Econ 100B Midterm 1
What is the Solow break-even investment and what is the formula?
It is the amount of investment that is needed to keep capital per worker constant. Equation: (𝛿 + n + g)k - 𝛿k (depreciation rate multiplied by capital per worker) tells us how much investment is needed to replace the depreciated capital - nk (population growth rate multiplied by capital per worker) tells us how much investment is needed to provide capital for new workers
Reading Concept: What do the long-term changes in the labor market in the United States imply for the wage skill premium? How would this affect income inequality? What could the government do about it?
- Globalization has increased labor demand and wages for highly educated and highly skilled workers in the United States. This led to a rise in skill premium. In other words, the returns to education has increased. - On the other hand, low skilled workers struggle to keep up with labor demand and thus struggle to find jobs with decent wages. This process has also led to an increase in income inequality. - The government can a) subsidize education for children and adults, b) provide retraining programs for displaced workers, c) provide social welfare such as unemployment subsidies or universal basic income, d) reform the tax system to fund such social welfare programs to reduce income inequality, or e) fight globalization by protecting domestic firms from their foreign competitors
Reading Concept: What was the role of construction sector in reducing unemployment in the United States?
- The progressive loss of manufacturing jobs was partially hidden by the increase of construction jobs as a result of the real estate boom in the early 2000s. - Once the real estate bubble popped in 2008-09, the demand for workers in construction came to a halt which led to a significant increase in unemployment rate. Question: What fueled the real estate boom and what led to real estate market crash? When the economy recovered, the housing prices were not as high as before the crisis and many unemployed workers that were in construction had to look for jobs as well.
What are some things that can shift labor supply curve to the left?
- increase in wealth - increase in expected future real wage - decrease in working-age population or labor force participation rate
What does a positive supply shock (an increase in A) mean for the economy?
- production function increases - MPK increases - rental rate of capital increases - MPL Increases - real wage increases
Regarding the solow model, what are some factors that decrease k?
1. Depreciation (𝛿) which accounts for the proportion of capital stock that wears out per year 2. Labor force growth rate (n) which reduces k by spreading the existing capital stock thinner among a larger number of workers 3. Growth of labor efficiency (g) which is the labor augmenting form of technological progress. It causes output to increase as the labor force becomes more effective at using technology.
Reading Concept: How has globalization affected the labor market in the United States?
1. Many manufacturing jobs that were initially held by unskilled American workers have been outsourced to countries that offer cheaper labor (such as China, Vietnam, and Bangladesh). 2. Many routine based jobs, usually part of some assembly line, have become automated (Artificial Intelligence or Robots) 3. The economy has transformed such that there is a greater demand for high cognitive skills, which poses a challenge for unskilled workers. This means they would need further education or training to meet new labor demands and this becomes more difficult for older folks. These led to a sharper divide among the US working class where highly educated workers find high earnings jobs whereas people with basic education are now struggling to find stable jobs and most of them end up working in the service industry for a minimum wage.
What are two types of firms responsible for business fixed investment
1. Production firms: rent the capital they use to produce goods and services 2. Rental firms: own capital, rent it to production firms
What is Technology (A) in Cobb Douglas Function?
A represents technology or total factor productivity ratio of aggregate output (i.e. real GDP) to aggregate input -> measure of productive efficiency because how much output can be produced from a certain amount of input
What are constant returns to scale
AF(cK, cL) = cAF(K,L) For example Y = A(5K + 10L) exhibits CRS A(5cK + 10cL) = cA(5K + 10L)
What is APC in relation with LCH?
APC = C/Y = 𝛼(W/Y) + 𝛽 This means that higher income households have a lower average propensity to consume than lower income households.
What happens to the break-even investment if there is an increase in popualtion growth?
An increase in population growth, n, causes an increase in break-even investment. This results in a lower steady state level for capital, k.
