AK2M - Suggested Answer of 2nd Midterm Econ 102 Winter 2007...

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Suggested Answer of 2nd Midterm Econ 102 Winter 2007 Mar. 6th 2007 Part A (Total 24pt) 1. (8pt) False : The saving rate a/ects the growth rate (recall the case that the marginal productivity of capital on capital per e/ective labor is constant). 2. (8pt) False : The less sensitive is investment to changes in the real interest rate, the steeper is the IS-curve. This can be explained by using the following diagrams: Y Y r (1) r increases (2) I decreases =>Insensitive case (2)' I decreases =>Sensitive case (3) Less sensitive investment case provides steeper IS-curve 3. (8pt) True : Suppose the money demand function takes the following form: M P = l 0 l i r + l Y Y The smaller l Y implies the less sensitive money demand with respect to the change in income. Note that we can obtain LM-curve as follows: r = l 0 l i + l Y l i Y M l i P where M is money supply Hence, smaller l Y Part B (Total 26pt) 1. (4pt): The level of unemployment U t +1 tomorrow is as follows: U t +1 = sE t + (1 f ) U t + nL t 1
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2. (6pt): Recall the dynamics of L t : L t +1 = (1 + n ) L t By using the two expressions above, we can derive the di/erence equation for unemployment rate
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AK2M - Suggested Answer of 2nd Midterm Econ 102 Winter 2007...

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