A consumer, Charlie, consumes only two goods: apples and bananas. Let A and B
denote the quantity of apples and bananas, respectively; and pA and pB , the price of
A and B . Charlie’s preference can be represented by nice indifference curves which
are bowed inward and he always spends all of his $20 income. If he consumes
(A,B) = (5,5) when ( pA , pB ) = (2,2) and (A,B) = (8,6) when ( pA , pB) = (1,2) ,
then is apple a normal good or an inferior good for him? What about bananas? (5%)
An exogenous fall in exports cannot be blamed for an increased budget deficit. The
only exogenous variables that affect the budget deficit are government spending and
the tax rate. (6%)
Consider a company owned by a foreign businessman but producing in the Taiwan. In
a given year a company spends $100 on intermediate goods and $200 in wages. It has
sales for $800.
Hence, its contribution to Taiwan’s GNP is the same as its value added, and it does not
contribute value added to the GDP of the country where the businessman resides.
(6%)
In a closed economy where there is only consumption, no government or investment
and no inventory accumulation, the GDP deflator and the CPI should give exactly the
same measure of inflation. (6%)
Explain the “time inconsistency problem”. (8%) How does this affect the central
bank’s monetary policy effectiveness? (8%) How can policy makers avoid such time
inconsistency problem? (4%)
Suppose that a financial innovation makes the demand for money more interest-elastic.
How does this affect the relative efficacy of monetary and fiscal policy? (12%)
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