Part one.

Consider a economy with a constant population of N = 200. Individuals are endowed with y = 10 units of the consumption good when young and nothing when old. 1. What is the equation for the feasible set of this economy? Portray the feasible set on a graph. With arbitrarily drawn indifference curves, illustrate the stationary combination of c1 and c2 that maximizes the utility of future generations 2. Now look at a monetary equilibrium. Write down equations that represent the constraints on first- and second-period consumption for a typical individual. Combine these constraints into a lifetime budget constraint 3. Suppose the initial old are endowed with a total of M = 800 units of fiat money. What condition represents the clearing of the money market in an arbitrary period t? Use this condition to find the real rate of return of fiat money 4. Assume the lifetime utility function is c 1,tc 1 2,t+1 where = 1/2. Setup the Lagrangian function, derive the first-order conditions, and find algebraic expressions for consumption when young, when old for all t 1. Show your work. 5. How does the return of money affect consumption when young, when old, and real money holdings (vtmt)? Provide intuitive answers for each case. 6. What is the value of money in period t (vt)? Use the assumption about preferences and your answer in part (3) to find an exact numerical value. What is the price of the consumption good pt? 1 7. If the rate of population growth increased, what would happen to the rate of return of fiat money, real money holdings, the value of a unit of fiat money in the initial period, and the utility of the initial old? Explain your answers. Hint: Answer these questions in the order asked. 8. Suppose instead that the initial old were endowed with a total of 400 units of fiat money. How do answer to part (6) change? Are the initial old better off with more units of fiat money?

Part 2.

