First Examination
February 29, 2000
1
High interest rates will stimulate investment, for
people will want to consume less.
False. This question confuses (deliberately so)
saving and investment.
2 If Robinson Crusoe had taken gold with him to his desert island, he would have been better off, for the money would have facilitated exchange.
False. Money is useful for making exchanges. But with whom would Crusoe have traded?
3 As we know, per capita GDP is approximated by y = A (K/L)1/3, so that the rate of growth of GDP per capita is given by
Dy/y
@
DA/A
+(1/3)[DK/K
- DL/L]
where Dy/y represents the rate of growth of output per capita, etc. The symbol @ means approximately equal to. Right now investment is running about 15 percent of GDP and the capital stock is growing at about 5 percent per year, contributing about 1.67% to the growth rate of per capita GDP. (NB, the equation and data are accurate). If we can double the investment rate from 15 percent to 30 percent, we can add another 1.67 percent a year to our rate of growth for the next several years.
False. The first year, the calculation is
correct. But there are diminishing
returns to capital investment. To keep up the growth rate, we would want to
invest an increasingly higher percentage of our GDP.
4. The short run labor supply curve is upward sloping because workers don't expect periods of high wages or low wages to last long.
This statement is true. If people really expected high wages to last
for a long time, we would get a different response. We would expect then to be in the backward bending portion of the
labor supply curve.
1. Given the information in the table below for three consecutive years in the US Economy, calculate the missing data:
|
Year |
Nominal GDP (in billions of US dollars) |
Real GDP (in billions of 1982 dollars) |
GDP |
Inflation (percent change in GDP |
Real GDP per Capita (in 1982 dollars) |
Population (in |
|
1980 |
2,684.4 |
|
85.72 |
9.5 |
|
227.8 |
|
1981 |
|
3,193.6 |
|
9.6 |
|
230.1 |
|
1982 |
|
|
100.00 |
|
13,397 |
232.5 |
|
Year |
Nominal GDP (in billions of US dollars) |
Real GDP (in billions of 1982 dollars) |
GDP |
Inflation (percent change in GDP |
Real GDP per Capita (in 1982 dollars) |
Population (in |
|
1980 |
2,684.4 |
3,131.59 |
85.72 |
9.5 |
13,747 |
227.8 |
|
1981 |
3,000.36 |
3,193.6 |
93.95 |
9.6 |
13,879 |
230.1 |
|
1982 |
3,114.80 |
3,114.80 |
100.00 |
6.4 |
13,397 |
232.5 |
2. In this course, we have developed a “basic model”. Sketch out that basic model and show how we derive the various parts of this model.
See the notes for
this problem.
3. East Muddle (EM) is a relatively poor country. The government has a tax rate of about 50%. A new reform party is campaigning on a platform of cutting the tax rate to 25%. The reform party, running its campaign on a shoestring, has promised that the effect will be to stimulate economic growth and bring about a rise in per capita GDP. The incumbents have dismissed these claims, saying that the effect will be a huge increase in the size of the deficit, and thus higher interest rates.
Who is right? Particularly, address yourself to two questions:
· Can the cut in tax rates lead to a higher level of GDP?
Yes it can, if it
increases the incentives to work. See
Figure 5-7. This graph makes the
argument here.
· The argument that the government deficit will soar is obvious: if the government keeps spending constant while halving tax revenues, it will have to borrow. But could the reform party be right? Specifically, under what conditions would they be right? And how would your answer depend on what you concluded about the impact of the tax cut on the level of GDP?
Take a look at Figure
5-9. The Reform party is advocating
that one of these cases is true. Of
course, if there is an increase in GDP, then we don’t require that all of the
tax cut be saved..