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Final Exam, Spring 2010. Daytime MBA. Each question 10 points. 100 points total. SHOW WORK.
1.
Steve and Erwan have the following production possibilities schedule
Beef
Poultry
Steve
10/hour
8/hour
Erwan
8/hour
7/hour
a. 2 points. Suppose Steve and Erwan do NOT trade and they each spend 4 hours a day making
beef and 4 hours a day making poultry. How much beef and poultry do Steve and Erwan
each produce (and immediately consume).
b. 4 points. Prior to trade, what is the cost of Beef in units of Poultry for Steve? What is the
cost of Beef in units of Poultry for Erwan?
c. 4 points. Now Suppose Steve and Erwan start to trade. What does Steve export to Erwan?
What does Erwan export to Steve? Explain why.
2. Steve and Erwan have the following production possibilities schedule
Consumption today
Consumption tomorrow
Steve
10.00/hour
10.20/hour
Erwan
8.00/hour
8.40/hour
a. 2 points. Suppose Steve and Erwan do NOT trade and they each spend 4 hours a day making
Consumption today and 4 hours a day making Consumption tomorrow. How many units of
Consumption today and Consumption tomorrow do Steve and Erwan each produce.
b. 4 points. Prior to trade, what is the implied interest rate for Steve? What is the implied
interest rate for Erwan?
c. 4 points. Now Suppose Steve and Erwan start to trade. Who runs a trade deficit? Explain
why.
3. On January 1, 2008, the price of a Big Mac is $3.00 in the United States and the exchange rate is
1.5 U.S. dollars per English pound. The inflation rate in the United States in 2008 is 2 percent
and the inflation rate in England in 2008 is 4 percent. Assume purchasing power parity holds.
a. 5 points. What is the price of a Big Mac in England on January 1, 2008 and January 1, 2009
b. 5 points. What is the Exchange rate in U.S. dollars per English pound on January 1, 2009.
4. On January 1, 2009, one English pound can buy 1.5 U.S. dollars. The one-year real risk-free
interest rate in England and the United States is 3 percent. The expected inflation rate in 2009 is
1 percent in the United States and the expected inflation rate in England is 5 percent. Assuming
that the Fisher equation, purchasing power parity, and covered interest party all hold, what is
the forward exchange rate in dollars per pound for January 1, 2010, when contracted on January
1, 2009.
5. You have been given the following information for the country of Costa Rica:
Year
Apple Prices
Apple Quantities
Banana Prices
Banana Quantities
2000
3
4
5
6
2001
3.2
4.1
5.2
6.1
Fill out the following table (in your blue book), make sure to show work.
Year
Expenditures on
Apples
Expenditures on
Bananas
Nominal GDP
2000
2001
6. Given your answer from question 5, fill out the following table in your blue book. Make sure to
show work.
Growth Rate of
Real GDP
(in Percent)
2000-2001
Inflation Rate
(in Percent)
7. Given your answer from questions 5 and 6, fill out the following table in your blue book. Make
sure to show work.
Year
Real GDP,
BASE YEAR 2000
Real GDP,
BASE YEAR 2001
2000
2001
8. Explain why government tax revenues and deficits are not the same thing as “government
spending” in the National Income and Product Accounts.
9. An acquaintance named Lutz hands you the following data on sources of income in the year
2009 in Germany:
Unambiguous Labor Income
60 Marks
Unambiguous Capital Income
25 Marks
Ambiguous Income Source 1
7 Marks
Ambiguous Income Source 2
8 Marks
Total Income
100 Marks
Using the method we discussed in class and in the book, estimate the fraction of total income
accruing to capital in Germany in 2009. Show work.
10. You have been told that a firm produces output Y using Labor L according to the production
function: Y = 100 Lα. The available data suggest α=0.5 for this firm. You also know that the
marginal cost of an additional unit of labor is $15. How many units of labor (fractional units of
labor are OK) should the firm employ to maximize profits? Show work!