1. Which of the following is considered investment spending in macroeconomics? (Points : 2) GM builds a new plant to manufacture automobiles. Ryan Jones buys some GM stock. Ryan Jones buys some GM bonds. Ryan Jones buys some GM stock and bonds. 2. A budget surplus would exist when which of the following occurs? (Points : 2) Taxes are greater than government spending. Taxes are less than government spending. Taxes are less than government spending plus investment. Investment is less than government spending less taxes. 3. To help increase investment spending, the government can: (Points : 2) lower taxes on consumption, so that disposable income rises. lower taxes on the returns from savings, so that total savings increase and the interest rate falls. raise taxes on the returns from bonds while lowering taxes on stock dividends. lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant. 4. If there is an increase in the government budget deficit: (Points : 2) the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase. the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease. 5. In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect: (Points : 2) the interest rate to fall as there is currently a shortage of loanable funds. the interest rate to rise as there is currently a surplus of loanable funds. the interest rate to rise as there is currently a shortage of loanable funds. the interest rate to fall as there is currently a surplus of loanable funds. 6. The price determined in the market for loanable funds is: (Points : 2) the margin call. the profit rate. the transaction fee. the interest rate. 7. Crowding out is a phenomenon: (Points : 2) where an increase in government's budget surplus decreases the overall investment spending. where overproduction in the goods market leads to a sharp drop in the aggregate price level. where an increase in government's budget deficit causes the overall investment spending to fall. where an increase in imports causes the overall domestic production to fall. 8. From the standpoint of economic growth, banks are important to: (Points : 2) fight inflation. keep interest rates low. channel savings into investment. channel investment into savings. 9. Which of the following is NOT one of the three tasks of a financial system? (Points : 2) transactions costs reduction risk management provide liquidity determining fiscal policy 10. Which of the following portfolios is the most diversified in terms of risk? (Points : 2) $100,000 worth of stock in ten different companies in the same industry $100,000 worth of stock in ten different companies in two different industries $100,000 worth of stock in ten different companies in five different industries $100,000 worth of stock in one company that sells ten different products 11. When you take out a loan from a bank, it is: (Points : 2) an asset to you and a liability to the bank. an asset to you and an asset to the bank. a liability to you and a liability to the bank. a liability to you and an asset to the bank. 12. Which of the following financial assets is likely to be the most liquid? (Points : 2) stocks bonds mutual funds shares bank demand deposits 13. The financial system performs certain tasks in order to make the financial market more efficient. Which one of the following is NOT one of these tasks? (Points : 2) reducing risk reducing menu costs reducing transaction costs providing liquidity 14. Which of the following qualify as an asset from the viewpoint of a household? (Points : 2) a house mortgage credit card debt car loan 15. Samantha is asking her employer for a 5% raise for the coming year. If the inflation rate during the next year is 5.5%, then her real wage will: (Points : 2) increase by 5%. decrease by .5%. decrease by 5%. increase by .5%. 16. The MPS plus the MPC must equal: (Points : 2) zero. one. income. saving. 17. If the MPS = .1, then the value of the multiplier equals: (Points : 2) 1. 5. 9. 10. 18. If the MPC is 0.8, then the multiplier is: (Points : 2) 4. 5. 8. 10. 19. If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is: (Points : 2) 0.2. 0.4. 0.6. 0.8. 20. Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will: (Points : 2) decrease by $250 billion. increase by $250 billion. increase by $600 billion. decrease by $400 billion. 21. Consumer spending in the United States normally accounts for approximately ______ of the economy. (Points : 2) 1/3. 1/2. 2/3. 3/4. 22. David receives a tax refund of $800. He spends $600 and saves $200. David's marginal propensity to consume is: (Points : 2) 0.6. 0.75. 0.25. 0.20. 23. If the disposable income increases, then: (Points : 2) the consumption function will shift upwards. there will be a rightward movement along the consumption function. there will be a leftward movement along the consumption function. the consumption function will shift downwards. 24. Suppose the marginal propensity to consume is equal to 0.90 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change? (Points : 2) $450 billion increase $90 billion increase $500 billion increase $500 billion decrease 25. When David has no income, he spends $500. If his income increases to $2,000, he spends $1,900. Which of the following represents his consumption function? (Points : 2) C = 1.2 ? YD. C = 0.95 ? YD. C = $500 + 0.7 ? YD. C = $500 + 1,000 ? YD. 26. Which of the following is NOT a determinate of consumer spending? (Points : 2) current disposable income expected future disposable income wealth investment spending 27. The consumption function shifts when: (Points : 2) disposable income changes. expected future disposable income changes. people receive a pay raise. disposable income goes down. 28. If the Federal Reserve increases interest rates to reduce inflation: (Points : 2) planned investment spending is most likely to increase. planned investment spending is most likely to decrease. planned investment spending is most likely to remain the same. unplanned investment in inventories is likely to be negative. 29. If households increase savings in their bank accounts, _______ and the interest rate _______, therefore increasing investment spending. (Points : 2) the supply of loanable funds shifts right; rises the demand of loanable funds shifts right; rises the supply of loanable funds shifts right; falls the demand of loanable funds shifts left; falls 30. Rising inventories typically indicate _______ unplanned inventory investment and a _________ economy. (Points : 2) positive; slowing negative; slowing positive; expanding negative; expanding 31. In general, a change in the price level, all other things unchanged, causes: (Points : 2) a movement along the aggregate demand curve. a shift of the aggregate demand curve. both a movement along the aggregate demand curve and a shift in the curve. no change in the purchasing power of assets. 32. Suppose that the stock market crashes. Which of the following is most likely to occur? (Points : 2) the aggregate demand curve shifts to the right the aggregate demand curve shifts to the left a movement up the aggregate demand curve a movement down the aggregate demand curve 33. Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which of the following is most likely to occur? (Points : 2) a decrease in short-run aggregate supply a decrease in aggregate demand an increase in short-run aggregate supply an increase in aggregate demand 34. All of the following are examples of fiscal policy, EXCEPT when the: (Points : 2) government spends on building and repairing the nation's bridges and roads. Fed lowers the interest rate by increasing the money supply. U.S. Congress approves an economic stimulus package. taxpayers receive a $1500 per family rebate. 35. Which of the following would shift the aggregate demand curve to the left? (Points : 2) An increase in the interest rate. An increase in the aggregate price level. An increase in consumer wealth. Stronger consumer optimism about future income. 36. If the government lowers taxes in response to a recession, the government is engaging in what economists call: (Points : 2) monetary policy. investment policy. consumption policy. fiscal policy. 37. Which of the following has the most direct effect on aggregate demand? (Points : 2) changes in taxes changes in interest rates changes in the money supply changes in government spending 38. If the Fed increases the quantity of money in circulation: (Points : 2) interest rates decrease, investment increases, and the aggregate demand curve shifts to the right. interest rates increase, investment increases, and the aggregate demand curve shifts to the right. interest rates decrease, investment increases, and the aggregate demand curve shifts to the left. interest rates increase, investment decreases, and the aggregate demand curve shifts to the left. 39. The long-run aggregate supply curve is vertical because in the long run: (Points : 2) technological progress outpaces raises in nominal wages. all factors of production increase. the price of labor is flexible, while the price of physical capital is fixed. all prices are flexible. 40. An increase in aggregate demand will generate _______ in real GDP and _______ in the price level in the short run. (Points : 2) an increase; an increase an increase; no change a decrease; no change no change; an increase 41. A recessionary gap occurs if: (Points : 2) actual real GDP is less than potential output. actual real GDP is greater than potential output. actual real GDP is equal to potential output. unemployment is less than the natural rate. 42. An inflationary gap: (Points : 2) is generally regarded as desirable, especially by people living on a fixed income. means that the economy is operating beyond its potential output. means that there are pressures for wages to fall. means that SRAS will soon shift rightward. 43. Stabilization policies have: (Points : 2) not reduced the effects of business cycles caused by either demand shocks or supply shocks. reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks. reduced the economic costs of supply shocks but have not been so successful against demand shocks. been successful in reducing the economic fluctuations by neutralizing the effects of both supply and demand shocks. 44. Suppose that the economy is in a recessionary gap, the policy makers in the government can: (Points : 2) increase taxes and increase aggregate spending via the multiplier to remove the recessionary gap increase the money supply, lower the interest rate, increase investment and consumption spending and thus increase aggregate demand. cut government expenditure, decrease investment and consumption spending and thus increase aggregate supply. increase nominal wages, shift the short run aggregate supply to the left and thus remove the recessionary gap. 45. If the economy is currently in a recessionary gap, real GDP will be ________ potential output. (Points : 2) below the same as above in equilibrium with 46. Explain the difference between fiscal and monetary policy.