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Homework 4 for Intermediate MacroeconomicsDue on 10/12/2010
1. Consider an economy described by the following equations:
13
44
(,)
10
14
3.5
0.7(
)
15
0.5
FKL KL
G
T
CY
T
Ir
=
=
=
=+
−
=−
The supply of labor is fixed at
L
=81 and the supply of capital is
fixed at
K
=16.
a) Compute the output, the real wage rate and the real rental price
of capital. How much is the total labor income and capital income?
What fraction of total income does each factor of production
receive?
b) Compute the private saving, public saving and national saving?
c) Find the equilibrium interest rate and investment.
d) Now suppose that G rises to 12. How does this affect total
output? Compute the private saving, public saving and national
saving.
e) Find the new equilibrium interest rate and investment.
2. Consider the CobbDouglas production function with two inputs:
capital K and labor L. It is
21
33
YFK
L K
L
==
The firm sells its goods at price P, pays a nominal wage W to every
unit of labor it hires and pays a nominal rental price R for every
unit of capital it rents.
a) Write down the expression for firm's profit, revenue and costs.
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 Fall '08
 KISINA
 Macroeconomics

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