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1 Multiple Choice (30 points)
Answer the following questions. You DO NOT need to justify your answer.
1. (6 Points) Consider an economy with two goods and two periods. Data are
Good 1
p
1
t
= 1
p
1
t
+1
= 1
q
1
t
= 1
q
1
t
+1
= 1
:
1
Good 2
p
2
t
= 1
p
2
t
+1
= 1
:
4
q
2
t
= 1
q
2
t
+1
= 1
:
3
where
q
1
t
stands for the quantity of good
1
produced in period
t; q
2
t
stands for the quantity of
good
2
produced in period
t; p
1
t
stands for the price of good
1
in period
t
and
p
2
t
stands for the
price of good
2
in period
t:
The o¢ ce of national accounts wants to calculate the real GDP growth rate in this economy
using the chain index and they hire you to do so. What is the correct growth rate you should
report to the o¢ ce of national accounts?
(a) 19.7%
(b) 20.8%
(c) 20.1%
Remember that we can calculate growth in real GDP using the chain index
with the following formula
g
t
+1
;t
=
1
2
p
1
t
+1
q
1
t
+1
+
p
2
t
+1
q
2
t
+1
p
1
t
+1
q
1
t
+
p
2
t
+1
q
2
t
+
p
1
t
q
1
t
+1
+
p
2
t
q
2
t
+1
p
1
t
q
1
t
+
p
2
t
q
2
t
±
1
=
1
2
1
:
1 + 1
:
82
1 + 1
:
4
+
1
:
1 + 1
:
3
1 + 1
±
1
=
1
2
2
:
92
2
:
4
+
2
:
4
2
±
1 = 0
:
2083
which implies that the correct answer is b.
1
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View Full Document2. (6 Points) When we characterize labor supply as an upward sloping relationship between hours
worked and wages, we assume that
(a) the substitution e/ect dominates the income e/ect.
(b) the income e/ect dominates the substitution e/ect.
(c) the income and the substitution e/ect cancel out making the relationship between hours
worked and wages unambiguous.
Remember that the budget constraint of an worker is
wT
=
pc
+
wl
where
T
is the total number of hours available to distribute between leisure and work,
w
is the hourly wage rate,
p
is the price of the consumption good,
c
id the
consumption of the consumption good, and
l
is hours of leisure consumed by
the agent.
Notice that an increase in the wage,
w
has two e/ects: on the one hand it
increases the lefthand side of the equation, which makes the agent consume
more
c
and enjoy more leisure, hence work less.
On the other hand, an
increase in
w
makes the price of leisure more expensive, hence making leisure
decrease.
When we assume that hours worked increase with the wage we assume that
3. (6 Points) According to the Solow growth model, which of the following statements is FALSE?
(a) A country which experiences higher population growth than another will have a lower
output per worker in steady state.
(b) Steady state consumption in a country which saves more will always be higher than steady
state consumption of a country with a lower savings rate.
(c) Capital accumulation alone can not sustain long run growth in capital per worker.
We know from the Solow model that population growth depreciates capi
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 Fall '09
 Geurrieri

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