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Midterm 1 Fall 2007 with Solutions

Midterm 1 Fall 2007 with Solutions - Name Economics 200...

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Name________________________________ Economics 200 Midterm Examination 1 Thursday, October 4, 2007 Write your name in the space provided at the top of this page. Turn in this page with your bluebook(s). Bluebooks not so accompanied will NOT be graded. Also write your name on your bluebook but do not begin writing in your bluebook until told to do so. You have one hour and 10 minutes to complete this exam. Each question carries the number of points indicated for a total of 70 points. Think of it as 1 point = 1 minute. NB: I prefer brief, precise, correct answers to long-winded, waffling responses that mistake quantity for quality. Good luck! ó. 1. Consider the production function where is the quantity of output produced, is the ] œ +O  ,P ] O amount of capital employed, is the amount of labor employed and and are positive constants. DO P + , NOT USE CALCULUS for any part of this question. (a) (3 points) Show that this production function exhibits constant returns to scale. (b) (2 points) Show that the marginal products of capital and labor are and respectively. + , (c) (3 points) Show that, for this production function, if the factors are paid their marginal products, the sum of the payments to factors of production equals total output. (d) (2 points) Explain why the result in part (c) is not surprising. 2. Suppose that the US government imposes a 50 cents per check tax on all checks written against demand deposits at US banks. (a) (3 points) What effect would this tax have on the currency to deposit ratio? Explain. (b) (3 points) , what effect would this tax have on the money supply? Explain. Ceteris paribus (c) (4 points) What action could the Fed take to prevent the change in the money supply? Explain 3. (5 points) Find the real interest rate in an economy with a nominal interest rate of 11% per annum and constant income velocity of money in which the money stock grows at 14% per year and real GDP grows at 5% per year. 4. (5 points) Why does the labor demand curve slope downward?
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5. (5 points) Why might we expect capital flow to poor countries? Why doesn't it? HINT: For the Cobb- Douglas production function with we have . JÐOß PÑ œ EO P !   " QT œ EÐOÎPÑ
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Midterm 1 Fall 2007 with Solutions - Name Economics 200...

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