ECON402 Study Guide - Midterm Guide: Balanced-Growth Equilibrium, Discounting, Real Interest Rate
20 May 2018
School
Department
Course
Professor
Name___________________________
Student # ______________________
University of Waterloo
Department of Economics
ECON 402
Prof. Kate Rybczynski
Example Final Exam
Instructions:
TURN OFF ALL CELL PHONES AND PAGERS!
You have 2.5 hours to complete the exam.
It is a closed book exam and no “cheet sheets” are permitted.
EXPLAIN for full marks.
Use pen and do not use whiteout.
No calculators are permitted.
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1. Consider an overlapping generations model without production, and
without a discount factor.
U = ln(C1t) + ln(C2,t+1)
Lt people are born in period t, and Lt = (1+n)Lt -1
Individuals endowed with A units each of the economy's single good when
they are born.
Goods can be stored, and 1 unit stored yields X>0 units next period,
where X<(1+n).
a) Will there be any intergenerational trade in this economy? Why or why
not? (2)
b) What is the equilibrium for this economy? (note: you should solve for
the decentralized equilibrium, not the social planner's problem, and find
consumption in both periods) (5)
2
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b) Let s be the fraction of endowment stored by the young and be
constant across time.
What is total consumption per person endowment unit (AL) as a function
of s AND what value of s maximizes consumption per person ?(3)
d) Explain whether the outcome from part a) is Pareto efficient and how
the social planner could improve the situation. (2)
3
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