14.02_quiz1_fa2008

14.02_quiz1_fa2008 - Quiz 1 Solutions October 29, 2008 1...

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Quiz 1 Solutions October 29, 2008 1 Multiple choice questions [30 points] Answer the following multiple choice questions. Please circle the correct answer. There is only one correct answer in each question. 1. An increase in the price of a good that is produced domestically and only consumed by the Government - holding all other prices and quantities (a) increase CPI but not the GDP de±ator (b) will not a/ect the CPI nor the GDP de±ator (c) not a/ect the CPI and will increase the GDP de±ator (d) increase both CPI and the GDP de±ator (e) have an ambigous e/ect on both the CPI and the GDP de±ator ANSWER . c . The CPI only measures the prices of goods and services bought by consumers, hence this purchase wont a/ect the index. The GDP includes all goods produced domestically. 2. According to the Solow model with no population growth nor technological change, the per capita capital stock should (a) increase steadily until convergence to the steady state, provided the production function exhibits decreasing marginal product of capital. (b) decrease steadily until convergence to the steady state, provided the production function exhibits decreasing marginal product of capital. (c) decrease steadily until convergence to the steady state, provided the initial level of per capita capital stock is higher than the steady state level of capital per capita. (d) increase steadly until convergence to the steady state, provided the savings rate is initially low. 1
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(e) increase steadily until convergence to the steady state, provided the initial level of per capita capital stock is higher than the steady state level of capital per capita. ANSWER . c . As seen in problem set # 2, we can have convergence from below if initial capital stock is less than its steady state level, or convergence from above if the initial capital stock is higher than its steady state level. 3. Consider the Solow Model with constant population and no technological progress. Suppose that the initial level of capital per capita is lower than the steady state level of capital per capita.Suppose further that, at some point in time, the economy loses half of its capital stock due to a war. Then the Economy will feature a
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This note was uploaded on 10/25/2009 for the course 14 14.02 taught by Professor Geurrieri during the Fall '09 term at MIT.

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14.02_quiz1_fa2008 - Quiz 1 Solutions October 29, 2008 1...

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