MidtermPracticeAnswers - these funds aside and lets it grow...

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Macroeconomics 314-1 Professor Levon Barseghyan Midterm – What to expect 1. Suppose the economy is initially at a steady state, and that some of the nation’s capital stock is destroyed because of a natural disaster or a war. a. Determine the long-run effects of this on the quantity of capital per worker, and on output per worker. No change. b. In the short run, will aggregate output grow at a rate higher or lower than the growth rate of labor force (assume there is efficiency growth). Higher. c. After WWII, growth in real GDP in Germany and Japan was very high. How do your results above shed light on this empirical evidence? This evidence is consistent with the Solow Growth model. 2. The economy is populated by Joe and the government. The interest rate in this economy is 20 percent. The government decides to increase economy’s saving and imposes a tax of 45.000 dollars (more or less the price of a good 330i BMW) on Joe. The government puts
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Unformatted text preview: these funds aside and lets it grow at the rate of interest. However, it does not increase its spending or change its behavior in any other way. This government will retire in 2 or 6 years and does not want to leave any funds to Democrats. Therefore any savings it has will be paid back to Joe. What happens to his savings? Does it matter when the government retires? Savings go down by 45.000 dollars. It does not matter when the government retires. This is a case in which Ricardian Equivalence holds . 3. In the Solow model, suppose that the marginal product of capital increases for each quantity of the capital input, given the labor input. a. Show the effects of this on the aggregate production function. Production function of the worker goes up . Aggregate production function goes up for any level of capital and labor....
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