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Question 1

C₁ is present consumption
C₂ is future consumption
Y₁ is the present endowment
Y₂ is the future endowment
r is the real interest rate between the present and the future
Ω is wealth

Which of the following equations is not the household's intertemporal budget constraint?

a) 0 = (Y₁ - C₁)
+ (Y₂ - C₂ )/(1+r)

b) C₁ + C₂/(1+r) = Ω

c) Y₁ +Y₂/(1+r) = Ω

d) C₁ + C₂/(1+r) =
Y₁ +Y₂/(1+r)

Question 2

Point A represents the endowments of Crusoe for today and tomorrow and the real interest rate is r . Crusoe's wealth is equal to...

a) OB

b) DB

c) OY₁+OY₂.

d) The area of the rectangle OY₁AY₂.

Question 3

In a two-period world where firms can invest K in the present period in order to produce F(K) in the future period, if the real rate of interest is r, then the net return from investing K would be equal to:

a) F(K)/(1+r) minus K

b) F(K) minus K/(1+r)

c) F(K) minus K

d) K times (1+r)

Question 4

The reason that it does not matter whether a firm uses debt (borrowing) or equity (own saved funds) to finance its investment plans is...

a) ...that Ricardian equivalence fails.

b) ...that in a global world it is always possible for a nation to borrow abroad.

c) ...that a Ponzi-scheme is necessary so the firm is indifferent.

d) ...that firms belong to their shareholders and the net return from investment raises their wealth.

Question 5

Consider the current government budget, where:

T₁ is today's net taxes.
D₁ is government debt at the start of today.
G₁ is today's government spending.
r_G is the real interest rate paid on government debt.
All variables are positive.

The government is running a deficit today, if

a) G₁ - T₁ > 0

b) D₁ (1+ r_G) > T₁ - G₁

c) r_GD₁ > T₁ - G₁

d) (G₁+ D₁) r_G - T₁> 0

Question 6

Suppose the market interest rate is equal to 5%. The price of a bond that promises one payment of € 100 in one year would be equal to:

a) € 100.00 - € 5.00

b) € 100.00

c) € 100.00 + € 5.00

d) € 100 ÷ 1.05

Question 7

The difference between a nation's current account surplus and its primary account surplus is its …

a) … net asset position with respect to the rest of the world.

b) … net investment income from abroad.

c) … balance of payments

d) …net sovereign borrowing

Oxford University Press, Online Resource Centre, Chapter 07.

Chapter 07