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Macroeconomics Extra Practice Problems

The document contains 4 practice problems related to macroeconomics concepts. Problem 1 discusses an intertemporal consumption model where utility is a function of consumption in periods 1 and 2. It asks the reader to solve for consumption, examine how a discount factor affects consumption, and determine the condition under which utility increases with an interest rate increase. Problem 2 presents a similar model but with minimum consumption utility. It asks about indifference curves, solving for consumption, and how interest rates may not affect consumption. Problem 3 analyzes the effects of an aging Chinese population on consumption and interest rates. Problem 4 examines the short-run effects of increased credit card use on output and interest rates by reducing the demand for money.

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Shreya Agrawal
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55 views2 pages

Macroeconomics Extra Practice Problems

The document contains 4 practice problems related to macroeconomics concepts. Problem 1 discusses an intertemporal consumption model where utility is a function of consumption in periods 1 and 2. It asks the reader to solve for consumption, examine how a discount factor affects consumption, and determine the condition under which utility increases with an interest rate increase. Problem 2 presents a similar model but with minimum consumption utility. It asks about indifference curves, solving for consumption, and how interest rates may not affect consumption. Problem 3 analyzes the effects of an aging Chinese population on consumption and interest rates. Problem 4 examines the short-run effects of increased credit card use on output and interest rates by reducing the demand for money.

Uploaded by

Shreya Agrawal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Macroeconomics

Extra Practice Problems

1. Consider the inter-temporal model of consumption studied in class. Denote consumption


in periods 1 and 2 by C1 and C2 respectively. Let the utility function of the consumer be
given by
p p
u(C1 , C2 ) = C1 + β C2 ,

where β < 1.

(a) Solve for C1 and C2 as functions of Y1 , Y2 and r.

(b) How does β affect C1 and C2 ? Explain.

(c) Show that following an increase in r, utility increases if the following condition holds:
r
Y2
β(1 + r) > .
Y1

(d) Provide the intuition behind the above result.

2. Consider the inter-temporal model of consumption studied in class. Denote consumption


in periods 1 and 2 by C1 and C2 respectively. Let the utility function of the consumer be
given by
u(C1 , C2 ) = min[C1 , C2 ].

(a) What do the indifference curves corresponding to above preferences look like?

(b) Solve for C1 and C2 as functions of Y1 , Y2 and r.

(c) Can you think of a situation where a change in r will have no effect on C1 and C2 ?
Provide intuition.

(d) Will the result in part (c) hold in case of any utility function?

1
3. Due to the absence of a well-developed social security system, the working individuals
in China are expected to look after their ageing parents. A demographic transition in
China increases the proportion of older people in the population. This causes working
individuals to reduce their consumption by a fixed amount.

(a) How will this development affect output and nominal interest rate in China in the
short-run?

(b) Would your answer be different if, instead, the marginal propensity to consume de-
clined?

4. Credit cards reduce the demand for money because consumers do not need to make instant
payments. How will an increase in the popularity of credit cards in an economy affect
output and nominal interest rate in the short-run?

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