General Directions for Essay: You are to write an essay on the following topic . This should be a unified, thoughtful essay. The essay will be graded on conte nt, expression, clarity, organization, and overall quality (including legibility).
1. During the past ten to fifteen years, the Internet has changed the way many businesses operate, leading often to an increase in firm productivity. Using the production - side assumption of constant returns to scale and an aggregate Cobb Douglass production function, in addition to the assumption of perfect competition in both the output and input markets, construct an argument which relates the e ffect of the Internet on GD P, real wages, firm profits, an d the income share of capital. Be explicit about how the assumptions stated in the question tie into your argument.
2. At the end of the Cold War, the US government was able to reduce government spending on the military by 2% of GDP. Consider the two following plans for reallocating this money: a) The entire amount is given to households in the form of a tax cut. b) The entire amount is given to businesses in the form of an investment tax credit. For both a) and b), use the Classical Model to analyze what will happen to the equilibri um real interest rate, consumption, and investment relative to the sit uation before the defense cut. Assume that households save more when real interest r ates increase, and vice versa. Which policy will result in a higher rate of long - term growth of the US economy? (Note: while graphs may be useful in helping determine the answer, they are not themselves an answer to the question.)