Midterm 1 - Econ 352• You have 23 questions. Each question is worth 4.35 points.Part 1Assume there are two economies that each behave according to the basic SolowGrowth Model as we discussed in class. They both have the same depreciationrate, the same population growth, the same TFP parameter, and the sameproduction function.1. Then if country 1 has an higher output per capita then country 2 in thesteady state then it has to be that:Answer: Country 1 has a higher savings rate so the answer is A2. If consumers only care about their steady state consumption then it hasto beAnswer: Country 1 has a higher output but more goes to savings so wecannot determine without further information. So the answer is DAssume now country 1 is able to adopt a new type of technology thatimplies a lower depreciation of capital. However, to start using this newtype of technology half of the existing capital will be lost.3. Comparing economy 1 in the new steady state relative to its old steadystate it will have:Answer: Higher consumption per capita. So the answer is A4. Assume consumers get to vote on whether to adopt or not this new technol-ogy. Also assume consumers only care about consumption starting fromthe moment of the adoption of the new technology until the economy getsto its new steady state and and thereafter. Then:Answer: It’s unclear what consumers will decide to do. So the answer isC5. Assume now that country 1 has done the transition but that country 2can copy costlessly the new technology and without giving up any of itscapital . I.e. there is no destruction of the old capital. Will country 2 doit?Answer: Yes. So the answer is A.1Part 2Assume there is an economy that behaves according to the basic SolowGrowth Model as we discussed in class.6. In a presidential debate two of the candidate debate on how to increase thegrowth rate of the economy . The first one says “we can increase outputby increasing our savings rate”. The other one says “We cannot increaseoutput 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 growthrate per capita forever then all we need to do is allow a one time increaseof a million immigrants”. Candidate 2 says “This will increase growth percapita forever only if the immigrants bring their own capital that can putinto the production function”Answer: Both are lying so the answer is A.Part 3Assume all economies is the world behaves according to the basic SolowGrowth Model as we discussed in class.8. Assume all countries in the world have the same parameters (i.e. they allhave the same depreciation rate, the same population growth, the sameTFP parameter, the same production function, and the same savings rate).The only thing that differs across the economies is their initial level ofcapital. Then in the short run (as economies start with their initial levelsof capitalAnswer: As an investor you are better off investing in a poor country. Sothe answer is A.9. Assume all countries in the world have the same parameters (i.e. they allhave the same depreciation rate, the same population growth, the sameTFP parameter, the same production function, and the same savings rate).The only thing that differs across the economies is their initial level ofcapital. Then in the very long run (as economies converge each to itssteady state)Answer: As an investor you are indifferent in which country to invest. Sothe answer is C.2Part 4Assume there are two firms that produce a single good in an economy onlywith labor. That is both firms produce withY1,t= AtN1−α1,tY2,t= AtN1−α2,tBoth firms produce the same good that they sell at the same price. Notethat we initially assume that they both have the same TFP (i.e. they havethe same A).10. Assume that N1> N2(i.e. firm one uses more labor than firm two) thenthere must be a way to reshuffle labor across the two firms and increaseoutput 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 thanfirm two) then it must be that the marginal productivity of labor is lowerin 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. Thatis A1,t> A2,t. Then it must be that in an efficient equilibrium (i.e. thefirms maximize their profits and there are is no government intervention)thatAnswer: We need to equate the marginal productivities of labor in anefficient equilibrium. So the answer is C.Part 5Assume that a certain country ES satisfies all the assumptions of the Solowmodel (i.e. standard production function (for example you may assumethat the production function is a Cobb-Douglas) , constant depreciationrate, constant population growth rate, and constant saving rate ). Theeconomy is currently at a steady state at some kss.Recently, a certain part of the population decided to separate and becomean independent country S. Assume that upon separation, the separators(country S) will have 20% of the population, and 15% of the capital that3the unified country currently had. (Just to clarify, Country E will nowhave 80% of the original population and 85% of original capital.) That isthe 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 theeconomy can change its capital stock from the 85% of the original capital)what will happen to the consumption per capita in country E relative toits final steady stateAnswer: 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 theeconomy can change its capital stock from the 15% of the original capital)what will happen to the consumption per capita in country S relative toits final steady stateAnswer: 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 uponseparation 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’sthe only change relative to the previous question16. Then we know that in the long run:Answer: In the long run both countries will have the same steady