Whitman CollegeEcon 407Exam 1October 4, 2006Write all answers in your blue book. Thoroughly explain all of your answers. The exam ends at 2:20.1. Suppose there are four traders: Audrey, Bradley, Charley and Dudley. Audrey produces artichokes but gets utility only from the consumption of blueberry poptarts. Bradley produces blueberry poptarts but gets utility only from the consumption of cranberry muffins. Charley produces cranberry muffins but gets utility only from the consumption of dandelion wine. Dudley produces dandelion wine but gets utility only from the consumption of artichokes.(a) (10pts) Suppose these traders live in a monetary economy. Describe a series of bilateral trades that, in the end, leaves everyone consuming his chosen good, and which provides evidencesupporting the conclusion that this economy is a monetary economy. Explain your reasoning. Be sure to include a definition of a monetary economy in your explanation.(b) (10pts) Now suppose these traders do not live in a monetary economy. Describe a series of bilateral trades that, in the end, leaves everyone consuming his chosen good, and which provides evidence supporting the conclusion that this economy is not a monetary economy. Explain your reasoning.2. Consider “The Economic Organization of a P.O.W. Camp,” by R. A. Radford. (a) (5pts) According to Radford, what caused inflation in the POW camp? (b) (5pts) What caused deflation in the POW camp, according to Radford?(c) (10pts) What costs of inflation and deflation does Radford describe? 3. (a) (10pts) In “Deflating the Case for Zero Inflation, ” what does Rao Aiyagari mean when he says that inflation is “a type of tax”? (b) (5pts) What does Aiyagari believe would happen if the United States government eliminated the inflation tax?4. In the October 3, 2006 Wall Street Journal article “Reading the Bond Market’s Tea Leaves to Deduce What’s Ahead” (p. R21) a WSJ reporter asked fund manager Liard Landmann “Do you expect an economic downturn?” Mr. Landmann replied :“We definitely expect a slowdown. All the factors are in place for that. Monetary policy works with a lag so the Fed’s interest-rate increases of the past two years are poised to weigh on the economy. There’s a housing slowdown, and the consumer is not in a position to provide stimulus to the economy.”Consider the yield curves for United States government treasury debt from the October 3, 2006 Wall Street Journal, shown below. (a) (20pts) Under the Pure Expectations theory of the term structure of interest rates, does the current yield curve (the one marked “Yesterday”) provide evidence supporting a forecast of an economic slowdown to come? Thoroughly explain your answer.(a) (20pts) Under the Liquidity Premium theory of the term structure of interest rates, does the current yield curve provide evidence supporting a forecast of an economic slowdown to come? Thoroughly explain your answer.QuickTime™ and aTIFF (LZW) decompressorare needed to see t his pict ure.(c) (5pts) Why do economists look at yield curves when we want to “deduce what’s
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