Midterm 1 Econ 352 You have 23 questions Each question is worth 4 35 points Part 1 Assume there are two economies that each behave according to the basic Solow Growth Model as we discussed in class They both have the same depreciation rate the same population growth the same TFP parameter and the same production function 1 Then if country 1 has an higher output per capita then country 2 in the steady state then it has to be that Answer Country 1 has a higher savings rate so the answer is A 2 If consumers only care about their steady state consumption then it has to be Answer Country 1 has a higher output but more goes to savings so we cannot determine without further information So the answer is D Assume now country 1 is able to adopt a new type of technology that implies a lower depreciation of capital However to start using this new type of technology half of the existing capital will be lost 3 Comparing economy 1 in the new steady state relative to its old steady state it will have Answer Higher consumption per capita So the answer is A 4 Assume consumers get to vote on whether to adopt or not this new technology Also assume consumers only care about consumption starting from the moment of the adoption of the new technology until the economy gets to its new steady state and and thereafter Then Answer It s unclear what consumers will decide to do So the answer is C 5 Assume now that country 1 has done the transition but that country 2 can copy costlessly the new technology and without giving up any of its capital I e there is no destruction of the old capital Will country 2 do it Answer Yes So the answer is A 1 Part 2 Assume there is an economy that behaves according to the basic Solow Growth Model as we discussed in class 6 In a presidential debate two of the candidate debate on how to increase the growth rate of the economy The first one says we can increase output by increasing our savings rate The other one says We cannot increase output forever by increasing the savings rate Answer Both are right so the answer is D 7 As the debate goes on candidate 1 says If we want to increase the growth rate per capita forever then all we need to do is allow a one time increase of a million immigrants Candidate 2 says This will increase growth per capita forever only if the immigrants bring their own capital that can put into the production function Answer Both are lying so the answer is A Part 3 Assume all economies is the world behaves according to the basic Solow Growth Model as we discussed in class 8 Assume all countries in the world have the same parameters i e they all have the same depreciation rate the same population growth the same TFP parameter the same production function and the same savings rate The only thing that differs across the economies is their initial level of capital Then in the short run as economies start with their initial levels of capital Answer As an investor you are better off investing in a poor country So the answer is A 9 Assume all countries in the world have the same parameters i e they all have the same depreciation rate the same population growth the same TFP parameter the same production function and the same savings rate The only thing that differs across the economies is their initial level of capital Then in the very long run as economies converge each to its steady state Answer As an investor you are indifferent in which country to invest So the answer is C 2 Part 4 Assume there are two firms that produce a single good in an economy only with labor That is both firms produce with Y1 t 1 At N1 t Y2 t 1 At N2 t Both firms produce the same good that they sell at the same price Note that we initially assume that they both have the same TFP i e they have the same A 10 Assume that N1 N2 i e firm one uses more labor than firm two then there must be a way to reshuffle labor across the two firms and increase output in the economy that is the allocation is inefficient Answer True So the answer is C 11 Continue to assume that N1 N2 i e firm one uses more labor than firm two then it must be that the marginal productivity of labor is lower in the first firm than in the second one Answer True So the answer is B 12 Now assume that the first firm experiences an increase in its TFP That is A1 t A2 t Then it must be that in an efficient equilibrium i e the firms maximize their profits and there are is no government intervention that Answer We need to equate the marginal productivities of labor in an efficient equilibrium So the answer is C Part 5 Assume that a certain country ES satisfies all the assumptions of the Solow model i e standard production function for example you may assume that the production function is a Cobb Douglas constant depreciation rate constant population growth rate and constant saving rate The economy is currently at a steady state at some k ss Recently a certain part of the population decided to separate and become an independent country S Assume that upon separation the separators country S will have 20 of the population and 15 of the capital that 3 the unified country currently had Just to clarify Country E will now have 80 of the original population and 85 of original capital That is the only change 13 Then we know that in the long run Answer In the long run both countries will have the same steady state per capita as the original ES country had So the answer is A 14 Upon separation i e right immediately after the separation before the economy can change its capital stock from the 85 of the original capital what will happen to the consumption per capita in country E relative to its final steady state Answer It will be higher than its final steady state So the answer is A 15 Upon separation i e right immediately after the separation before the economy can change its capital stock from the 15 of the original capital what will happen to the consumption per capita in country S relative to its final steady state Answer It will be lower than its final steady state So the answer is D Now assume that separation is agreed upon in a peaceful way and so upon separation Country S will have 20 of the population and 20 of capital And therefore E will have 80 of population and 80 of capital That s the only change relative to the previous question 16 Then we know that in the long run Answer In the long run …