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Consider an economy with two consumers and two goods. Consumer 1 has endowment wl = (11,8) and utility function U1(x) = =3 +2vx]. Consumer 2 has endowment w? = (4,8) and utility function U2(x) = 2 +4\\/x]. (a) Find all Pareto efficient allocations where both consumers consume strictly positive amounts of good 1 and good 2. (b) Argue that any feasible allocation r = (x], r?) where r? = 16 and 12 0}. 4. Sampling model: {Y/},_, is an independent sample, sequentially generated using Y, = x;B+ Uji = 1, . ..,n, where the U, are a IID(0, 02). 1.1 Theoretical Part Let X be the n x k matrix of regressors, and let Y be the n x 1 vector of the dependent variable. 1. Compute BLS by minimizing (Y - XB)" (Y - XB), where B E RK. 2. Prove that BLS B, V(B, 0) ERk x R+ 3. Prove that vn (BLS - B) is asymptotically distributed as multivariate normal with zero mean, and report the asymptotic covariance matrix. Hint: The multivariate version of theFigure 15-5 Price level (GOP deflator, 2000 100) SRAS AD Real GDP (trillions of 2000 dollars) 8.) Refer to Figure 15-5. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-45 model in the figure above, the correct Fed monetary policy for this situation would be depicted as a movement from (Hint: What would return the economy to long-run equilibrium?) A. Cto D. B. A to E. CBto C. D. A to B. E. Cto B. 9.) The Taylor rule helps explain the relationship between the Fed's and A. money supply target; economic conditions B. money supply target; the federal funds target C. federal funds target; the monetary growth rule D. federal funds target; economic conditions 10.) While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fall A. smaller firms will resent not receiving similar assistance. B. stockholders and bondholders of these firms were not allowed to receive the proceeds from the sale of assets that would have occurred if the firms had declared bankruptcy, C. there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail. D. there will be less competition in the U.5. economy, which could led to higher prices for consumers.QUESTION ONE One of the economic impacts of the current covid -19 pandemic is a rise in demand deficient unemployment. i) Explain how fiscal policy can be used to solve this problem. (5 marks) i) How can monetary policy be used to address the same problem. (5 marks) iii) Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand and real GDP. Illustrate with a graph where appropriate (5 marks) iv) Discuss the negative redistributive effects of unanticipated inflation on any three groups/agents in the economy. (5 marks) v) Which of the two types of inflation is most likely to be associated with a negative GDP gap? Illustrate with a graph. (5 marks) vi) During World War II, an Allied soldier named Robert Radford spent several years in a large German prisoner-of-war (POW) camp. At times more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described how an economy developed in the camp, in which prisoners traded food, clothing, and other items. Services such as barbering also were exchanged. Lacking paper money, the prisoners began to use cigarettes (provided monthly by the Red Cross) as money. Prices were quoted, and payments made, using cigarettes. (a) In Radford's POW camp, explain how cigarettes fulfilled the three main functions of money (3 marks) (b) Briefly discuss why a non-smoking prisoner would have been willing to accept cigarettes in exchange for a good or service in Radford's camp. (2 marks)