Scenario: Question asks to maximize productivity
Approach: calculate the different marginal product of labor and capital and compare MPK = dY/dK to calculate what an additional investment same with MPL but just continue to repeat until done profit maximization usually occurs when MPL or MPK = market prices of L or K if its too much, decrease until MPL/K is back to the market price
What are shifts in the intertemporal consumption shown with income?
As consumers, we are always greedy for our personal satisfaction. We always want more and more. Of course, that means we would prefer higher satisfaction than less, and we would want higher indifference curves. This means that our budget constraint line will shift outwards with an increase in income
What is the nominal cost of capital and real cost of capital?
Assuming: ΔPk/Pk= π Nominal cost of capital: Pk(i+ δ −π) = Pk(r+ δ) Real cost of capital: Pk/P (r+ δ)
What is the equation for APC?
Average Propensity to Consume C/Y
How is the Keynesian Consumption represented?
C = C(BAR) + cY C = Consumption c = MPC = marginal propensity to consume (slope of consumption function) C(BAR) = autonomous consumption Y = income
What are some factors that affect the rental price?
Cobb Douglas: Y = AK^a L ^ (1-a) MPK = R/P = aA(L/K)^(1-a) R/P would increase if: - K decreased (for example, earthquake or war) - L increased (for example, pop. growth or immigration) - A increased (technological improvement or deregulation)
What is the equation for national income?
Compensation of Employees + Other Income + Corporate Profits
What are some caveats in PIH?
Consumers may increase their spending if their temporary income increases (i.e. Christmas income bonuses) but they may also choose not to increase their spending if their current income is higher than their permanent income. This means that even if economic policies resulted in increase in overall income levels, this may not necessarily translate to increased consumer spending as long as the consumers themselves perceive these increases in income as temporary and not permanent.
How do we determine The Golden Rule savings rate or level of capital?
Consumption, or economic well-being, is maximized when the vertical distance between f(k) and 𝛿k is maximized. This occurs when the slope (MPK) of f(k) equals the slope (𝛿) of 𝛿k.
What are the constraints to further growth in China?
Convergence theory. As China had developed incredibly from a poor economy to one of the richest in the world. However, as it grew, its accumulation of capital has reached an optimum level where the economy is at a steady state. Additionally, developed countries are experiencing diminished returns. China's technological gap with other developed countries has shrunk. In fact, China is now one of the leading countries in technological innovation.
What is "creative destruction"?
Creative destruction is the economic transformation where new industries replace old ones as a result of mobility in labor and resource as well as technological innovation. This leads to economic growth. Creative destruction is a common theme among economies that experience high rates of economic growth as this would be difficult to achieve with just slight improvements in existing industries.
What are the factors for production?
Definition: inputs that were used in the production process that produced output (Y) Components: 1. Labor (L) human capital 2. Capital (K) stock of productive assets 3. Technology (A) determines the productivity of the factors of production 4. Natural Resources (Z) inputs into production provided by nature Should be able to give examples of each
Is the unemployment rate a good measure of the unemployed and employed? What are 2 examples of this?
Difficult to distinguish someone who is truly unemployed and economically inactive (not part of the labor force) - Discouraged workers: people who would like to work but have given up in their search for employment, won't show up in unemployment statistics due to the time frame of what's considered unemployed - Free riders: people who claim to be unemployed in order to receive unemployment benefits or some financial assistance even though they are not really looking for work
In the last couple of years, how has the contribution to productivity been?
Diminishing since WWII
What is the first conjecture of Keynesian Consumption Function?
FIRST CONJECTURE: Marginal Propensity to Consume (MPC) is between 0 and 1. Marginal Propensity to Consume is the proportion of an additional dollar of income (output) spent on consumption of goods and services. For instance, if we increase Abbie's disposable income (Y) by $100 and she spends $90 of it on food and college parties, we say her Marginal Propensity to Consume is $90/$100 = 0.9.
What is the equation for GDP?
GNP + Net Factor Payments
How was the Keynesian Consumption disproved?
