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Final

2450FinalW11_answers.pdf

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Department
Economics
Course
ECON 2450
Professor
Wai Ming Ho
Semester
Winter

Description
YorkUniversityDepartmentofEconomicsAPECON245003NIntermediateMacroeconomicTheoryIIAnswerstoFinalExamWinter2011WaiMingHo000cytc1aThelifetimebudgetconstraintofaconsumeryt1r1r00GmtGbThelifetimebudgetconstraintofthegovernmentmt1r1rcTheconsumermaximizeslifetimeutilitysubjecttothelifetimebudgetconstraintTheoptimalconsumptionbundleisatthepointwherethebudgetlineistangenttoan0indierentcurve1rMRSOncewehavetheoptimalcwesolvefortheoptimalccsavingbyusingsytcdInacompetitiveequilibriumforthistwoperiodclosedeconomywithmidenticalconsumersandagovernmentthefollowingthreeconditionsmusthold0iEachconsumerchoosescurrentandfutureconsumptiontomaximizeucctaking00asgivenryytandta0Theoptimalconsumptiondecisionisgivenbythecondition1rMRSacc00GmtGiiThegovernmentsintertemporalbudgetconstraintholdsmt1r1riiiAllmarketsclearthecurrentgoodmarketYCGwhereCmc00000thefuturegoodmarketYCGwhereCmcpgpthecreditmarketSS0whereSmsInaclosedeconomythecreditmarketclearswhentheaggregatequantityofconsumerspsavingsprivatesavingSisequaltothequantitythatthegovernmentwantstogborrowSTheequilibriumrealinterestrateristhelevelofrthatclearstheamarkets0m4t00eIf4t0and4G4G0thenm4t04t1r4t0and1rg4Sm4t0Thegovernmentssavingdecreasesinthecurrentperiod0Giventhatthelifetimetaxburdenofeachconsumerdoesnotchangetheoptimalcandcdonotchangeandthecurrentperiodsavingofeachconsumerincreases4s4t0pggAsnationalsavingdoesnotchange4S4S4Sm4s4S0therewillnotbeanyeectontheequilibriummarketclearingrfSupposenowthattheeconomyisasmallopeneconomyfacingaworldinterestraterwiIfrrthentheeconomywillrunacurrentaccountdecitinperiod1Conwasumersinthesmallopeneconomywouldliketoincreaseitscurrentconsumptionby
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