2. Give a brief discussion of the real business cycle theory.

(a) What does it mean for allocations to be Pareto eficient? What are the policy implications?

(b)Explain some of the problems associated with commodity-based money.

(c)  Explain the extent you agree with this statement: Ricardian equivalence shows that government deficits do not matter.

i. Can the real interest rate be negative? Why?

ii. Can the nominal interest rate be negative? Why?

(a) Find the cost function, C(Y), that tells the minimum cost required to produce Y units of output.

(b) Will the firm encounter any problem, if the firm charges a price P equal to marginal cost? Explain your logic.

3.  In most endogenous growth models, allowing a monopolist to caplure no- nopolistic proft plays an important role in boosting innovation. Consider a monopolict facing a linear demand function: Q = a - 6P, and the marginal cost is constant at c. Parameters a, b, and c are positive constants with a - bc ＞ 0. Find the ratio of monopolistic proft to the total potential consumer surplus available if the good were priced at marginal cost.

(a) Express the aggregate capital evolution equation.

(b) Express the capital evolution equation in terms of i: = :y and the model parameters. State the necessary assumption for this derivation.

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