Midterm Practice 1
Econ 3102
ATTENTION: The following questions DO NOT cover all the material that will be on the midterm. I
put questions about some of the material that was not in the problems sets, so that you can have an idea
of how they may show up in the midterm. Make sure, you also know how to solve all of the questions in
both problem sets and go over the chapters 1 though 7 (except endogenous growth in chapter 7) and the
handouts.
There are answers for the measurement section without the derivation. You should work on the derivation
yourself. If you read the book you should be able to answer all of the questions for the other two sections.
Measurement
Suppose the country of Banapples is closed and only produces apples and bananas every year. Suppose
that we have collected the following data:
PA
QA
PB
QB Pop.
Year
2009 $1.00 250 $2.00 200 300
2010 $1.50 100 $3.00 200 325
PX and QX denote the price and quantity produced of good X .
1. Calculate Banapplesnominal GDP for 2009 and 2010.
GDP2009 = $650,
GDP2010 = $750
2. Calculate Banapplesreal chained GDP for 2009 and 2010, choose the index for 2009 to be equal to
the nominal GDP in that year.
c
RGDP2009 = $650,
c
RGDP2010 = $500
3. Using the implicit price de
ator, calculate the rate of in
ation between 2009 and 2010.
= 50%
4. Calculate the growth rate in Banapples real chained GDP per capita between 2009 and 2010.
s
g
29%
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Short Answers
5. List the THREE approaches to measuring GDP.
6. State TWO situations in which a competitive equilibrium (CE) may not be Pareto optimal.
7. Brie explain in terms of income and substitution eects why an increase in the real wage may
y
cause a worker to supply less hours to the labor market.
8. If the taxes were reduced what would happen to a consumer demand for the consumption good and
s
supply of labor? Explain.
9. Explain why the Malthusian model does a reasonable job at explaining economic growth until the
Industrial Revolution. Does it do well in explaining economic growth since then?
10. In the standard growth accounting exercise, what are the THREE that factors account for growth
in RGDP per capita?
11. Does absolute convergence in the Solow model predict that all countries will eventually converge to
the same standard of living? Explain.
12. Compute the growth rate of Y in a steady state of the Solow model.
Answer:
zF (K 0 ; N 0 )
N 0 F (k 0 ; 1)
Y0
=
=
= (1 + n) ,
Y
zF (K; N )
N F (k; 1)
where the last equality follows from the fact that in the steady state k 0 = k = k .
13. In the Solow model, what happens to the steady state level of capital per capita if the growth rate
of population increases. Is this consistent with the data?
The Solow Growth Model
Consider our standard Solow growth model with real output at time t given by Yt = zF (Kt ; Nt ) =
1= 3 2=3
zKt Nt . The initial capital stock is K0 > 0. Capital depreciates after use at the rate 2 (0; 1).
Assume that each agent is endowed with one unit of time h = 1 and each agent does not value leisure.
Additionally, each agent saves a fraction s 2 (0; 1) of their total income. The population evolves according
to Nt+1 = (1 + n) Nt , where n 0 and N0 = 1. There is no government and the economy is closed.
14. Derive an expression that relates capital per worker tomorrow kt+1 and capital per worker today kt .
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15. What is the steady-state value of capital per worker k , in terms of exogenous variables and parameters.
16. If all countries are identical, except for their initial capital stocks, what does the Solow growth model
predict will occur in the long-run? Does the data support this?
17. In a steady-state, are aggregate variables changing? If so, at what rate are they growing per period?
If not, explain why they are not growing in the steady-state.
18. What is the key driving force of sustained increases in RGDP per capita in the Solow model?
19. Suppose that the economy is initially in a steady-state and suddenly TFP decreases from z0 to z1 .
What happens to steady-state capital per capita k , output per capita y , and consumption per
capita c ? Plot the evolution of capital per capita from the old to the new steady-state.
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