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Sections A1 and B1 Midterm 1 Answers

# Sections A1 and B1 Midterm 1 Answers - ECON 102...

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ECON 102: Introductory Macroeconomic Analysis Sections A1 & B1 Spring, 2010 First Midterm Exam Answers 1. (10 minutes/20 points) (a) (4 minutes/8 points) According to the growth accounting formula: %∆ (Y/L)= % ∆A + α % ∆ (K/L) Using the information for China, where α=1/6 %∆ (Y/L) = .5 + (1/6) ×18 = 3.5 Hence, productivity growth in China is 3.5% (b) (6 minutes/12 points) We are told that the labor force has grown at 2% in China and 1% in the US. Using this information, we can calculate the growth rate of the capital stock by using the formula: %∆ (K/L) = %∆K - %∆L, where %∆K is the growth rate of the capital stock. Plugging in the numbers for the US and China into the formula: US: 3 = %∆K – 1, implies that %∆K = 4. China: 18 = %∆K – 2, implies that %∆K = 20. 2. (17 minutes/34 points) (a) (2 minutes/4 points) To compare living standards, we would look at per capita consumption. C/pop = (1-s) (Y/L) (L/pop)

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Since the only difference between the two countries is the consumption rate, Partyland must now have a lower savings rate, s. This means that (1-s) is higher, which, at least for now, implies higher per capita consumption. (b) (5 minutes/10 points) The higher consumption per person in Partyland today was facilitated by a lower savings rate and therefore, reduced investment in capital stock. In Sayvland, on the other hand, a higher savings rate provides more funds for investment in capital stock.
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Sections A1 and B1 Midterm 1 Answers - ECON 102...

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