However, this claim from Keynes turned out to be false against long term empirical evidence and other Economists' investigations. They saw that the ratio of consumption to income remained stable over time and consumption grew at the same rate as income. What were some reasons for this? - Expectations Matter (Will consumers expect their income to rise or fall?) - Distinction between current and permanent income is crucial - Real interest rates need to be considered
What is the income effect with relation with intertemporal consumption?
If a consumer is a saver, meaning the individual would prefer to save his income than spend it immediately, then the rise in real interest rates would benefit him since his income would increase.
If labor force participation rate falls, does the labor supply curve shift and in which direction? Then what happens to the wage?
If labor falls -> total supply of labor falls so that labor supply curve shifts left, this would real wage higher on the curve causing it to increase
What is the equation for intertemporal budget constraints?
If our consumer can borrow: Intertemporal budget constraints says that the present value of current and future cash inflows cannot exceed the present value of currently available funds and future cash inflows and is thus a constraint faced by the decision maker making choices for the present and the future. C1 + C2/1+r = Y1 + Y2/1+r left side shows the present value of expenditure and the right side shows the present value of income
What are interest rates and what is the difference between nominal and real interest rates?
Interest rates are the measure of cost of borrowing or the returns to lending. For example, if you lend $100 to a friend, you can charge a 3% interest rate. Your return to lending that friend $100 would be $3 and your friend's cost of borrowing that $100 would be $3. Nominal interest rates, denoted as i, is the rate at which the nominal value of your asset increases over time. This would be the interest rate on your loan or investment. For example, your bank could have a 5% interest rate. This means if you deposit $1000 into your bank account, you are lending your bank that amount of money and would receive 5% of that as a return. This is your nominal interest rate. Real interest rates, denoted as r, is the rate at which the real value of your asset increases over time. We know that to go from nominal to real values, we adjust for changes in price levels, or inflation.
What is the main idea of capital accumulation?
Investment increases the capital stock but depreciation reduces it change in capital stock = investment - depreciation 𝛥 k = i - 𝛿k = sf(k) - 𝛿k
What are net factor payments?
It is the income paid to domestic factors of production by the rest of the world minus the income paid to foreign factors of production by the domestic economy. This can be income earned from work or income earned from property and entrepreneurship. For example, an American engineer employed abroad in Singapore earns 10,000 USD. Non resident in the American domestic economy earns 8,000 USD. Net factor payments would be 2,000 USD (10,000 - 8,000).
What is the Beveridge Curve?
It shows us the relationship between unemployment rate and job vacancy rate. The job vacancy rate is the number of unfilled jobs expressed as a proportion of the labor force. It shows an inverse relation: As unemployment inc, vacancy decreases
What is the golden rule of capital accumulation?
It's the saving rate which maximizes steady state level of the growth of consumption -> maximize the economic well-being of the individual members of society
In the beveridge curve, what does distance from the origin represent?
Labor Market Efficiency: difficulty for firms and workers in finding each other If structural changes to the labor market makes it more difficult for workers to find better suited jobs, we say there is an outward shift (shift away from the origin). Here, there is greater vacancy rate but also greater unemployment rate. On the other hand, if the structural changes in the labor market facilitates better job match making, firms fill up openings faster and workers find jobs quicker. We say there is an inward shift (shift towards the origin).
What components can unemployment rate be broken down into and what types of unemployments are they?
Long run and short run Long run - natural rate of unemployment Short-run - cyclical unemployment
What is the natural rate of unemployment? What are its two components? How does it compare to the current employment rate in the recession/boom?
Long term unemployment rate of an economy that would be compatible with a steady inflation rate two components: frictional and structural component In a recession, our current unemployment rate would be below the natural rate and in a boom, vice versa
What is MPK and MPL?
MPK = dY/dK MPL = dY/dL Typically exhibits diminishing marginal product of capital and of labor - increasing returns slow down as you increase labor or capital
In the beveridge curve, how is relation to economic activity represented?
