There are two groups: "omnivores (from now consider them as group A) ", and "vegans"(group B)

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There are two groups: "omnivores (from now consider them as group A) ", and "vegans"(group B) .
There are 100 individuals: 50 are omnivores and 50 are vegans. Omnivores eat meat (good 1) and
vegetables (good 2) with utility log x
A
2 +log x
A
1
2
whereas vegans only eat vegetables (good 2) with utility
log
x
B
2

. All individuals can produce 4 units of meat and 4 units of vegetables which they sell in a
competitive market.
(a) Set the price of meat to one. Find the vegetable demand function for each of the omnivores.
[4 marks]
(b) How does invoking Walras law facilitate solving for the price of vegetables? [3 marks]
(c) What is the equilibrium price of vegetables? [4 marks]
(d) What are the utility levels of omnivores and vegans at the equilibrium price of vegetables? [Hint:
you can leave your answer in logs] [8 marks]
(e) Does it make sense to compare utility of omnivores and vegans? [3 marks]
(f) Now suppose that 25 of the omnivores become vegans, i.e. so that there are 75 vegans and 25
omnivores. What is the new equilibrium price of vegetables? [6 marks]
(g) How does the utility of omnivores and vegans change due to the increase in the number of
vegans? Explain the economics behind your finding. [8 marks]
(h) Explain why your finding in part 7 depends on a general equilibrium analysis, i.e. considering
a change in the equilibrium relative price of vegetables. Would you get a different result if the
supply of vegetables also increased as more people become vegan? [6 marks]
(i) Assume that some vegans consider the market for meat to be repugnant. Discuss the parallels
and differences in the arguments that could be made for banning eating meat and markets for
organs for transplant, referring to the course readings in your answer. What economic considerations should go into deciding whether to allow meat consumption? (Hint: should distributional
considerations be a deciding factor?

 

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Use the data in the table below to represent a household's consumption and income for each given year. a. Use a fixed weight inde. c. Use a chain weighted index to determine how much income has changed between the two years. 3. The data in the table below describe key features of the trade relations between012 Price Index 2005 (CPI) Price Index 2012 (CPI) Europe 40% 10.6 RMB/Euro 8.26 RMB/Euro NA NA Japan 30% 12.9 Yen/ RMB 12.8 Yen/RMB NA NA USA 30% 8.28 RMB/$ 6.30 RMB/$ 195 230 a. Calculate the trade weighted exchange rate for China for 2012, assuming that the 2005 rate equals 100. How much has it changed since 2005? [Be careful to use appropriate units in your calculations.] b. Assume that China's price index in 2005 was 100 and that for 2012, it stands at 130. How has the real exchange rate between the U.S & China changed between 2005 and 2012? c. Explain why the real exchange rate represents terms of trade. 4. On a number of occasions, U.S. Senators have proposed levying a tariff on Chinese imports. Assume that the U.S. is a large open economy. Carefully illustrate and discuss the potential effects of such a policy on the real exchange rate, net exports, and domestic investment. How would the results change if the U.S. were a small open economy?

 

