7. (5 points)

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g) 3ow "omment on what has happene to the tra e balan"e for ea"h "ountr+ an relate to the movie "lip from /olbert about spen ing be+on our means. 6e"all that ,aree Sakaria (the guest) suggeste that we (the ES) nee e to go to al"oholi"s anon+mous (22). 2re +our results "onsistent with the home "ountr+ going to 22: ?h+ or wh+ not: ;&plain (5 points).

@eI You "an s"he ule a written lesson hereIinstae u."omDquestions an the+ will be able to sele"t +ou as the tutor. 9f the+ have an+ questions about this! the+ "an "onta"t us ire"tl+.

## T 6obertI rakesh up"oming. o"

T 6obertI oka+ this is an assignment that is ver+ similar as to what to e&pe"t. all the answers are not here. the+ graphs ma+ or ma+ not be a""urate.the questions are ver+ simiilar an on the up"oming assigment! all the questions must be answere

T 6obertI i o believe the graphs are a""urate in the o" i =ust sent +ou

T 6obertI the first question on the up"oming assignment is a agwoo D homer problem. the se"on questions is a user "ost an esire "apital sto"k problem (+ou i this on the se"on assignment that +ou "omplete ). the thir one has two parts. ( ..1! +ou "al"ulate n

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star! w star! an + star) ( ..\$! is a savings A investment problem similar to the the one in the se"on assignment +ou "omplete . 'owever! this time +ou will "al"ulate the Y. in the hw! the+ gave +ou the Y). 0he last question is open e"onom+ goo s market equilibrium. +ou woul solve for the tra e balan"e of ea"h "ountr+U (this is from the last assignment +ou =ust worke on)

T 6obertI to be safe +ou woul want to spen about \$0 * \$H minutes on ea"h part in or er to make sure it gets one

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T 6obertI this link above has a agwoo homer e&ample an will be similar to the first question on the assignment

## T 6obertI this link has an e&ample similar to question \$ an question ..\$

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6obertI the last assignment +ou =ust "omplete is similar to the final question

T 6obertI o +ou nee an e&ample for ..1 (the n star! w star! + star one) +ou haven5t one that for me in an assignment but i "an sen +ou an e&ample for it if +ou are not familiar with it

T 6obertI 9 have sent +ou ever+thing! please review an let me know if +ou have an+ questions

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