Movement along the curve As activity (demand) increases, vacancies rise and unemployment decreases. Likewise, as activity decreases, vacancies drop and unemployment increases. This is an indication of cyclical changes in our unemployment rate, but it could also be a sign of structural unemployment. When vacancy = unemployment rate, this the point of frictional level of unemployment as people are moving to job to job
What is the equation for GNP?
National Income + Depreciation
What is the difference between nominal and real measurements?
Nominal variables are measured in the current dollar terms. Real variables are adjusted for changes in the dollar terms to reflect it in quantity terms.
What is a rental firms profit rate?
Profit rate = real income of capital - real cost of capital Profit rate = R/P - Pk/P (r+ δ) = MPK - Pk/P (r+ δ)
How can you relate nominal and real GDP with an equation?
Real GDP = Nominal GDP/ GDP Deflator x 100
In the last couple of years, what has Real GDP been doing?
Real GDP growth is declining over time.
What was the overall relation in Keynesian Consumption?
Relating consumption with current disposable income
What point do competitive firms rent capital to?
Rent capital to the point where MPK = R/P The marginal production of capital will be equal to real rental price R/P = the income that rental firms earn from renting the unit of capital to production firms.
What is the second conjecture of Keynesian Consumption Function?
SECOND CONJECTURE: Average Propensity to Consume (APC) falls as income rises. Average Propensity to Consume is the ratio of total consumption to total income, or denoted as just Consumption (C) / Income (Y). This is different than Marginal Propensity to Consume because MPC looks at the proportion of an additional dollar amount of income spent on consumption and not total amount. This implies that the rich save a higher proportion of their income than the poor.
What was the overall relation in Intertemporal Consumption?
Showed how consumers are both rational and forward looking where they choose consumption for the present and the future to maximize their lifetime satisfaction.
What is the third conjecture of Keynesian Consumption Function?
THIRD CONJECTURE: Income is the primary determinant of consumption.Not much else to this conjecture other than Keynes believed interest rates did not have an important effect on consumption relative to income.
What is the substitution effect with relation with intertemporal consumption?
The increase in real interest rate increases the opportunity cost of current consumption since borrowed income would be more expensive and future income would be greater. This means the consumer is more likely to tend consume at a later period and thus, current consumption would go down, causing C1 to fall.
What is the Random Walk Hypothesis?
Through this assumption of rational expectations, these rational consumers should have already considered scenarios where there are fluctuations in their income levels. For instance, a rational consumer that has anticipated a change in temporary income levels will not change their consumption levels. Their consumption levels will only change if they experienced unanticipated changes in their permanent income (i.e. Winning the Lottery - significant enough to change permanent levels of income), resulting in changes in their consumption habits. This is known as random walk as changes in consumption would become unpredictable and unanticipated.
What is the LCH equation
To achieve smooth consumption, we want to split our wealth up equally over our lifetime. This means we have: C = (W + RY) / T or C = 𝛼W + 𝛽Y W = initial wealth Y = annual income until retirement (assumed constant) R = number of years until retirement T = lifetime in years 𝛼 = 1/T which is our marginal propensity to consume relative to wealth 𝛽 = R/T which is our marginal propensity to consume relative to income
What is the Life Cycle Hypothesis (LCH)?
The theory tells us that consumers want to smooth consumption over their lifetime by saving in periods with high income and borrowing in periods of low income.
What is the PIH?
Theory that states consumers will spend at a level consistent with their expected long term average income This expected long term average income is thought as their "permanent" level of income, which we denote as Yp. Any deviations from this permanent income is considered temporary income, denoted as Yt, meaning current income could be subjected to random transitory fluctuations. Our total current income is Y = Yp + Yt. By this hypothesis, our consumption function is C = 𝛼Yp.
According to the authors, why did China's economy grow so fast?