Part A (15 points) State whether you think each of the following questions is true (T), false (F), or uncertain (U) and briefly explain your answer. No credit will be given for an answer without any explanation (1) [5 points] Staggering makes the overall level of wages and prices adjust quickly, because individual wages and prices change frequently (2) [5 points] If Congress raises taxes, the response of the economy to the tax increase depends on how the central bank responds (3) [5 points] The Mundell-Fleming model shows that a fiscal policy is more effective than a monetary policy Part B (15 points) Briefly answer the following questions in words. (1) [5 points] Can an IS curve be vertical? Give an example (2) [5 points] What is an advantage to fixed exchange rates? (3) [5 points] Why do firms have motives for holding inventories of goods? Give an example 1 Part C (70 points) (1) [14 points] IS-LM Model Assume the following model of the closed economy in the short run, with the price level (P) fixed at 1.0: C = 0.5(Y − T) T = 1, 000 I = 1, 500 − 250r G = 1, 500 Md P = 0.5Y − 500r Ms = 1, 000 (a) [2 points] Write a numerical formula for the IS curve, showing Y as a function of r alone [Hint: Substitute out C, I, G, and T] (b) [2 points] Write a numerical formula for the LM curve, showing Y as a function of r alone [Hint: Substitute out M/P] (c) [2 points] What are the short-run equilibrium values of Y , r, and national saving (S)? (d) [2 points] Assume that G increases by 1,500 (i.e., G = 3, 000). By how much will Y increase in short-run equilibrium? (e) [3 points] You are the chief economic adviser in this hypothetical economy. Do you believe that fiscal policy is more potent than monetary policy? Briefly discuss [Hint: Use the slope of IS and LM curve in (a) and (b)] (f) [3 points] Write the numerical aggregate demand (AD) curve for this economy, expressing Y as a function of P (2) [10 points] Classical models in the Long Run During early 1980s, President Reagan proposed to increase defense spending and decrease taxes. Table 1 shows how the policies affected the U.S. economy. Use the Classical Model to answer the following questions (a) [3 points] Use the closed economy model and illustrate graphically how the model predicts national saving (S), investment (I), real interest rate (r), net export(NX), and real exchange rate (ε) in the long run (b) [2 points] Are the data in the table consistent with model predictions that you found in part (a)? Briefly discuss 2 Table 1: The Reagan Deficits variable 1970s 1980s actual change S 19.6 17.4 ↓ I 19.9 19.4 no change r 1.1 6.3 ↑ NX -0.3 -2.0 ↓ ε 115.1 129.4 ↑ Data: decade averages; all except r and ε are expressed as a percent of GDP (c) [3 points] Now use the small open economy model and illustrate graphically how the model predicts national saving (S), investment (I), real interest rate (r), net export (NX), and real exchange rate (ε) in the long run (d) [2 points] Are the data in the table consistent with model predictions that you found in part (c)? Briefly discuss (3) [6 points] Open Economy in the Short Run Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming (IS∗ − LM∗ ) model to illustrate graphically the impact of an increase in the world interest rate (r ∗ ) on the nominal exchange rate (e) and level of output (Y ) in a small open economy with a floating-exchange-rate system (4) [10 points] The Model of AD and AS Assume that an economy is initially operating at the natural rate of output (Y ). A short-run aggregate supply equation is given by Yt = Y + α(Pt − P e t ), where Y is output, P is the price level, P e is the expected price level, and α > 0 (a) [2 points] What is the slope of the aggregate supply curve? (b) [3 points] According to the sticky-price model, the value of α depends on the fraction of firms with sticky prices. Other things being equal, if a greater proportion of firms follows the sticky-price rule, what happens to the slope of the AS curve? (c) [5 points] Use the model of aggregate demand and aggregate supply to illustrate graphically the short-run and long-run effects on price and output of an unexpected expansionary monetary policy change 3 (5) [10 points] The Phillips Curve Suppose that an economy has the Phillips curve πt = π e t − 0.5(ut − 0.06) (a) [2 points] What is the natural rate of unemployment (u n )? (b) [4 points] Use the Phillips curve diagram to illustrate graphically how the inflation rate (π) and unemployment rate (u) change in the short run to an unexpected expansionary monetary policy (c) [4 points] Use the Phillips curve diagram to illustrate graphically how the inflation rate (π) and unemployment rate (u) change in the short run to an expected expansionary monetary policy (6) [10 points] Consumption Theories (a) [3 points] What were Keynes's three conjectures about the consumption function? (b) [2 points] What is the consumption puzzle? (c) [3 points] How does the Permanent Income Hypothesis (PIH) resolve the puzzle? (d) [2 points] Demographers predict that the fraction of the population that is elderly will increase over the next 20 years. What does the Life-Cycle Hypothesis (LCH) predicts for the influence of this demographic change on the national saving rate? That is, will the national saving rate increase or decrease? Why? (7) [10 points] Money Supply and Inflation To increase tax revenue, the US government in 1932 imposed a two-cent tax on checks written on deposits in bank accounts (In today's dollars, this tax was about 25 cents per checks) (a) [2 points] How do you think the check tax affected the currency-deposit ratio? Briefly explain (b) [2 points] Briefly discuss how this tax affected the money supply using the model of the money supply under a fractional-reserve banking system (c) [3 points] Now use the IS −LM model to discuss the impact of this tax on the economy in the short run. Was the check tax a good policy to implement in the middle of the Great Depression? (d) [3 points] Explain how this tax influenced nominal interest rates and inflation rates in the long run using the Quantity Theory of Money (QTM) and the Fisher effect 4 Part D (10 points) If you are a Graduate student, you should answer the following questions. This is a bonus question for Undergraduate Students (8) [10 points] Suppose that the central bank strictly followed a rule of keeping the real interest rate at 3% per year. That rate happens to be the real interest rate consistent with the economy's initial equilibrium (a) [5 points] Assume that the economy is hit by a money demand shock only. Under the central bank's rule, how will the money supply respond to a money demand shock? Will the rule make aggregate demand more stable or less stable than it would be if the money supply were constant? (b) [5 points] Assume that the economy is hit by IS shocks only. Under the central bank's rule, how will the money supply behave? Will the interest-rate rule make aggregate demand more stable or less stable than it would be if the money supply were constant?