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 a Country 1 has a higher savings rate b Country 2 has a higher savings rate c It cannot be that the two countries have different output in the steady state d It depends how long they have been in the steady state 2 If consumers only care about their steady state consumption then it has to be a Country 1 consumers are happier b Country 2 consumers are happier c They are equally happy d Cannot determine who is happier 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 a Higher consumption per capita b Lower consumption per capita c Same consumption per capita d Cannot determine 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 1 a Consumers will surely want to adopt the new technology b Consumers will surely reject the adoption of the new technology c It s unclear what consumers will decide to do d Consumers will be indifferent between the two options 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 a Yes b No c It depends on how long it will take to get to the new steady state d It depends on how big is the change in the depreciation rate 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 a Both are lying b Candidate 1 is correct and candidate 2 is lying c Candidate 2 is correct and candidate 1 is lying d Both are right 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 a Both are lying b Candidate 1 is correct and candidate 2 is lying c Candidate 2 is correct and candidate 1 is lying d Both are right 2 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 a As an investor you are better off investing in a poor country b As an investor you are better off investing in a rich country c As an investor you are indifferent in which country to invest d Unclear where you should invest 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 a As an investor you are better off investing in a poor country b As an investor you are better off investing in a rich country c As an investor you are indifferent in which country to invest d Unclear where you should invest 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 labo across the two firms and increase output in the economy that is the allocation is inefficient 3 a False b Unclear c True 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 a Unclear b True c False 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 a Firm 2 hires more workers than firm 1 b It depends c Firm 1 hires more workers than firm 2 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 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 a In the long run both countries will have the same steady state per capita as the original ES country had b In the …