FinalSample1Solution - Econ 314-1 Cornell University Prof...

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Econ 314-1 Prof. Barseghyan Cornell University Suggested Solutions to Practice Finals Suggested Solutions to Practice Finals “Professor Levon Barseghyan Econ 314-1 Final Exam” (covered in Review Session) 1. a) Decrease in depreciation rate, d , will tilt break-even investment line, and k*, y*, and c* = (1-s)f(k*) all increase. b) Lower population growth rate, n , will tilt break-even investment line, and k*, y*, and c* = (1-s)f(k*) all increase. c) Decrease in saving rate will decrease saving line, hence k* and y* decrease. c* is ambiguous. If k* is such that f’(k*)=n+d (i.e. at Golden Rule Steady-State), and c* will decrease because of the change in s . d) Increase in technology, f 1 ( . ) > f 0 ( . ), that is technology is better. This increases k*, y*, and c*. 2. a) Temporary adverse supply shock will shift FE to the left and LM to the left. Hence Emp (dec), Y (dec), r (inc), I (dec), C (dec), P (inc). Read Abel & Bernanke p. 323-325 (for gen equilibrium) and p. 421 (for Keynesian). b) Decrease in expected future wealth (may be due to pessimism or psychic cost) decrease C d and increase work hour (assuming no change in MPK). Under this,
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