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Unformatted text preview: HOMEWORK ASSIGNMENT 2
Due: Mon 10/04/2010
1. Consider the following production function: Y = 10 K0.3 L0.7, where Y represents output,
K represent capital, and L represents labor.
a) Compute expressions for the marginal products of labor and of capital
b) Do workers or capitalists (owners of capital) end up getting paid the larger share of
total output? What fraction of total output gets paid to workers?
c) Suppose that an increase in immigration into the U.S. increases the U.S. labor force.
Discuss the effect on the real wage and the real rental price of capital. Would workers
currently in the U.S. be happy about the immigration? How about the owners of U.S.
factories?
d) Suppose that a hurricane destroyed large amount of capital stock in the U.S. Discuss
the effect on the real wage, the real rental price of capital, total income of labor, and
total income of capital.
2. Congress is debating whether to implement a tax cut. Suppose you are a policy analyst
working for the Congressional Budget Office, and it is your job to analyze the
macroeconomic effects of a permanent tax cut. Suppose you have worked out the
following very simplified (closed economy) model to characterize basic features of the
U.S. economy:
Y = 10000
G = 2500
T = 1500
I = 2000  4000r
Investment function
C = 500 + 0.8(YT) Consumption function
a) First find the equilibrium levels of the interest rate, investment and consumption for
the economy described for the equations above.
b) Discuss the effects on the economy of lowering the level of T by 10%. You should
compute the new equilibrium values of the interest rate, consumption and investment.
In particular, by how much would investment be crowded out by the tax cut?
3. Suppose a small and open economy can be described by the following equations:
Production: Y = F(K,L) = 50K1/2 L1/2
Consumption: C (Y −T ) = 0.8(Y −T ) ,
Investment: I(r) = 30/r
Net exports: NX (ε) = 100 – 320/ε
with K = 50, L = 50, G = 500 , T = 600 , r* = 0.05
a) Calculate private savings, public savings and national savings
b) Calculate the amount of net capital outflows
c) Calculate the real exchange rate ε that maintains the trade balance at the long run level
of output
4. Question 1 from “Problems and Application”, p.143, Mankiw 5th edition. ...
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This note was uploaded on 10/30/2010 for the course INTERNATIO 8989989 taught by Professor 90 during the Spring '10 term at Mt. Vernon Nazarene.
 Spring '10
 90

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