There are a couple of factors. First, China had a high savings rate, ranging between 35% and 45% of its GDP. This meant that they were able to invest a substantial amount of public sector investment into education and infrastructure, which would drive growth in technology and applied practical knowledge, leading to total factor productivity growth. China also experienced major resource mobility, which led them to experience "creative destruction". In China's early stages of its economy, it was mostly comprised of the agricultural sector. People from this sector began to move to new industrial sectors where investment and higher productivity were taking place. These people were typically underemployed in the agricultural sector, meaning there was a surplus of labor. Their movement towards new sectors had little adverse effect on total output from traditional sectors. This movement of people geographically and across sectors contributed to China's significant and sustained economic growth.
What is the equation for national income identity?
Y = C + I + G + NX - GDP (Y) is the compensation of employees + other income + corporate profits + depreciation + net factor payments - Consumption (C) is the domestic household spending on final goods and services (durable goods, nondurable goods, services). This accounts for majority of output (roughly 70%). - Investment (I) is the spending for new capital goods (business fixed investment and residential fixed investment) plus inventory investment. - Government (G) purchases of goods and services. - Net exports (NX) is the difference between exports and imports.
How is indifference curves related with intertemporal consumption?
There is an optimal (C1, C2) such that the highest possible indifference curve just touches our budget constraint line.
How can we shift the steady state?
There would have to be an increase of saving rate -> results an upward shift in investment causing our k to grow to a new steady state
What are shifts in the intertemporal consumption shown with real interest rate?
This means that if we were to save for consumption in period 2, C2, we would have a greater amount of income, Y2, to spend and thus a greater amount for C2. On the other hand, it would be more costly to borrow money in period 1, meaning we have less income, Y1, to spend in period 1, C1, and thus a lower amount for C1. Overall, the budget constraint line becomes steeper, and in other words, C1 falls and C2 rises. However, this isn't always the case as we consider two scenarios.
What is frictional unemployment?
Unemployment rate that occurs when time is needed for workers to be matched with jobs. This is sometimes referred to as the unemployment caused by job search
What is the Unemployment Rate?
Unemployment rate: # of unemployed people/ labor force People: - willing and able to work - actively looking to work - not currently employed - within typically 4 week
What is cyclical rate of unemployment?
Unemployment that fluctuates according to the stage of business cycle the economy is at. Addressed with short term policies
What is structural unemployment?
Unemployment that results from a mismatch between workers and jobs. Exists when there is a shift in the labor demands in the market due to extraneous factors such as technology, competition, and government policy. This occurs because workers lack the skills and training to pursue certain available jobs or are simply too far from areas where their area of expertise is hiring. An example of this is if you were an employee who is able to produce a specialty clothing product but it is no longer in trend, as a result, your expertise and position are no longer needed.
In an economy with the production function 𝑌 = 40𝑘^0.5, , a current capital stock of 400, and a depreciation rate of 12%, and assuming no changes in population or technological progress, what must the saving rate exceed in order for output per worker to increase? a. 4% b. 5% c. 6% d. 7%
Using the equation: 𝛥 k = i - 𝛿k = sf(k) - 𝛿k To calculate what the saving rate must exceed, we set 𝛥 k = 0 to indicate our steady state Plugging and chugging we get our steady state saving rate is 6% meaning it'll have to exceed this to increase output per worker
What is the equation for the Cobb-Douglas Function?
Y = AF(K,L) Y = AK^a L^b a,b = output elasticities of capital and labor and measure the responsiveness of the output to a change in levels of either labor capital ex: if α = 0.45, a 1% increase in capital usage would lead to approximately a 0.45% increase in output.
