# Problem Set _2 ANSWERS - Name(Last name first name SID GSI...

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Problem Set #2 (Spring 2011) 1/5 Name: _________________________ (Last name, first name) SID: _________________________ GSI: _________________________ Econ 100B Macroeconomic Analysis Professor Steven Wood Spring 2011 Problem Set #2 ANSWERS Due: February 15, 2011 (in class before 3:50:01 p.m.) Turn your completed problem set in to your GSI Please sign the following oath: The answers on this problem set are entirely my own work. I neither copied from the work of others nor allowed others to copy from my work. _______________________________________ Signature Any problem set turned in without a signature will be assigned a grade of zero. Problem Set Instructions 1. You MUST complete your problem set on this template. 2. Graphs and equations MAY be drawn by hand. When drawing diagrams, clearly and accurately label all axis, lines, curves, and equilibrium points. 3. Explanations MUST be word-processed. Your explanations should be succinct and to the point.

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Problem Set #2 (Spring 2011) 2/5 A. Multiple Choice Questions (15 points) . Circle the letter corresponding to the best answer (3 points each). 1. Suppose an economy described by the Solow growth model is initially at a steady state with an economic growth rate of 3%. An earthquake then destroys 25% of the capital stock and kills 25% of the labor force. If these are the only effects then after the earthquake the growth rate of per-worker output: a. Declines permanently. b. Does not change but the level of economic output declines. c. Initially declines but then returns to zero once the economy returns to a steady state. d. Initially increases but then returns to zero once the economy returns to a steady state. 2. While Chairman of the Federal Reserve, Alan Greenspan argued that lower inflation reduces the pricing power of business firms, forcing them to increase productivity to maintain profit margins. This view: a. Contradicts the quantity theory of money. b. Is an implication of the equation of exchange. c. Reflects Greenspan’s views on the velocity of money. d. Suggests that the per-worker production function rotates lower as inflation falls. 3. Suppose total factor productivity and the labor force are fixed, the capital stock is growing at 1% per year, the output elasticity with respect to capital is 0.4, and the money supply is growing at 2% per year. Then according to the Growth Accounting Formula and the Quantity Theory of Money, the inflation rate will be: a. 1.0%. b.
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Problem Set _2 ANSWERS - Name(Last name first name SID GSI...

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