AKFinal07_ver4

AKFinal07_ver4 - Sketch for the answer of 2007 Final1 Mar....

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Sketch for the answer of 2007 Final 1 Mar. 12th 2008 Part A a used airplane itself does not change US GDP. The second statement is incorrect. Trades between US and non-US companies change US GDP through net export component. Buying the airplane from abroad would GDP. 2. True: Since we use current prices as weight to compare past quantity and current quantity purchased, having a Paasche index greater than one implies past quantity is also feasible choice today. Choosing current goods basket over feasible past basket implies people should be better o/ by this choice. Therefore, living standards have risen, assuming people only value the goods in the market. 3. False: Given Cobb-Douglas production function with capital share , the steady state capital per e/ective labor is given by solving: sk ( n + ± + x ) k = 0 , k ss = s n + ± + x ± 1 1 . y ss = k ss = s n + ± + x ± 1 . Hence, in the steady state, the level of per capita output is given by: A t y ss This is smaller with higher ± . Next, if we measure welfare by per capita consumption in the steady state, this is given by A t f k ss ( n + ± + x ) k ss g = A t (1 s ) k ss . Since k ss is decreasing in ± , the economy with higher ± will have lower per capita consumption in the steady state. Finally, growth rate of output is given by g Y = x + n + g y . In the steady state g k = g y = 0 and hence g Y = x + n , which is independent of ± . (Note that, in the short run, we can argue g Y is lower with higher ± ) 4. True: If we assume f ( k ) = Bk , where sB > ( n + ± + x ) , then g k = g y = sB ( n + ± + x ) > 0 in the steady state. Therefore, g K = g Y = sB ± . g Y L = sB ² ± + n ³ . Since these growth rates will be lower with higher ± in the long run, the level is lower too. Per capita consumption in the steady state is given by A t k t f B ( n + ± + x ) g , which grows at the rate sB ( n + ± ) . Again, this will be lower when ± is higher. 5. True: Suppose, initially, the goods market clears (i.e. the economy is on the IS curve). With lower in- Therefore, we need to have higher output to clear the goods market (hence a downward sloping IS curve). With the greater interest-sensitivity of investment, given same interest change, excess goods demand created
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AKFinal07_ver4 - Sketch for the answer of 2007 Final1 Mar....

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