What of these are ways to reduce the natural rate of employment? a. Increasing rate of job separation b. Decreasing rate of job separation c. Increasing rate of job finding d. Decreasing rate of job finding e. b and d f. a and c g. b and c
g. b and c NRE = s / s+ f
A decrease in the price of exported goods consumed exclusively abroad will show up in: a. GDP deflator but not in CPI b. Both the CPI and GDP deflator c. CPI but not in GDP deflator d. Nowhere as exported goods are not domestically consumed and therefore, they remained unaccounted for in these indexes
a. GDP deflator but not in CPI Remember that GDP (Gross Domestic Product) consists of consumption, investment, government spending, and net exports. So GDP / GDP deflator would be affected by a decrease in price of exported goods consumed exclusively abroad. CPI (Consumer Price Index) looks at a specified basket of goods and services consumed domestically. This would be more accurate in reflecting what the economy's standard of living looks like.
Which of the following statements is true? a. The unemployment rate does not tell us anything about the duration of unemployment. b. The duration of unemployment decreases during recessions. c. The duration of unemployment increases during economic expansions. d. None of the statements above is true.
a. The unemployment rate does not tell us anything about the duration of unemployment. Unemployment rate tells us the percentage of unemployed people over the labor force. Earlier, we saw the characteristics of unemployed people and it usually does not reflect much about the duration of unemployment. While we usually consider 4 weeks, this is not standardized across unemployment measurements. But we do know that the duration of unemployment should not change regardless of the stage of the business cycle an economy is in. As a result, Option A would be the most accurate and hence, most appropriate answer
Suppose in a given month, 5% of employed workers lose their jobs, and 20% of unemployed workers find a job. What is the natural rate of unemployment?a. 80% b. 20% c. 25% d. 15%
b. 20% Using our equation that natural rate of employment = s / s + f = 0.05 / (0.05 + 0.2) = 0.2
Macondo is a country with 10'000 inhabitants. There are 8'000 people who have the legal age to work. Currently there are 5'000 people working and 300 looking actively for a paid job. The rest of people is either waiting for the market to improve to start looking for a job (700 individuals) or decided to not work anymore (2'000 individuals). What is the unemployment rate in Macondo? a. 300 b. 5.66% c. 3.75% d. 3%
b. 5.66% Unemployment rate is the number of unemployed people over labor force. The number of unemployed people here is 300. Labor force is the sum of employed (5,000) and unemployed (300). This means unemployment rate is 300 divided by 5300 which is approximately 5.66%
In the Solow model, a decrease in the saving rate leads to a. An increase in output per worker b. A decrease in output per worker c. A permanent increase in the growth rate of output per worker d. A permanent decrease in the growth rate of output per worker e. None of the above
b. A decrease in output per worker Looking at the equation 𝛥 k = i - 𝛿k = sf(k) - 𝛿k we see that a decrease in saving rate will decrease change in capital and output per worker
Which of the following is not a component of the Gross National Product of a country? a. Consumption b. Capital Depreciation c. Net Factor Income from Abroad d. Net Exports
b. Capital Depreciation Gross National Product (GNP) includes what is produced domestically and what is produced by domestic labor and business abroad in a year.
According to the WSJ article, "Why China grows so fast", which of the following didthe authors cite as reasons for China's growth? a. Foreign aid b. High savings rate and resource mobility c. Discovery of natural resources d. The Cultural Revolution
b. High savings rate and resource mobility
You hesitate between purchasing an electric bike for CHF 2000 (CHF is Swiss Franc) or doing a deposit that will pay you CHF 100 in interests until next year. Given a catastrophic macroeconomic situation, you expect that year-to-year inflation will raise by 10% in your country. What is the level of real interest rate that banks or deposit holders are offering you? a. 5% b. 15% c. -5% d. -15%
c. -5% A deposit of CHF 2000 that pays me CHF 100 means a 5% nominal interest rate (dividing CHF 100 by CHF 2000 would give us this value). Remember that interest rate is the cost of borrowing or returns to lending. The question tells us that inflation is 10%. By the Fisher equation, where r = i - 𝛑, where r is our real interest rate (the output we are interested in), i is our nominal interest rate and 𝛑 is our inflation rate, we just compute the difference to determine that 5% - 10% = -5%.
