Sketch for the answer of 2007 Final
1
Mar. 12th 2008
Part A
1. False: The °rst statement is correct. Besides the service fee reported as value added, money spent on
a used airplane itself does not change US GDP. The second statement is incorrect. Trades between US and
nonUS companies change US GDP through net export component. Buying the airplane from abroad would
increase import, hence decrease net export de°ned by export  import. Therefore, this would decrease US
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 CobbDouglas 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
terest rate, there will be excess goods demand, since lower interest rate stimulate °rms±investment demand.
Therefore, we need to have higher output to clear the goods market (hence a downward sloping IS curve).
With the greater interestsensitivity of investment, given same interest change, excess goods demand created
by an increase in investment demand would be bigger. Therefore, necessary adjustment of output would be
bigger and we obtain a ²atter IS curve.
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 Winter '08
 Serra
 Economics, Macroeconomics, Steady State

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