mt2ans - Economics 202 Spring 2008 Name: _KEY_ Professor...

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Economics 202 Name: __KEY__________ Spring 2008 Professor Melick Second Midterm 1. In the labs of General Electric, researchers discover that in fact it is possible to produce energy through the process known as “cold fusion”. It is now clear that energy can be relatively cheaply produced without using dangerous technologies. In the two attached graphs labeled 1a and 1b, illustrate the effect of this discovery on the economy using the classical model with misperceptions. In each panel of each graph show a point B that represents short-run equilibrium and a point C that represents long-run equilibrium. In Graph 1a, illustrate the effect with the end result that the price level falls , while in Graph 1b illustrate the effect with the end result that the price level rises . Please use a few sentences to answer the following questions. A. Explain the immediate or impact effect of the discovery in the labor market. The change in technology will have an immediate impact on the demand for labor. We have the equation for the marginal product of labor, ( ) 1 K MPN A N α = - . The increase in technology directly boosts A and will also (see below) boost the capital stock. Both of these work to increase MPN and shift out ND. B. Explain the immediate or impact effect of the discovery in the goods market. The change in technology will have an immediate impact on desired investment, d I . We have the equation for the marginal product of capital, 1 f N MPK A K - = . The increase in technology directly boosts A and will also (see above) boost the labor force. Both of these work to increase f MPK . This will lead to an increase in the desired stock of capital * 1 t K + which will increase desired investment, as can be seen through a re-writing of the equation governing capital
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This note was uploaded on 05/13/2010 for the course ECON 323 taught by Professor Jakes during the Spring '10 term at Alcorn State.

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mt2ans - Economics 202 Spring 2008 Name: _KEY_ Professor...

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