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Unformatted text preview: University of Southern California Department of Economics
ECON 205 Principles of Macroeconomics
Spring 2008
Prof Safarzadeh
Assignment # 4 Student Name: 3%
I. Answer the Following questions: 1. You read in the paper that real per capita GDP is growing at a rate of 3.5%. During the same period= capital per
unit of labor is growing at a rate of 2.4%. Use the Solow’s 1/3 rule to ﬁnd the contribution of capital growth to the GDP growth r g 2 . What is the contribution of productivity to the GDP growth? . . Ifthe labor is growing at a rate of 1.5%, what is the rate of growth of capital at the steady state? 3 . Q 2. What is the rate of real GDP growth at the steady state? 5 Z 2. Banana Republic’s real per capita GDP is growing at a rate of 2.5%. During the same period, capital per unit of
labor is growing at a rate of 1.5%. Use the Solow’s 1/3 rule to find the contribution of capital growth to the GDP growth a 5 Z . What is the contribution of productivity to the GDP growth? ' . . Ifthe labor is growing at a rate of 2%. what is the rate of growth of capital at the steady state? 3 . S 2 . What is the rate of growth of real GDP at the steady state? 5! Z 3. What is the role of population growth in the classical growth model? Speciﬁcally, what is the main determinant
of population growth in the classical model? y . What is the relationship between the population growth and capital per unit of labor? y 23 ”1 K g..— éﬂﬂde What is the relationship between the population growth and wager capita GDP growth? mw’té—Et What is the relationship between population growth and the steady state at the classical model (what makes the economy stay at the steady state). I at. ' ﬁWd/Wt MW%W%. at ngrmWA/wmwté What is the role of the population growth in the neoc assical growth model? Speciﬁcally, what is the main determinant of po A (.4 3! 114 '11'1', ", _ y . /
What is the relationship between population growth and capital per unit of labor? What is the relationship between population growth and real per capita GDP growth? AAA/487% What makes the economy stay at the steady state. nulation growth in the neoclassical model? . ‘ 1
l _ :
l, 1 f 1. t. 1‘  . 1 1 I )I/ 1 1M1 MWMWQG 5. Which of the follow' ; changes resu  ' . » rary growt ‘ ita real GDP (please circle): Increase
increase in capit) , increase in capital per unit of labo increase in Cine/”TM
W productivity technological advancements, investment in human capital. 6. Which of the following changes result(s) in a sustained growth of per capita real GDP (please circle): Increase in savin ' se in investment ,inoreas in ca ital, increase in capital per unit of labor, increase in productivity,
technological advancemen investment in human capital.
_. _______.__~4 7 7. The best indicator of improving living standards is growth in c...— f— 8. To obtain the most accurate comparison of living standards between the U. S. and India, we would translate Indian output into dollars using W % C P P to J 9. Ifthere are decreasing returns to capital, then adding another machine will Wput.
10. A temporary increases in output per worker can come from two sources. They are 5 {IE , and 11. To indefinitely maintain a high growth rate of output per capita, a country needs 12. In the lon —run steady state, which of the followin is affected by an economy's rate of saving (please circle)? a capital per worke , 6 level of inve®l three. M M... II. The following graph represents the productivity curves in a classical growth model. 1 Given that the subsistence level of per capita income is 100, What is the capital per unit of labor in the steady state level? 26"? . e What will happen to population growth if the per capita GDP is more than 100? W»
What will happen to population growth it the per capita GDP is less than 100? Sj @111 g I Q‘ . What will happen to per capita GDP if the per capita GDP is more than 100? W What will happen to per capita GDP if the per capita GDP is less than 100? T 91 5 :3 a :i 1 Z .
What will be the steady state per capita GDP, if the productivity increase shifts productivity curve from PC] to PC2? l 0 0 What will be the capital per unit of labor at the new steady state? I Q Q
What will be the steady state per capita GDP, if productivity increase shifts the productivity curve from PC 2 to PC}? What will be the capital per unit of labor at the new steady state? g 9 . 2m] 4]l] 2. Suppose the graph in question 1represents the productivity curves in a modern growth model. Given that the subsistence level of per capita income is 100, what is the capital per unit of labor in the steady state level? 1W1, q§0fzﬂ p62, 390% (063 t ,1
What will happen to population growth if the per capita GDP is more than 100? W. ,1}
What will happen to population growth if the per capita GDP is less than 100? f ZM£ ;__,.._—e_'_ I Cy; ,‘t . What will be the steady state per capita GDP, if the productivity increase shifts productivity curve from PCI to PCZ? 2 0? What will be the capital per unit of labor at the new steady state? ﬂ 5‘ Q
What will be the steady state per capita GDP, if productivity increase shifts the productivity curve from PC 2 to PCS? a ﬁg .
What will be the capital per unit of labor at the new steady state? a g Q . If the productivity growth raises the capital per unit of labor to 1000, what will be the per capita GDP? 5:29 3. Suppose in the model above (the graph) population is growing at a rate of 1.5%. Answer the following question based on the assumption made on the population growth: At the steady state B, the rate of growth of K/L is a .
At the steady state B, the rate of growth of Y/L is a . At the steady state B, the rate of growth of K is l 5'" Z .
At the steady state B, the rate of growth of Y is l 9 Z . At the steady state C, the rate of growth of K/L is 9 I .
At the steady state C, the rate of growth of Y/L is a: . I At the steady state C, the rate of growth of K is l . S" 4 .
