Name and immatriculation number; ££ $2 Exam, Advanced Macroeconomics 1, Part 1, WS 13/14 Prof. Fuchs-Schiindeln, Ph.D. ‘Time allowed: 60 minutes ‘The exam has 6 questions and you can reach 60 points in total. At the beginning of each question the total number of achievable points is stated. Similarly, for each subquestion the number of achievable points is stated. You should use the points as a guideline for how many minutes to spend on each question Please write your name and immatriculation number on the top of each sheet of the examination book and the handout with the questions. Write all your answers in the examination book. ‘The handout with the questions has nevertheless to be returned. Please make your handwriting as clean as possible. Good luck! Question 1 ) sfies the usual properties. She has a saving technology s considering (7 points in total) Answer thé following questions in words. (max 3 lines for ea 1. (3 points) Assume an agent’s utility sat with the interest rate r > 0 and discounts the future by 3 € (0,1). Suppose she ‘a particular consumption sequence {é,,é1,1} that leads to u'(&) < BU + ru If she behaves optimally, what will she change? 2. (2 points) What does certainty equivalence mean? 3. (2 points) What is the difference between partial equilibria and general equilibria’? Question 2 ‘The optimal change in consumption (9 points in total) Assume quadratic utility and 3(1 +r) between period ¢ and period t — 1 (from the perspective of period ¢) is given by [Enver] 1. (5 points) Suppose income follows the process given by AG, = ) “| -£ where AC, = C, — Cy-1 and r > 0 is the interest rate. Y=V +e, @ ~iid.N(0,07) where Y is a constant. Derive the optimal consumption response. AC), Interpret the resulting2. (4 points) Derive explicitly the volatility (variance) of income and consumption growth. Which of the two entities exhibits higher volatility? Explain the result intuitively. Question 3 (11 points in total) Consider an overlapping generations model. Each cohort lives for T’ periods, goes to school in the first. periods of life and earns no income in those periods. Each agent. works from period S+1 to T and is rewarded with income Y in each working period. Assume 6 = 1,r = 0, ie., agents desire a flat consumption path. Assume that an agent can borrow or lend on the international financial markets during his/her life, but. cannot leave any debt. at. the end of life 1. (6 points) Calculate aggregate saving (the flow value that is saved, not the stock) at a given point in time when the population grows by the factor (1 +n) but there is no income growth. (Normalize such that the youngest generation has size 1, the second youngest ;1,, the third youngest (:1;)*, ..., the oldest. (;4;)"”") 2. (5 points) Suppose for simplicity that there are exactly as many schooling as working years (S = T —S). Compare aggregate saving for an economy with negative population growth (n <0) and an economy with no population growth (n = 0). In which economy is aggregate saving higher? Show formally and explain the result intuitively. Question 4 (10 points in total) An agent lives for 2 periods, i.c., period 1 and 2, and receives deterministic income Y; > 0 in each period. She can save/borrow at the interest rate r = 0. Her utility is given by log(C) where C’ is the consumption and she discounts the future by 3. She has an initial asset level Ay. 1. (2 points) Write down the agent’s maximization problem (i.e., an objective and budget. con- straint(s)) in a sequential form. No derivation is needed. 2. (2 points) Write down the agent’s maximization problem in a recursive form. That is, state the Bellman equation. What are the state variables and the control variables? No derivation is needed. O and it is tion. This 3. (4 points) Assume = 1. Assume that the agent has no utility after she dies, 1 not possible to leave debt. Solve this maximization problem using the Bellman eq means you should derive the policy function for periods 1 and 2. 4, (2 points) Suppose now Yp is stochastic and will be drawn from a distribution whose support is given by {Y,Y} where Y < Y. Derive the endogenous borrowing limit for this agent in period 1Question 5 (15 points in total) Consider an economy consisting of two infinitely lived agents. There is a single non-storable consumption good. The type 1 agent receives the endowment stream {y!}® such that {0,2,0,2,0,2,---}. The type 2 agent receives the endowment stream {y?}2» such that {2,0,2,0,2,0,---}. Type ¢ € {1,2} agent maximizes her life-time utility 2%, $'loge. 1, (4 points) Consider a social planner solves a planner’s problem in which he puts equal weights for each agent. Write down and solve the planner’s problem. 2. (2 points) Is the allocation you derived in the previous question Pareto efficient? Why/why not? 3. (2 points) Assume that the two agents meet each period t and choose a loan l, from type 2 (even type) to type 1 (odd type). The loan has to be paid back by type 1 in the next period and the interest payment is given by r1. Write down the agents’ maximization problem, given a price system {r1}{29- No derivation is needed. (3 points) Define a competitive equilibrium of this economy. 4 points) Show that the equilibrium consumption of each agent is constant over time, i.e., G =@ for i € {1,2}. No need to solve for (2,2) Question 6 (8 points in total) Consider the following deterministic household problem. gaz Elon) Ste = 4 — ey > 0,41 20 where 8 € (0,1) is the discount rate. The initial asset ay > 0 is given. 1. (1 point) Write down the Euler equation. No derivation is needed. ation is needed. 2. (2 points) Write down the Bellman equation. No d 3. (5 points) Show that this system has a unique solution.