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YOUR NAME__________________________________Columbia UniversityIntermediate Macroeconomics W3213,Midterm Exam Fall 2013 (A.D.), Professor XavierNOTE: YOU ARE NOT ALLOWED TO USE CALCULATORS!!!!
YOUR NAME and UNI__________________________________Question 1.- Short Speeches(a)Discuss the role of “patents” as a mechanism to induce economic growth. Do you think patents are a good idea? Discuss the prosand the cons.(b)“The citizens of poor countries are unhealthy. As a result they are not very productive. And because they are not very productive,they are poor. Hence, poor people are in a health-‐poverty trap from which they can only escape with large amounts of aid”.Discuss the validity of this statement, using graphs and economic models.(c)In the long run, the Keynesian model shows that an increase in money supply leads to inflation and no real effects in GDP. Do youagree? If so, why? Explain, and show graphically.(d)If the economy as a whole is open and is indebted (as it is the case for the USA today), an increase in interest rates leads to lowerconsumption unambiguously. Do you agree? Why or why not?
YOUR NAME and UNI __________________________________Question 2.- Physical and Human CapitalAssume that an economy has the production function Y = AK1/3H1/3L1/3, where K is physical capital, H is skilled labor or human capital and Lis raw labor. Human capital, in turn is the product of average human capital, h, time total amount of people, L.(a)Does this production function exhibit constant returns to scale? Show why or why not.(b)Write down the production function in per capita terms (use the “per capita notation”: y=Y/L, k=K/KL and h=H/L).Imagine that the economy is closed, that the saving rate is the constant fraction “s” and the depreciation rate is “࠵?“. Population growth isan exogenous constant number “n”.(c)Families need to allocate their savings “s” across the two capital goods, k and h. They do that by equalizing the marginal product of kto the marginal product of h. Using this, derive the optimal relation between k and h.(d)Using the relation you found on (c) find the “effective production function”. That is, the relation between GDP per capita, y, and capitalper person, k.(e)Write down the fundamental equation of Solow-‐Swan for the GROWTH RATE of capital stock per person, k, as a function of theparameters A, s, n,࠵?, and the capital stock k, for this specific model.(f)Consider the parameters A = 1, s = 0.2,࠵?=0.09, n = 0.01. Graph the “savings line” and “depreciation line”. Is there a steady state? Isit unique? Explain why or why not.(g)What is the steady state capital stock per person, k*, in this economy?(h)What is the steady state human capital stock per person, h*, in this economy?(i)What is the steady state level of GDP per capita, y* in this economy? Explain(j)What is the steady state growth rate of per capita GDP, y? Explain(k)What is the steady state growth rate of total GDP, Y? Explain
YOUR NAME and UNI __________________________________