**MIDTERM 1 **

中级宏观经济学代考 In the real intertemporal model with investment, the government increases spending on roads and bridges expected to be completed in the future.

**Section I: True, False or Uncertain (35 marks) **

Determine whether the following statements are True, False or Uncertain and Justify your response. You can write, calculate, or draw to explain your answer. Marks are awarded for stating the correct response True/False/Uncertain (2 marks) ** and **providing an accurate justification (3 marks).

- With identical consumers, pay-as-you-go social security may be Pareto improving.

- In a model with money neutrality, money supply should be increased by 1% to obtain a 1% increase in real output. 中级宏观经济学代考

- Bad news about future total factor productivity has the same effect as a reduction in current total factor productivity.

- A reduction in the depreciation rate will increase investment demand and the optimal investment schedule will shift to the right.

- If the real interest rate rises, lifetime wealth declines, causing leisure to decline, and labour supply to rise, thereby causing a leftward shift in output supply.

- The interest rate will remain constant when z’ and K increase simultaneously.

- The demand for money will fall due to lower interest rates on transactions accounts at banks.

**Section II : Open Questions (65 marks) 中级宏观经济学代考**

Question 1 (30 marks)

In the two-period model of consumption and saving, assume that individuals can borrow/lendat an interest rate r > 0. Suppose that there are two consumers, ? = {1,2}, with utility functions given by

(a) Solve for consumer’s optimization problem.(2 marks)

(b) Given β = 0.8, (y_{1,}y_{1}‘) = (100,120), (y_{2,}y_{2}‘) = (120,100), (t,t’) = (20,10), and r = 10%. Calculate the optimal consumption bundle (c, c’) and savings for each consumer.(3 marks)

#### (c) Suppose that the real interest rate decreases to 5%.

(i)Determine the optimal consumption bundle for consumer 2.(1 mark)

(ii)Illustrate the effect(s) of the change for consumer 2 on a diagram. Ensure that you carefully label the income and substitution effect of the change. (4 marks)

(iii)Which effect dominates in this case, income or substitution effect? Justify your decision.(2 marks) 中级宏观经济学代考

(d) Suppose that there are credit market imperfections due to limited commitment. Given β = 0.8, (y_{2,}y_{2}‘ )= (100,120), (t,t’) = (120,100), (c, c’) = (20,10),p^{H}= 1,

H = 100 and r = 10%. The borrowing interest rate is r^{B}= r + 2%.

##### (i)Determine the initial optimal consumption bundle and savings for each consumer. Is the collateral constraint binding for each consumer? (3 marks)

(ii)Provide an explanation for the changes observed compared to part (b).(2 marks)

(iii)Illustrate the initial case for consumer 1 with limited commitment. (3 marks) 中级宏观经济学代考

(iv)If the government decides to change the timing of taxes such that (t,t’) = (10,21). Determine the new optimal consumption bundle and saving for consumer 1.(2 marks)

(v)Illustrate the effect(s) of the change in the timing of taxes using the same diagram from (d) part (iii).(3 marks)

(vi)Explain in detail the impact on consumer 1.(3 marks)

(vii)Does Ricardian equivalence hold? Explain.(2 marks)

### Question 2 (35 marks) 中级宏观经济学代考

(a) In the real intertemporal model with investment, the government increases spending on roads and bridges expected to be completed in the future. Firms expect that the new roads and bridges will have a permanent impact on total factor productivity.

(i)Illustrate the effect(s) in the current period using relevant diagrams from the course.(4 marks)

(ii)Explain in detail (by making any necessary assumptions), the effects on NS, ND, YS and YD.(8 marks)

(iii)Summarize (by making any necessary assumptions), the effects on consumption,investment, output, the real interest rate, employment and the real wage rate inthe current period.(6 marks) 中级宏观经济学代考

#### (b) Assume that money is added to the model. If the government’s planned increase in spending in part (a) is financed through seigniorage.

(i)Illustrate the effect(s) of the policy in the current period using relevant diagrams from the course.(6 marks)

(ii)Explain in detail (by making any necessary assumptions), the effects on the price level, consumption, investment, output, the real interest rate, employment and

the real wage rate in the current period.(8 marks)

(iii)How does the outcomes compare to the situation from part (a)?(3 marks)

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