Homework 3 (Chapters 5-9)
Due on Wednesday, August 20 in class
Refer to the model in Chapter 5 to answer the following questions
1) (3 pts)Can the government run a deficit in one period closed economy model? Why or why not?
2) (5 pts)What are the endogenous variables and exogenous variables in the model?
3) (3 pts)What are the four conditions that a competitive equilibrium must satisfy for this model?
4) (3 pts)Why is the competitive equilibrium in this model Pareto optimal?
5) (10 pts)What are the effects of an increase in government purchases? Show the effects on a diagram.
6) (10 pts)What are the effects of an increase in total factor productivity? Show the effects on a diagram.
7) (5 pts)Explain why employment may rise or fall in response to an increase in total factor productivity.
8) (10 pts) Suppose that government decides to reduce taxes. In the model used in this chapter determine the effects this has on aggregate output, consumption, employment, and the real wage and explain your results.
9) (6 pts) Define the following key terms: externality, first fundamental theorem of welfare, marginal rate of transformation, Pareto optimality, production possibilities frontier, first fundamental theorem of welfare.
Refer to the model in Chapter 9 to answer the following questions:
1) (3 pts) Why do consumers save?
2) (3 pts) What is the price of future consumption interms of current consumption?
3) (3 pts) Show how to derive the consumer’s lifetime budget constraintfrom the consumer’s current period and future budget constraints?
4) (3 pts) What are the three properties of the consumer’s preferences?
5) (3 pts)How is the consumer’s motive to smooth consumption captured by the shape of an indifference curve?
6) (5 pts) What are the effects of an increase in current incomeon consumption in each period, and on savings?
7) (5 pts) What are the effects of an increase in future incomeon consumption in each period, and on savings?
8) (5 pts) What produces a larger increase in a consumer’s current consumption, a permanent increase in consumer’s income or a temporary increase?
9) (15 pts)A consumer’s income in the current period is y=100, and income in the period is y’=120. He or she pays lump sum tax t=20 in the current period and t’=10 in the future period. The real interest rate is 0.1 or 10% per period.
a) Determine the consumer’s lifetime wealth.
b) Suppose the current and future consumption are perfect complements for the consumer that he or she always wants to have equal consumption in the current and future periods. Draw the consumer indifference curves.
c) Determine the consumer’s optimal current period and future period consumption are, and what optimal saving is, and show this ina diagram with the consumer’s budget constraint and indifference curves. Is the consumer a lender or a borrower?