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Unformatted text preview: Quiz 2 Answers PART I 1) False, capital Accumulation alone will not sustain growth in output per worker in the long run due to diminishing marginal returns to capital as more and more capital is added to a given number of workers, the increments to output become smaller and smaller and ultimately level off. In the long run, technical progress will be needed to sustain growth. 2) Part a) False. The companys value added is $700  $200 in wages and $500 in profits. Its contribution to US GNP is therefore only $200. I gave 3 points for It contributes only $200 to US GNP or It contributes value added to GDP rather than GNP or Its contribution to US GNP is not equal to its value added since profits are subtracted from GDP when calculating GNP. 0 points for anything along the lines of The company contributes nothing to US GNP since it is foreign owned. Part b) True. The companys value added does not contribute anything to the GDP of the country which the businessman hails from, since the value is not added within that countrys domestic borders. 3) If neither consumption nor investment are affected by the interest rate, the equilibrium in the goods market is given by Y= I(Y) + C(Y) + G, independent of the interest rate level. Monetary policies can only affect the equilibrium output in the short run through changing the interest rate level. The interest link is not present in this case, so the monetary policy is completely ineffective. 4) An oil shock affects the markup level ( ) and then the natural unemployment rate (u n ) and the natural output level (Y n ). Te output level is affected both in the short run and in the long run. If tax revenues are proportional to output (T=tY), the revenues are going to be affected and therefore the Budget Deficit (BD=GT). i Y LM LM IS PART II 1) u tu t1 = (g yg yt ) : Okuns law This equation recognizes the fact that productivity of labor (A) and labor itself (L) are growing at the combine rate of g y (normal growth rate). So unemployment rate decreases every time output growth rate is above the normal rate. The relation is derived from the production function Y=AN so u = 1Y/AL. g yt =g mt t : ADrelation This equation is derived from the ISLM model. Increasing the real amount of money increases the level of output in equilibrium. The above equation is describing that relation in rate of growth terms, assuming the relation between the equilibrium output level and the real amount of money is linear (Y= M/P)....
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 Fall '09
 Geurrieri

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