Which 2 reasons are mentioned in "The New Artisan Economy" as the causes forincrease in unemployment? a. Automation and Productivity Loss b. Globalization and Productivity Loss c. Automation and Globalization d. Decrease in Agricultural and Manufacturing production
c. Automation and Globalization
According to the theory of convergence a. Income per capita is the same regardless of poor or rich countries b. Income per capita in rich countries should grow faster than in poor countries c. Income per capita in poor countries should grow faster than in rich countries d. Income per capita in poor countries would only grow if they receive foreign aid
c. Income per capita in poor countries should grow faster than in rich countries The convergence theory is the hypothesis that income per capita in poorer economies will tend to grow at faster rates than richer economies. In poorer economies, production factors such as capital and labor are generally low. Because capital is low, the economy is at a point where they want to invest in capital since they have yet to arrive at a steady state whereas richer economies are at or trying to move past their current steady state. And we know that as capital grows, output grows, or as capital per worker grows, output per worker grows. This makes economic growth tend to rise faster than that of richer countries. Additionally, each new additional unit of capital creates more output in poorer economies than each new additional unit of capital in a richer economies by the law of diminishing returns.
The current unemployment rate can be calculated by dividing the number ofunemployed persons by: a. Population b. Number of Employed Workers c. Labor Force d. Price Level
c. Labor Force UR = U/L
Farmland has an aggregate production function, i.e. its real GDP (Y) that depends on the stock of physical capital (K), the number of workers (L), the arable terrain for agricultural exploitation (T), and A is a parameter capturing the level of technology. This function is: Y = AK^0.3 L ^0.3 T^0.4 Which of the following statement is false? a. The production function shows constant returns to scale b. Individually each production factor shows diminishing returns c. Owners of physical capital receive the same retribution (in % of GDP) as owners of arable terrain d. A 10% increase of physical capital will have the same impact as a 10% increase of labor on the aggregate level of production.
c. Owners of physical capital receive the same retribution (in % of GDP) as owners of arable terrain C is false because our output elasticities for physical capital (K) and arable terrain (T) are different, where they are 0.3 and 0.4 respectively. That means, as a percentage of GDP, owners of physical capital will receive 30% of the retribution while owners of arable terrain will receive 40%. A is true because the output elasticities for all our production factors add up to 1. B is also true because the output elasticities for our production factors are less than 1, demonstrating diminishing returns. We do not consider A as a production factor because it measures the productive efficiency of the economy. D is true because capital and labor have the same output elasticities.
Which of the following will probably not contribute significantly to economic growth? a. Agricultural reforms that increase crop yields in a country like Vietnam. b. The discovery of oil in a country like Japan. c. The discovery of diamonds in a country like Haiti. d. Investment in research and development in a country like Switzerland.
c. The discovery of diamonds in a country like Haiti. C is the correct answer because even with the discovery of diamonds which means greater natural resources, since Haiti has a poorer infrastructure which results in lower productive efficiency. This means they are unable to utilize this discovery of diamonds as effectively.For A, an increase in crop yields will lead to an increase in both newly produced goods and services as well as net exports since Vietnam is a major exporter. This will generally lead to a significant increase in economic growth. For B, Japan has a good infrastructure that will, unlike Haiti, allow them to utilize the discovery of oil. This will also indicate a positive supply shock that will lead to an increase in economic growth. For D, investment in research and development in a rich economy with an established infrastructure, much like Japan, will also lead to greater output in the long run.
According to the WSJ and the Economist articles, which of the following is not a concern for future growth? a. Real Estate Investment b. Demographics c. Unemployment d. Debt
c. Unemployment
In the last couple of years, what has Capital been doing in relation with labor?
capital has been growing faster than labor
Using the data from the previous question, what is the labor force participation rate in Macondo? a. 80% b. 50% c. 62.5 d. 66.25
d. 66.25 Labor force participation rate is the labor force over the adult population. We saw that the labor force is 5,300 and that the number of people who are legally allowed to work is 8,000. Labor force participation rate is then 5,300 divided by 8,000 to get 66.25%.
