# mid2f07 - Econ 302 Midterm Exam #2 Monday, November 19,...

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Econ 302 Midterm Exam #2 Monday, November 19, 2007 You have 80 minutes. Each of the multiple-choice questions (1–14) is worth 3.5 points (14 × 3 . 5 = 49). Mark your answers on the exam sheet. Questions 15 through 21 are worth a total of 51 points. Write your answers in the bluebook. If you Fnd a question to be ambiguous—which is highly unlikely, try to interpret in a way that is the most sensible to you. Good luck! 1. Suppose that there are 1 unit of labor ( L = 1) and 1 unit of capital stock ( K = 1) in an economy. The aggregate production function is Y = AL 0 . 5 K 0 . 5 , where A is technology level. Now, due to some structural changes in the economy, the production process becomes more capital-intensive. In particular, the new production function is Y = AL 0 . 1 K 0 . 9 . After this structural change, which of the following statement about the “new” economy is true? Assume that A , K , and L remain unchanged. (a) Real capital rental rate increases. (b) Real wage increases. (c) Capital share of income remains the same as before. (d) Output increases. 2. In a simple scenario with only two factors of production, suppose that capital’s share of income is 0.4 and labor’s share is 0.6, and that annual growth rates of capital and labor are 6 and 2 percent, respectively. Assume there is no technological change. At what rate does output grow? (a) 8 percent (b) 4.2 percent (c) 4 percent (d) 3.6 percent 3. Consider a production function of the form Y = F ( K,L,Z ), where Z is a measure of natural resources used in production. Assume this production function has constant returns to scale in all three factors, and diminishing returns in each factor. What will happen to output per worker ( Y L ) if capital ( K ) and labor ( L ) both grow at the same rate but Z is Fxed? (a) It goes up. (b) It remains constant. (c) It goes down. 1

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4. Suppose that the government of a closed economy wants to increase investment. When the prices are Fexible, which policy will unambiguously achieve this goal? (a) Expansionary monetary policy (b) Expansionary ±scal policy (c) Introduction of tax on interest income (d) Introduction of consumption tax 5. The US makes soap bars that are sold for 5 dollars each. Mexico makes chocolate bars that are sold for 100 pesos each. The real exchange rate between these two countries is 2 soap bars
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## This note was uploaded on 03/27/2008 for the course ECON 302 taught by Professor Gold during the Spring '07 term at University of Wisconsin.

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mid2f07 - Econ 302 Midterm Exam #2 Monday, November 19,...

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