1st_Midterm Practice

# 1st_Midterm Practice - Econ 352 Intermediate Macroeconomics...

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Econ 352 YiLi Chien Intermediate Macroeconomics Spring 2011 1 st Midterm Practice Questions Part One (40 pts) Instruction: answer the following questions using analytical frameworks. Depict appropriate diagrams if needed. 1. (15 points) Consider a Cobb-Douglas production function with K (capital), L (labor). The production function is Y=AK 0.4 L 0.6 , where A is technology level. a) (5 pts) Derive expression for the marginal product of capital and labor. b) (5 pts) Show that this Cobb-Douglas production function exhibits constant returns to scale. c) (5 pts) Derive the labor share (total labor income divided by total output) in the equilibrium of this economy. (Hint: the equilibrium real wage rate is equal to marginal product of labor) 2. (25 pts) Consider an economy as in chapter 3, but with consumption depending on disposable income and the real interest rate, i.e., C = C(Y – T, r). More specifically, we suppose that consumption is an increasing function of Y – T, but a decreasing function of r. (,) Y FKL = 0 , 0 ) ( ), , ( < > = r C T Y C r T Y C C 0 ) ( ), ( < = r I r I I T T G G = = , a) (7 pts) Define total saving in this economy. What is the relationship between total saving and interest rate? Plot total saving against r (i.e., the supply of funds)

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b) (8 pts) Plot the investment function in the same graph. Define the equilibrium interest rate. c) (10 pts) Suppose there is an increase in government spending. Plot the new equilibrium in loanable fund market and analyze what happens to consumption, investment, private saving, public saving, total saving and interest rate.
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## This note was uploaded on 04/02/2012 for the course ECON 352 taught by Professor Staff during the Fall '08 term at Purdue.

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1st_Midterm Practice - Econ 352 Intermediate Macroeconomics...

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