Which of the following does the unemployment rate NOT capture? a. Discouraged workers b. Free riders c. The underemployed d. All of the above
d. All of the above
For you to be considered out of the labor force, you can be a. A full time retiree b. A full time student c. A full time volunteer d. Any of the above
d. Any of the above Recall that the definition of unemployed is they are willing and able to work, actively looking for work, but not currently employed. To be considered out of the labor force, you are neither employed or unemployed, which means you are not willing and able to work, not actively looking for work, and not currently employed. This means that options a, b, and c would satisfy said characteristics, hence option D is the most appropriate answer.
In the Solow model, when investment exceeds depreciation, what happens to capital per worker (k)? a. Capital per worker is higher than the steady state level, and will continue todecrease. b. Capital per worker is lower than the steady state level, and will continue todecrease. c. Capital per worker is higher than the steady state level, and will continue toincrease. d. Capital per worker is lower than the steady state level, and will continueto increase.
d. Capital per worker is lower than the steady state level, and will continueto increase. Increase to a new steady state so its lower than the new steady state and continuing to increase
The Golden Rule level of capital is that steady-state value of k that maximizes: a. Capital b. Investment c. Depreciation d. Consumption
d. Consumption It's the saving rate which maximizes steady state level of the growth of consumption -> maximize the economic well-being of the individual members of society
Using the same production function from question 3, you know that the stock of physical capital increased by 5% during this period, while arable terrain remained stable during the period of consideration. Furthermore, you know that technology witnessed a minor loss in efficiency of 1% and that new entrants to the labor force equal retirements observed during the period. This function is: Y = AK^0.3 L ^0.3 T^0.4 You can conclude that during this period, the national output: a. Grew by 1.5% b. Decreased by 1% c. Grew by 2.5% d. Grew by 0.5%
d. Grew by 0.5% Since the output elasticity of capital is 0.3 and our percentage change in capital is 5%, we multiply both to get 1.5%. Since the percentage change in A is -1%, we sum them to get 0.5%.
If someone loses their job because they were replaced by a machine, they are_________ unemployed. a. Cyclically b. Frictionally c. Seasonally d. Structurally
d. Structurally Machine replacement indicates that the unemployment was caused by a structural shift in job requirements
Movements along the Beveridge curve are due to changes in which of the following? a. Cyclical unemployment b. Structural unemployment c. Frictional unemployment d. The natural rate of unemployment e. Two of the above
e. Two of the above: Cyclical -> left and right along the curve to signify changes in short term shifts in job vacancies with unemployment rates Structural -> to and fro from origin to indicate changes in job requirements that switch up unemployment rates and job vacancies
What would be decreasing or increasing returns to scale?
in the cobb douglas function, a+b < 1 = decreasing returns to scale as output inc by smaller proportion than input a+b >1 = increasing returns to scale as greater proportion than input
What is the formula for the total cost of capital (nominal price)?
interest cost + depreciation + capital loss i×Pk + δ ×Pk - ΔPk
What are the components needed for the cost of capital?
interest cost: i×Pk, where Pk = nominal price of capital depreciation cost: δ ×Pk, where δ= rate of depreciation capital loss: −ΔPk (a capital gain, ΔPk> 0, reduces cost of K ) Add everything together for the nominal cost of capital
What are the conditions for steady state capital stock?
investment = depreciation sf(k) = 𝛿k this means that the capital per worker is constant and capital stock is unchanged
What is the Fisher Equation and what is it used for?
r = i - 𝝿^e real interest rate = nominal interest rate - expected inflation
What does real cost of capital depend on?
• the relative price of capital • the real interest rate • the depreciation rate
What do investments depend on?
•MPK •interest rate •tax rules affecting firms
What is the formula for capital accumulation including the labor changes? What part is the actual investment and what part is the break even investment?
𝛥 k = sf(k) - (𝛿+n)k sf(k) = actual investment (𝛿+n)k = break even investment