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Berkeley ECON 202A - ECON 202A Final Examination

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Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8UNIVERSITY OF CALIFORNIA FALL 2006Department of Economics G. Akerlof/D. RomerECONOMICS 202AFINAL EXAMINATIONThe exam consists of two parts. There are 150 points total. Part I has 44 points and Part IIhas 106 points.Some parts of the exam are much harder than others. If you get stuck on one part, do the bestyou can without spending too much time, and then work on other parts of the exam.2PART I. Multiple choice. 44 points.In your blue book, give the best answer to 11 of the following 12 questions.Note:-- If you wish, you may add a brief explanation of your answer to AT MOST TWOquestions. If you add an explanation to an answer, your grade on that question will be basedon your answer and explanation together. This means that an explanation can either raise orlower a grade.-- If you answer all 12 questions, your overall score will be based on your average, noton your 11 best scores.1. Consider a consumer whose behavior is described by the permanent-income hypothesis. Inresponse to an unexpected, permanent fall in his or her labor income, the consumer will:A. Borrow against future income to keep his or her consumption unchanged.B. Immediately reduce consumption by the amount of the fall in labor income.C. Gradually reduce consumption by the amount of the fall in labor income.D. Gradually reduce consumption by more than the amount of the fall in labor income.2. The main prediction of the permanent-income hypothesis that is tested by Campbell andMankiw and by Hsieh is that:A. Expected changes in income do not cause expected changes in consumption.B. Unexpected changes in income cause unexpected changes in consumption.C. Temporary changes in income cause temporary changes in consumption.D. Permanent changes in income cause permanent changes in consumption.3. Consider two consumers who maximize lifetime utility and who are not liquidityconstrained. Consumer A' s utility function, u (• ), is quadratic, while Consumer B' s utilityAfunction, u (• ), satisfies u ' (• ) > 0, u ' ' (• ) < 0, u ' ' ' (• ) > 0. Then:BBBBA. Consumer A will never go into debt, but Consumer B may.B. Consumer B will never go into debt, but Consumer A may.C. In response to an increase in uncertainty about future income, Consumer A' sconsumption will not change, but Consumer B' s will fall.D. Consumer A will always have greater savings than Consumer B.4. In the firm optimization problem in the q-theory model, the transversality condition rulesout:A. Paths where the firm is violating its budget constraint by going further and furtherinto debt.B. Paths where investment does not satisfy 1 + C' (I(t)) = q(t).C. Paths where the firm is constantly increasing its investment even though theprofitability of capital is constantly falling.D. Paths where investment approaches zero.5. Consider the q-theory model where K is converging to its long-run equilibrium level frombelow. Over time, K is rising, and:A. q is falling, and investment is positive but falling.B. q is falling, and investment is positive but can be sometimes rising and sometimesfalling.3C. q is falling, and investment can be sometimes positive and sometimes negative.D. q can be sometimes rising and sometimes falling.6. Consider the q-theory model, and suppose that the economy is initially in long-runequilibrium. Now suppose that from time 0 to time T > 0, there is a gradual upward shift ofthe B(K) function. This will cause the q = 0 locus:.A. To jump to the right at time 0.B. To shift gradually to the right from time 0 to time T.C. To jump to the right at time 0 if it becomes known at time 0 that the B(K) functionwill shift gradually up, and to shift gradually to the right from time 0 to time T if each upwardshift of the function is unexpected.D. The change will have no effect on the q = 0 locus..7. If there is asymmetric information between lenders and entrepreneurs in financial markets:A. For an entrepreneur who is able to obtain outside financing, the expected payoff ofthe entrepreneur' s project has no effect on the entrepreneur' s decision of whether to undertakethe project.B. For an entrepreneur who has sufficient funds to finance his or her project withoutoutside financing, the expected payoff of the entrepreneur' s project has no effect on theentrepreneur' s decision of whether to undertake the project.C. For an entrepreneur who has sufficient funds to finance his or her project withoutoutside financing, prevailing interest rates in the economy have no effect on the entrepreneur'sdecision of whether to undertake the project.D. A project may not be undertaken even though the expected payoff exceeds theprevailing rate of return in the economy.8. Modigliani and Miller show that:A. The expected amount a firm has to pay to debtholders and equityholders for eachunit of financing it obtains is the same for debt and equity.B. Purchasers of assets view debt and equity as perfect substitutes.C. Because of the presence of complete Arrow-Debreu markets, firms' financingdecisions lead to Pareto efficient allocations.D. The total market value of claims on a firm does not depend on the mix of debt andequity financing that it uses.9. The long-run effect of a permanent decrease in the rate of money growth will be to cause:A. Real output to be lower than it otherwise would have been.B. The real interest rate to be higher than it otherwise would have been.C. The real money stock to be lower than it otherwise would have been.D. The real money stock to be higher than it otherwise would have been.10. If a central bank follows a “Taylor rule,” it will:A. Keep the money supply constant.B. Keep the money supply growing at k percent per year, where k is some smallnumber.C. Change the nominal interest rate only in response to changes in inflation.D. Change the nominal interest rate in response to both changes in inflation andchanges in the difference between output and its flexible-price level.411. One of the “case studies” in Taylor' s paper is:A. The large increase in oil prices in 1990.B. The “credit crunch” during the recovery from the 1990-1991 recession.C. The East Asian crisis of 1998.D. The bursting of the dot.com bubble in 2000.E. September 11, 2001.12. Ball and Svensson' s model of optimal monetary policy implies that:A. The socially optimal inflation rate is about 3 percent.B. The central bank should set the real interest


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