1. Short questions

a. Why would households be interested only in the real values of consumption, income and assets? Think about how households would feel if the nominalvalues of consumption, income and assets all doubled, and the price level, P, also doubled.

c. Distinguish clearly between a household’s initial asset position and the change in that position. If a household has negative saving, is that household necessarily a borrower in the sense of having a negative position in bonds?

d. How do increases in the rental price, R/P, and wage rate, w/P, affect respectively the quantity of capital services demanded, Kd, and the quantity of labor demanded, Ld? Where do the assumptions of diminishing marginal productof capital (MPK) and labor (MPL) come in?

e. Derive the intertemporal household budget constraint for the two-period case. According to this equation, by how much would next year’s consumption C2 rise if a household reduces this year’s consumption C1 by one unit? (Assuming nothing else changes in the equation.)