Business Conditions |
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First Midterm Examination |
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October 11, 2000 |
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Mr. Upton |
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Directions:
Each Problem has the indicated weight. Work all problems on the exam itself.
If necessary, use the back of the exam sheets, indicating that you have done
so. |
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1.
(10
Points). In Alakazam, the saving rate
has been 20% for a very long time.
Alakazam’s growth rate would have been higher in the past had saving
been 25%; going to a saving rate of 25% now will increase the growth rate and
thus make everybody better off. |
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Disagree for two reasons. First, the change in the saving rate would
not affect the equilibrium growth rate.
Second, it will not make everyone better off. There will be an initial drop in
consumption, followed by an increase later on. |
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2 (10 points). If we love our children, then we should oppose a government
program to give us money financed by borrowing that they will have to pay
back. Explain whether you agree or disagree with this statement. |
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Disagree. If we love our children, we have a bequest
motive. If the government gives us money, we will just put it aside for your
children to pay the higher taxes due later.
It will be a wash item. |
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3. (10 points). The life cycle model of consumption shows that, both in the
long run and in the short run, consumption is proportional to income. Explain
why you agree or disagree with this statement. |
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Disagree. In the short run, changes in income do not result in a
proportional change in consumption, which is proportional to wealth. In the long run, wealth is proportional to
income, so the statement is true. |
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4. (10 points). |
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U
= log(c1)+ log (c2) + log(c3) +log(c4) |
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expects to
earn $90,000 in period 2, $225,000 in period 3 and then retire. The discount rate is 50% per period. Baring surprises, he will consume $75,000
in the last period of life.
Explain whether you agree or disagree with this statement. Hint:
disagree, and give me the right number. |
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Wealth is $160,000. He will consume $40,000 this period. In period 4, his consumption will grow to
$135,000. |
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5. (20 points). Consider East Winchester,
a country initially exactly like Neutral in all respects. Because of social unrest in a neighboring
country, there is a massive wave of immigration, adding 20% to the population
at the beginning of year 1. The
demographics of the immigrants mirror those of the population of East
Winchester. In an unprecedented act
of generosity, the East Winchesterians share their wealth with these
immigrants. It is not exactly fair,
however. Every five people transfer
10% of their wealth to a new immigrant in their same age group. The young transfer 10% of their debts to a
new immigrant. (Life is not fair: it
just is). Thus a 42-year-old, say,
ends up with half the financial assets as someone currently living in East
Winchester. |
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Complete the following table for East Winchester (why are some choices boldfaced and some choices left out? Some get extra credit in grading, others -those omitted from the table - get no credit. |
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Explain Your Answer for the long run capital effective labor ratio. (Yes, you can get the right answers and lose points for an inadequate answer. I don't expect a lengthy answer, but you must provide an explanation and a well-labeled and explained graph. |
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This is just Loser all over again.
The fact that some people are wealthier than others is
irrelevant. Thus, this is a temporary
change and we know the net effect will be no change in the capital labor
ratio. Initially, the results will look
just like Loser. |
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6. (20 points). Consider a country Winchester, initially exactly like Neutral
in all respects. However, beginning
in Year 2, the age at which people begin work is suddenly and permanently
raised from 20 to 18 , resulting in a decrease in the labor force. The
announcement is made at the beginning of year 1. |
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Complete the following table for Winchester (why are some choices boldfaced and some choices left out? Some get extra credit in grading, others –those omitted from the table – get no credit. |
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Explain Your Answer for the long run capital effective labor ratio. (Yes, you can get the right answers and lose points for an inadequate answer. I don't expect a lengthy answer, but you must provide an explanation and a well-labeled and explained graph. |
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As far as long run effects, this is 60-65, just run from the other
end of the age spectrum. In terms of
short term effects, there are no implications for year one’s capital
stock. However persons aged 15 say,
see lower wealth. They reduce their
consumption and hence the saving rate increases. |
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7. (20 points). Consider West Winchester,
a country initially exactly like Neutral in all respects. For reasons we need not go into, the young
in West Winchester change their preferences for consumption now and consumption
later. Instead of consuming 1/80th
of their wealth the first year, they now wish to consume only 1/120th. Thereafter, there is no change. That is, in year 2 of life, they consume
1/79th of their wealth, etc.
The change begins to show up in year one. |
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Complete the following table for West Winchester (why are some choices boldfaced and some choices left out? Some get extra credit in grading, others -those omitted from the table - get no credit. |
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Explain Your Answer for the long run capital effective labor ratio. (Yes, you can get the right answers and lose points for an inadequate answer. I don't expect a lengthy answer, but you must provide an explanation and a well-labeled and explained graph. |
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First,
the short term effects. There will
clearly be no effect on the capital stock, wage rate, etc, in year one. There will be an effect on the saving
rate. There is less consumption. |
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As to
the long run effects, the increased saving leads to a higher capital labor
ratio and all the concomitant effects.
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8. (4
Bonus Points) Who won the 2000 Nobel Memorial Prize in Economics? For what?
And who is Alfred Nobel, other than the founder of the Nobel Prizes? |
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If you want the answer to this question, go to |
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In other
words, I don’t know the answer as of the writing of this exam. Nobel?
He invented dynamite. Before
Nobel, the explosive power of TNT was well know, but it was relatively
unstable. He found a relatively safe
way to handle TNT. All sorts of
construction projects then became possible with the availability of a relatively
safe explosive. |
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