Name :

What is the difference between what we were trying to explain in the first third of the class with the Solow Model vs. what we have been discussing in the second third?

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4. An object that is held to trade for goods and services. Is known as a

5. In our model B = (a number)

## Using words not the notation form.

Sources of funds (Income) = Uses of funds (Purchases)

6. On the income side Income side Income = + 7. +

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## Use words not the notation form.

On the Use of funds side what 2 things can a household do with their income

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Explain in detail what this equation says and what the letters notate.

C + ∆ B/P + ∆ K = π / P + (w/P)L + i ● (B/P + K)12.13.14.15.16.17.18.19.

Below is the profit function for a household. Find the profit maximizing amount of capital to hire. Assume technology is 100, labor is 100, the real wage is 10 and the rental price of capital is 1.

π / P = A ● (K.5 ● L.5) – (w/P ● L) – (R/P ● K)

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If the MPL is 10 and the MPK is 100 and technology is 5 and Labor demand is 1000 and Kapital demand is 3000. Depreciation rate is 0.

25. What is the real wage ?

26. What is the rental price of Kapital

25. TRUE / FALSE : Household decisions depend on the nominal values for wages and rent rather than the real values for wages and rent.

26. The labor market clears when:

a. the marginal product of labor is zero.

b. the real wage causes LS = LD.

c. the real wage causes LS to be minimized.

d. the real wage causes LS to be as large as possible.

27. A bond that is traded in the bond market in the Barro model is piece of paper that:

a. is the lenders claim to ownership in the company.

b. is the lenders claim to the amount owed by the borrower.

c. is the borrowers claim to the amount owed by the lender.

d. assures the person is who they say they are.

28. An investment in the Barro model is:

a. the purchase of a bond.

b. the purchase of ownership in a firm.

c. the purchase of a capital good used for production.

d. all of the above.

25. In Figure 6.1 an increase in real income is shown by:

a. a shift of the curve up and to the right.

b. a shift of the curve inward and to the left.

c. rotating the curve out the real consumption axis.

d. rotating the curve up the real saving axis.

25. In Figure 7.1 if the household opts to consume all its income it will be at point:a. Fb. Hc. Gd. IPeriod 1 Budget Constraint:C1 + (B1/P + K1)  = (w/P)1 ● LPeriod 2 Budget Constraint:C2 = (w/P)2 ● L + i1 ● (B1/P + K1) + (B1/P + K1) Derive the 2 period budget constraint. Hint C1 + C2 /??? = ????26. 27. 28. 29. 30. 31. 32. 33. 34. 35.   36. If a worker receives a bonus every Christmas, we would expect them to:a. save most of it.b. reject it.c. consume most of it.d. consume half of it and save half of it. Explain the difference between the income effect and intertemporal substitution effect (change in interest rates) on consumption today vs tomorrow.37. 38. 39. 40. 41.

42. TRUE / FALSE : The equilibrium business cycle model predicts that the real wage will be procyclical.

25. An increase in the level of technology, A, causes:a. a movement along the MPL hiring more labor.b. an increase in the MPLc. a decrease in the MPLd. a movement along the MPL hiring less labor. 26. The model predicts that an economic expansion caused by an increase in technology, A, will:a. drive up the real wage.b. drive down the real wage.c. cause labor supply to be greater than labor demand.d. lead to a relatively low real wage. 27. If technology, A, increases, then:a. the MPK increases and the demand for capital services decreases.b. the MPK and the demand for capital services increase.c. the MPK and the demand for capital services decrease.d. the MPK decreases and the demand for capital services increases. 28. If technology, A, increases permanently then we would expect:a. consumption to decrease as the substitution effect would be greater than the income effect of the change.b. consumption to increase as the substitution effect would be greater than the income effect of the change.c. consumption to increase as the income effect would be greater than the substitution effect of the change.d. consumption to decrease as the income effect would be greater than the substitution effect of the change. 29. An example of a temporary change in technology would be:a. a harvest failure.b. a new discovery.c. a new invention.d. all of the above. 30. A higher real wage:a. makes consumption more expensive.b. makes leisure less expensive.c. makes it a worse deal for households to work an extra hour.d. makes leisure more expensive. In the short run how do households adjust the amount of capital used in production?31. 32. 33.

What is the role of the depreciation rate in that decision? Specifically how does an increase in the depreciation rate affect the decision?

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37. An increase in RGDP does what to the reservation wage?

38. A lower reservation wage does what to unemployment?

## Y = .2 * K.5 * L.5

What is the MPK and MPL?

39. MPK =

MPL =