Macroeconomics Extra Practice Problems
Macroeconomics Extra Practice Problems
Macroeconomics Extra Practice Problems
where β < 1.
(c) Show that following an increase in r, utility increases if the following condition holds:
r
Y2
β(1 + r) > .
Y1
(a) What do the indifference curves corresponding to above preferences look like?
(c) Can you think of a situation where a change in r will have no effect on C1 and C2 ?
Provide intuition.
(d) Will the result in part (c) hold in case of any utility function?
1
3. Due to the absence of a well-developed social security system, the working individuals
in China are expected to look after their ageing parents. A demographic transition in
China increases the proportion of older people in the population. This causes working
individuals to reduce their consumption by a fixed amount.
(a) How will this development affect output and nominal interest rate in China in the
short-run?
(b) Would your answer be different if, instead, the marginal propensity to consume de-
clined?
4. Credit cards reduce the demand for money because consumers do not need to make instant
payments. How will an increase in the popularity of credit cards in an economy affect
output and nominal interest rate in the short-run?