Question 1. You are given the following information about an economy's long run aggregate production function. This production function is a Cobb-Douglas production function with constant returns to scale. Furthermore, firms in this economy are perfectly competitive profit maximizing firms. The input markets for capital and labor are also perfectly competitive.
Use the following information and your knowledge of the relationship between the marginal product of an input and its real price, to calculate the amount of labor and the amount of capital hired in this economy. Show your work.
Y = AKαL1-α where Y = real output, K = units of capital, L = units of labor
A = 2 A = measure of technology in the economy
α = .5 α = capital's share of income
R = 2 R = rental price of capital
P = 2 P = aggregate price level
Y = 800 W = nominal wage rate
W = 2
a. Show your work here for calculating the amount of labor (L) hired by this firm.
b. Show your work here for calculating the amount of capital (K) hired by this firm.
Question 2. When calculating the consumer price index
a. Quantities are allowed to vary.
b. Prices are allowed to vary.
Question 3. When government spending is less than net taxes government saving is
a. Positive
b. Negative
Question 4. Use the information below about an economy's CPI to answer this question.
Year CPI
2004 140
2005 180
2006 240
The rate of inflation in this country between 2004 and 2005 is
a. greater than 40%.
b. 40%.
c. less than 40%.
Question 5. In the classical model if government spending decreases, holding everything else constant, what happens to each of the following?
a. The interest rate _______
b. The level of investment _____
c. The level of private saving _____