MidtermPractice2 - than right before the war once the...

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CORNELL UNIVERSITY Professor Levon Barseghyan Econ 314-1 First Mid-Term Exam The answers should be short and straight to the point. First provide the answer, and then briefly explain how you got this answer. 1. (30 points) A country with its economy at steady state experiences a civil war. Suppose that the war destroys 40% percent of the capital stock, and casualties reduce the labor force by 40%. According to the Solow growth model with no efficiency growth i. (3 points) What is the immediate impact on capital per person? ii. (2 points) What is the immediate impact on total output and on output per person? iii. (10 points) Does it matter for the first two questions whether the country is at its steady state or not? iv. (5 points) Assuming that the saving rate and depreciation rate are unchanged, what happens subsequently to output per worker in the postwar economy once the economy reaches its new steady state ? Is the growth rate of output per worker after the war smaller or greater
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Unformatted text preview: than right before the war once the economy reaches its new steady state ? v. (10 points) How would your answers to the questions above change if the war reduces the capital stock only by 20%? 2. (20 points) Consider the Solow growth model with efficiency growth. Assume that there are two countries: Country A and Country B. Their economies are both at the steady state. These countries are identical, except Country A has a higher growth rate of population. i. (10 points) In which country income per worker grows faster? ii. (10 points) Can you determine which country has higher capital per worker? Why? 3. (30 points) i. (5 points) What is permanent income hypothesis? Give a brief description. ii. (5 points) Based on this hypothesis, what has a larger impact on current consumption of the households: permanent or one time increase in taxes? iii. (20 points) Does it matter for the part ii of this problem whether Ricardian Equivalence holds or not?...
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This note was uploaded on 10/12/2008 for the course ECON 314 taught by Professor Bar during the Fall '08 term at Cornell University (Engineering School).

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