Consider the demand and supply functions of K in a given economy.
K = 120 - R [Demand function]
K = 2R [Supply function]
(a) Consider a small open economy with the original demand and supp Assume that the world R* is 30. Find the following solutions. [3 marks
Total Labour Income =
Total Capital Inflow =
Labour-income/GNP ratio =
(b) Consider a small open economy with the original demand functior function, where K =3R. Assume that the world R* is 30. Find the foil
Capital-income/GNP ratio =
Labour-income/GNP ratio =
Question #2: (16 marks)
Consider Solow growth model withy = k°\ where k is the capital p©
Assume that marginal propensity to save (s) is 0.4.
Further assume that 8 + n + g equals 0.16. Find the following steady-
(a)y =
(b)k =
(c)MPk =
(d) c =
(e) sy =
(f) (& + n + g)k =
(g) Find the following when the economy is at Golden Rule steady- state.
s =
c =
Question #3: Assume full-employment Y. Assume that both SG and NX are zero at the initial equilibrium. Assume further that Sp is not a function of interest rate. Fill in the box with any of the following three signs.
t=i
increase
4< = decrease
0 = no change
Question #4:Consider an economy with the following AD equation (based on Chapter 9).
Y = 4(M/P), where V is 4
Full-employment Y = 4000
M=1000
Initial long-run P =1.0
(a) Assume that the velocity of money (V) decreases to 2 due to adverse demand shocks. If the central bank keeps M constant at 1000, the new long-run equilibrium price will be:
(b) Assume that the velocity of money (V) decreases to 2 due to adverse demand shocks. If the central bank increases M to keep Y at 2000 (complete accommodation policy), then M will increase to:
(c) Return to the original model, where V is 4 and M is 1000. Assume that an adverse supply-shock increases price to 1.25.
If the economy is left alone to adjust on its own without any money supply adjustments, the new long-run equilibrium price will be:
(d) Return to the original model as described before, where V is 4 and M is 1000. Assume that an adverse supply-shock increases price to 1.25 and as a result, the economy's real GDP falls to 4000.
Assume that the central bank increases money supply by 20% to offset (partially) the negative GD gap.
The new lon^-run equilibrium P will be:
According to efficiency-wage theory, I: cutting the employer payroll tax paid for hiring skilled workers leads to a smaller unemployment rate, and II: cutting the employer payroll tax for hiring unskilled workers leads to a smaller unemployment rate.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.
2. If the production function is y = kU2, the steady-state value of y is:
A) ^ = ((5 + g)/(5 + «))l/2.
B) y = (s + g)/{S + n).
C) y = (2/(S + n+g))m.
D) y = s/(S + n + g).
3. Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state, the country with the higher population growth rate will have a level of total output and rate of growth of output per worker as/than the country with the lower population growth rate.
A) higher; the same
B) higher; a higher
C) lower; the same
D) lower; a lower
4. If the production function is Y= AK?BLm in the land of Solovia, and the labour force increases by 5 percent while capital is constant, labour productivity will:
A) increase by 3.3 3 percent.
B) increase by 1.67 percent.
C) decrease by 1.67 percent.
D) decrease by 3.33 percent.
Use the following to answer question 5:(Exhibit: Saving and Investment in a Small Open Economy)5. (Exhibit: Saving and Investment in a Small Open Economy) In a small open economy if the world interest rate is r3, then the economy has:
A) a trade surplus.
B) balanced trade.
C) a trade deficit.
D) positive capital outflows.
6. (Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point represents the short-run equilibrium immediately following the drought and point represents the eventual long-run equilibrium.
A) B; C
B) B;A
C) E;D
D) D; A
7. (Exhibit: Policies Influence Real Exchange Rate) Which of the graphs illustrates the impact on the real exchange rate of an increase in household saving in the basic version of the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
8. In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade and net capital outflow.
A) deficit; negative
B) surplus; negative
C) deficit; positive
D) surplus; positive
9. When Henry Ford paid his workers $5 per day when the prevailing wage was between $2 and $3 a day:
A) it greatly increased his company's costs.
B) workers reduced their work efforts because they felt they "had it made."
C) Ford proved the efficiency-wage theory was wrong.
D) it raised the efficiency of his workers.
10. If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:
A) 1 percent.
B) 9 percent.
C) 10 percent.
D) about 11 percent.
11. Consider a small open economy whose demand and domestic supply of capital relationships are R = 30 - (l/2)K and K = 7R, respectively (where K and R denote capital and its marginal product). Capital is perfectly mobile internationally, and the yield on capital (R) in the rest of the world is 6.1: This country's GDP exceeds 900. II: This country's GNP exceeds 800.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.
13. If the information technology boom increases investment demand in the basic model of a small open economy, then net exports and the real exchange rate .
A) increase; appreciates
B) increase; depreciates
C) decrease; appreciates
D) decrease; depreciates
14. If an economy with no population growth or technological change has a steady-state MPK of 0.125, a depreciation rate of 0.1, and a saving rate of 0.225, then the steady-
state capital stock:
A) is greater than the Golden Rule level.
B) is less than the Golden Rule level.
C) equals the Golden Rule level.
D) could be either above or below the Golden Rule level.
15. In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:
A) output per worker.
B) output per effective worker.
C) consumption per worker.
D) consumption per effective worker.