Name of Student: _______________________ Student ID: ______________ CONCORDIA UNIVERSITY Department of Economics ECON 304 Sec B Instructor: Chowdhury

Shameem Mahmoud Exam duration: 60 min.; answer all questions MIDTERM EXAMINATION Winter 2011, Feb 17, Thursday Version 1

Answer the following Multiple choice questions (3 points each); in the following whenever relevant assume substitution effect dominates income effect: Q1. In a real intertemporal model all of the following statements are correct, except: a. The model is constructed on the basis of both consumption-savings and workleisure trade off decisions made by the consumers. b. Firms investment amount is determined as an endogenous decision within the system of the model. c. Use of capital stock in the current period is determined by the equilibrium outcome in the model. d. Position of the labor supply curve in the labor market shifts with change in real interest in the output market. Answer: c Q2. All of the following statements are incorrect, except: a. Labor supply curve in the labor market is upward sloping reflecting the fact that labor supply increases with wage and real interest rate. b. Consumption demand and demand for investment goods completely determines the output demand in the goods market. c. Labor use in equilibrium depends on labor productivity only. d. If government expenditure multiplier is one then a given increase in government spending leads to an equal amount horizontal shift in the output demand curve. Answer: d

Q3. In the real intertemporal model a temporary increase in total factor productivity (TFP) will cause the following: a. Increase in output and real interest in the new equilibrium reached after the shock. b. Increase in real wage rate and employment. c. Increase in employment and output. d. None of the above. Answer: b and/or c (if any student answered either or both of these two options then answer is correct) Q4. Which of the following statement(s) is (are) true? a. Assuming substitution effect outweighs income effect, an increase in labor supply and a simultaneous decrease in current period consumption will follow from an increase in current period real wage rate. b. A simultaneous increase in real wage rate and decrease in current period real interest rate, will increase the current labor supply. c. Increase in life time wealth and current period real interest rate will increase the labor supply. d. None of the above. Answer: d Q5. Assume that any change in the current period have more impact on current decisions than any anticipated change in future have on current period decisions. Then in the context of the intertemporal monetary model a simultaneous increase in capital stock in the current period and anticipated decrease in future total factor productivity will cause: a. an increase in price in the current period in the money market and an increase in real wage rate. b. a fall in price in the current period and an increase in real wage rate. c. the impacts on price and real wage are ambiguous. d. None of the above. Answer: d

Answer the following Numerical problem (only answer does not carry any point, you have to show your work; you may use both sides of the current page for your answer) Q1. Assume that a representative consumer needs to make optimal inter-temporal consumption-savings decision to decide how much to consume in the current period (C) and in the future period ( C ). Assume that the consumer needs not to make any workleisure decision as the net incomes for both current and the future period are exogenously given. Assume that for this consumer in the economy has current and future income ( y , y ) 20 and 30 units of wheat, respectively; also assume that the lump-sum taxes in the economy are 10 and 6 units of wheat, respectively for the current and future period. The real interest rate, r, is 50% of a unit of wheat. If the utility function for the consumer is, U (C , C ) = ln(CC ) , in other words the MU C = 1 1 and MU C = then, C C

(a) Find out the optimal values for C and C ? (5+5) (b) Is the consumer a borrower or lender? What is the optimal amount borrowed from future or lent at the current period? (2+3) (a ) MRSc ,c = muc C = = (1 + r ) muc C

C = 1.5C C y T B.C : C + = y T + (1 + r ) (1 + r ) C (30 6) C+ = (20 10) + 1.5 1.5 C = 13 and C = 1.5* C = 19.5 (b) borrower if ( y T ) p C therefore, the consumer is a borrower The borrowed amount = 13 (20 10) = 3 real units in present value term. In future value term = 1.5*3 = 4.5 real units. Note: So far borrowed amount is concerned answering either in present value or future value terms will suffice.

Designated for Rough work (if need be); any work in the following will not regarded as a formal part constituting your answers)