I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.

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Izmir Univery of Economics Department of Economics

ECON 202 INTERMEDIATE MACROECONOMICS Dr. Yetkiner

26 April 2006

Mid-Term 1. (10 Points) The following information about business activity is revealed to the Department of Commerce by the only three business firms in the economy: Beta Flour Company Sales Wages Depreciation Rent $ 250 100 30 50 Ace Oven Co. Sales Wages Depreciation $ 150 100 20 Dewdrop Cookie Co. Sales Wages Flour Inventory Beginning of Year End of Year Flour Purchases Oven Purchases Depreciation $ 900 600 100 200 250 150 50

Compute GDP by using product (value added), expenditure, and income approaches. Hint: You should indicate each item clearly.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

2. (10 Points) Assume that GDP=4,800; C=3,400; Private Domestic Savings=400; G=1,200; and NX=-120. What are disposable income, private domestic investment, and the budget deficit?

3. (10 Points) An individual is endowed with h=24 hours of leisure per day and = 240 units of fixed income (dollars) per day. His marginal rate of substitution in resource supply is MRSlc = c/l. The wage facing him is w = 10. How many hours of labor will he supply, and what will be his income from labor? Solve and illustrate your answer in full detail.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

4. (10 Points) Daniel has income of y1 = 200 when he is young and y2=300 when he is old. Initially, the real interest rate is r1 = 25%. Daniel chooses to consume c1* = 240 when he is young. a) What is the present and future value of Daniels lifetime resources? How much does Daniel consume when he is old (c2*)? Is Daniel a borrower or a lender? Please illustrate the problem and your answer in full detail in a figure. b) Now suppose that the interest rate increases to r2 = 50%. Daniels choice under this scenario is to consume c1** = 225 when he is young. How much does Daniel consume when he is old (c2**)? Redraw your figure from part (a), and add to it the illustration of what happens in response to the increase in the real interest rate.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

5. (15 Points) Suppose that Daniel has income of y1 = 400 when he is young and y2=100 when he is old. Initially, the real interest rate is r1 = 25%. The utility function of Daniel c 1 c 1 is U = 1 + 2 , where = 0.8 is the discount factor. Find the optimal values of 1 1 c1 and c2 for = 0.5 . Next, suppose that r has been raised to 30%. Find again the optimal values of c1 and c2. Disentangle the substitution effect from income effect, using the Hicksian compensation.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

6. (30 Points) Suppose that utility function u of a representative agent is u = ln(c) + (1 ) ln( L) , where c is consumption of physical goods and L is consumption of leisure. Suppose that production technology is represented by y = N 1 where y is output and N is labor demand. We assume that h = L + N and w is the real wage. There is no government in the economy. a) Find the optimal values of c , L , N , y , and w under the competitive equilibrium assumption. b) Find the impact of one-time permanent changes in exogenous variables on endogenous variables in the model.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

7. (30 Points) Consider a two-period model with a competitive firm and a household, who holds ownership of the firm. The household has a first-period endowment y = 120 . The firm operates only in the second period. The household can transfer wealth to the second period by lending to the firm at a competitive interest rate r. The firm borrows an amount k from the household and invests it at the end of period 1, and produce output y 2 = 10 k , in period 2 (note that there is no production in the first period). The firms objective is to maximize profits, , which are distributed to the household as dividends at the end of the second period. The representative households utility function is U = ln(c1 ) + (0.2) ln(c2 ) , where 0.2 is the discount factor. Find the competitive general equilibrium values of c1 , c2 , k , y 2 , , and r for this economy.

I. Hakan Yetkiner http://eco.ieu.edu.tr/hyetkiner.php

Izmir Univery of Economics Department of Economics

8. ++ Bonus Question (10 points) Write down a well-designed essay on chain-weighted measurement of National Income and Product Accounting with an EXAMPLE. Hint: You are expected to write down a one-page essay, including the numerical example.