Two period Consumption Model Paper

Two period Consumption Model
 Two period Consumption Model

Two period Consumption Model


What determines whether a consumer is a borrower or a saver in the first period of a two period consumption model? Draw the diagram showing the consumer’s optimisation with respect to consumption and savings in a two-period model if a representative consumer is a lender in the first period. [5 + 5 = 10 marks]


Explain why a tax cut is not a free lunch and its implications for an expansionary fiscal policy. [10 marks]


In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth? [10 + 5 = 15 marks]


Use diagrams and explain how the central bank in the New Keynesian model should change its target interest rate in response to each of the following shocks.

  1. There is a shift in money demand.
  2. Total factor productivity is expected to decrease in the future.
  3. Total factor productivity decreases in the present.  [3×5 = 15marks]

Section B: (Word limit: 1000 +/- 10% words)

Choose three countries – one rich country from the OECD group and two poor countries, one from Africa and one from Asia. Find out the average income per capita for the period 1990- 2014 in each country. Find some data on country characteristics that might help explaining the differences in average income per capita such as average investment rates, average savings rate, average population growth rates, average education attainment during 1990-2010

(Hint: See the Web site of the World Bank, to find such data).

Explain which of these factors is most responsible for the observed income differences? How useful is the Solow model as an analytic tool for understanding the difference between the rich and poor countries selected? [40 marks]

Before find the country data – use the link above to find LOW INCOME Asian and African country. If not be able to find data can use lower middle income

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