100b08mid2a

# 100b08mid2a - Economics 100B University of California Santa...

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Economics 100B Professor K. Kletzer University of California, Santa Cruz Fall 2008 Second Midterm – Sample Answers The answers to part A are more complete and a bit more difficult than most students thought. The “answers” for B and C are explanations of how you could answer the questions because you can order your answer and choose to use words, graphs and equations to varying degrees. Part A (45%) Choose any 3 of the following 4 statements. For each one you choose, state whether it is true, false or ambiguous and explain why. You must provide an explanation to receive any credit. A1) A higher saving rate lowers consumption in the medium run and in the long run. An increase in the saving rate is a reduction in the propensity to consume out of disposable income. That is, C = C(Y-T) is lower for any given Y-T. In the medium run, Y = Y n so consumption, C(Y n -T), is lower. In the long run, a rise in the saving rate leads to higher output per worker (if there is no technological progress, or higher output per effective worker if there is technological progress). The long run level of output per worker is found from ( ) N K g N K sf N + = δ and an increase in s leads to an increase in K/N. You can use the diagram from the book and lectures to show this. You can also do it with AN in the denominator in place of just N. Since K/N rises in the long run, so does Y/N = f(K/N). Since K/N rises in the long run, consumption rises if the economy is below the Golden Rule in the long run. A2) An increase in the rate of technological progress raises the growth rate of output per effective worker in the medium run but not in the long run. An increase in the rate of technological progress is an increase in g A . The growth rate of output per effective worker is always zero in the long run. The growth rate of output is A N g g + in the long run; the growth of output per worker is g N ; but the growth of output per effective worker is 0 in the long run. In the long run, saving per effective worker equals depreciation per effective worker, ( ) AN K g g AN K sf A N + + = δ which determines K/AN. An increase in g A lowers K/AN. You should draw a graph to show this by swinging up the line ( ) AN K g g A N + + δ to show that the intersection with the line AN K sf occurs at a lower K/AN.

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