At the steady state C, the rate of growth of Y is ‘ 5: ' 1 . II. Fill in The Blanks for the Following Questions: 1 M1: M+MW+ “734W 6%
2 The largest component ofMl is ‘ lg I14 5“ I A W 3— Banks create money whenever they 4% Myrna—y 4— che required reserve ratio is 0.03, there are no excess reserves, and people want to hold no currency, the deposit multiplier equals ' .— v
__33_ o 3 3 3 M _
5 Suppose that people want to hold no currency, that banks want to hold no excess reserves, and that the deposd I
multiplier is 8.33. The required reserve ratio I 2 / 6 List three aggregate demand shifters gr 5 g R g '3: 14 32527 , W WM
P55, '67 ‘ l T t
7List three aggregate supply shifters ( hj Elk/é, W, W W tab. 93 9—IfV=5,P=$3,andl’:50,thenthequantityofmoneyequals M M— P}! 042 M P)’ __ l§0 :30
"' 1/ 5“ 10 1'.sz $100, 1’: $500 andP = $2, then Vis equal to V :1 E): ._ memo
M ll“? 11 Suppose that the nominal quantity of money (ll/1‘) is $200 billion and the value of aggregate output (FY) is $1 trillion. The velocity of circulation is l o o ; ... S
249 c: 12 According to the quantity theory of money, a 10 percent increase in the quantity of money ultimately leads to a 10 percent increase in 1 5 : ¢2;Z . 13— According to the quantity theory of money, changes in the price level are usually the result of changes in them . 14List three main objectives of the Fed u,“ gT/LM ( ’2 t E I . ,{Z 15 Three policy tools by which Fed contro money are £34” M 9 MiMQZA W 16 List the monetary policy tools of the Fed In order of the frequency by which they are applied (list the most frequently used one ﬁrst) 1 L (IA ( 21 M 17 If a bond offering to pay $100 in one year sells for $80, the interest rate on the bond 1s —€xl 0 0 .1; 2 g /
S’a '
18. In a fractional reserve banking system with a required reserve of 8% a 10 billion dollar increase in high— r
powered money will increase money in the economy by 1 Q 1 S x‘ a ..._ \ '2 934%?“
19 If nominal GDP is $7 trillion, the price level is 200, and the nominal money stock is $1 trillion, then the velocity of money is 7 (7 20—11:" a perpetuity promises a permanent annual return of $200 with the interest rates at 6% a reasonable price for perpetuity is 2 0 D “.3 3 :33 . 35
I 0‘
21. If a bond offering to pay $1000 in one year sells for $940, the interest rate on the bond is 6g
? 4/47 22. If the public wishes to hold no currency, and the ratio of reserves to deposits is ‘20, then the money multiplier is
23. A bond ls offering to pay $100 in one year and the yield on the bond 1s 6 5%. The bond should sell for J%=oés , [9:15389’5 24— A person’s wealth is $100000 and that her income is $40000. The demand for money for this person is given by
Md 2 Y(.6  2i) where Md is demand for money, Y is income and i is interest rate. At the interest rate
of 5% the demand for money by this person is $ 2 Q 9 F0 . The demand for bonds by this person is $ 219 a a D , at the end ofthe year, the person’s wealth is 33 I26 6’00 . Ifthe interest rate rises to 8%,
the demand for money by this person will be $ I Z é Q Q The demand for bonds by this person will be
$22 $0 0 , at the end of the year the person’s wealth will be $ t Z 2 £50 a The problem above
shows that as interest rate increases, demand for money MW and demand for bond III. In each problem below, you are to illustrate the money market with the appropriately shaped demand and
supply curves. Unless explicitly stated otherwise, make the assumption that the market is at equilibrium. In each case, draw the shiﬁ(s) in the demand and supply curves which result from the exogenous actions
taken and indicate in the space provided whether each variable will increase (+), decrease (), remain x100 unchanged (0), or have ambiguous sign ('3). Please, number the curves so that the direction of each
shift will be clear. Mark the original equilibrium by El and the ﬁnal equilibrium by E; or E3. Unmarked
graphs Will be discounted in credit. Variables: M is the quantity of money, i is nominal interest rate, Ms is money supply, Md is demand for money, I is
investment and SM is stock market indicators.  1. Economy is in expansion and GDP is increasing. A i S l Demand for money (IVId) "l" Money Supply (Ms) __L Interest Rate (i) 4—
InVestment (I) "' Stock Indices (SM) _——— Demand for money (Md) j: t Money Supply (Ms)
J, [ 21 Interest Rate (i) :—
' l ‘_* nvestment (I) 
I Stock Indices (SM) _;_ M 09 3. Fed lowers ngedal Funds Rate. Demand for money (NM) @
Money Supply (Ms)
Interest Rate (i) ._ Investment (1) ._.l._.
Stock Indices (SM) 4: 4. Fed increases required reserve. 5, S‘ '6 2 Demand for money (NM) 2 Money Supply (MS)
Interest Rate (i) w :
Stock Indices (SM) __‘—_ Demand for money (Md) a
Money Supply (Ms) : Interest Rate (i)  Investment (1) *K j: I Stock Indioes (SM) _—+__ IMM 6. GDP is in expansion and Fed buys government securities in an Open Market Operation. Interest Rate (i) m_2_
.L Demand for money (Md) "" Money Supply (Ms) ={= Interest Rate (i) .— Investment (I) 4:
Stock Indices (SM) i . . l. .
8. Economy ls 1n expansnon and F d lowers dlseount rate‘ 5.
Demand for money (Md) :b “L? r r m D 2 Money Supply (Ms) Interest Rate (i) 2 9 Investment (1) '2 .
l! Stock Indiees (SM) 2 M I Stock Indiees (SM) 2 ...
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 Spring '07
 KAMRANY
 Macroeconomics

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