Intermediate Macro: Exam 1 Review

Consider the table below that shows hypothetical data for the CPI. Year CPI 2011 103.3 2012 105.2 2013 104.9 Answer: The inflation rate for 2012 is _____% and the inflation rate for 2013 is _____%.

(new-old)/old 1.8%; 0.3%

Suppose an economy has total income of $6 trillion, where total labor income equals $4.2 trillion and capital income equals $1.8 trillion. What is the value of the exponent on labor using a Cobb-Douglas production function, labor income share is? What is the value of the exponent on capital using a Cobb-Douglas production function, capital income share is?

4.2/6 = 0.7; 1.8/6 = 0.3, so b=0.7

Which of the following is not a basic result of the Solow growth model? A. Increases in productivity directly increase output per person and also increase it indirectly by causing the capital-labor ratio to rise. B. A higher rate of population growth raises the level of output per person. C. If different economies have the same aggregate production function, they will converge to similar levels of output per worker and per capita income. D. A higher saving rate increases the levels of capital and output per worker but does not affect their long-run growth rates.

B. A higher rate of population growth raises the level of output per person.

Which of the following would be counted into 2011 GDP? A. The purchase of an existing house in July 2011 B. The purchase of a used car in Oct 2011 C. The production if a car in Feb 2011; that is, not sold during 2011

C. The production if a car in Feb 2011; that is, not sold during 2011

Which of the following would be counted into 2019 GDP A. The purchase a used car B. The production of intermediate goods in Feb 2019 C. The production of a new iPhone

C. The production of a new iPhone

Beginning from a steady state in the Solow growth model, which of the following does not occur when there is an increase in the saving rate? A. In the new steady state, investment will equal depreciation and no additional rise in capital per worker will occur. B. The level of output per worker will increase from its current level. C. If the saving rate increases, a larger portion of the present output per worker will be invested in new capital. D. An increase in the saving rate will cause a permanent increase in the growth rate of capital.

D. An increase in the saving rate will cause a permanent increase in the growth rate of capital.

True or False: Because of the gains from higher saving rates, countries should aim for a 95% saving rate.

False

If GDP = 18450.1 billion And GNP = 18657.9 billion Net factor income = ?

GNP - GDP = NFI NFI = 207.8

Based on the net factor income, it can be concluded that foreign production by U.S. firms is higher or lower than U.S. production by foreign firms?

Higher, because GDP is a location number, GNP is a citizen number.

Beginning from a steady state in the Solow growth model, what of does occur when there is an increase in the saving rate?

In the new steady state, investment will equal depreciation and no additional rise in capital per worker will occur The level of output per worker will increase from its current level If the saving rate increases, a larger portion of the present output per worker will be invested in new capital.

Name three basic results of the Solow growth model?

Increases in productivity directly increase output per person and also increase it indirectly by causing the capital-labor ratio to rise If different economies have the same aggregate production function, they will converge to similar levels of output per worker and per capita income. A higher saving rate increases the levels of capital and output per worker but does not affect their long-run growth rates.

What is the capital-accumulation equation in the Solow growth model?

Investment per worker − Depreciation per worker

Is it correct to assume that total income equal total expenditure for a household?

No. As a whole economy, it is correct. But it's necessary for a household. *refine answer

Which of the following correctly characterizes the relationship between real and nominal GDP:

Real GDP = Nominal GDP/Price level

Using the following variables to find the steady=state values of the capital-labor ratio and output per-worker production function is y=2k^0.3 Saving rate=0.3; Depreciation rate=0.05; Population growth rate=0.06; A=2 Then k**=*?* *y**=*?

Solve for...

What are supply shocks? And is population explosion a source of supply shock?

Supply shock is shifts of TPF, so population explosion is not.

What is considered a supply shock

Tech advancement, natural disaster, energy prices

What determines the amount of investment per worker in the Solow growth model?

The capital-labor ratio, technology, the savings rate

Suppose that the following production function represents the economy of Chile: Y = F (K, L) = Ak^0.4*L^0.6 Assuming Chile's national income equals $180 billion, what is the real labor income? What is the real capital income?

The real labor income = 180 x 0.6 = 108; the real capital income = 180 x 0.4 = 72

The significance of the national income identity is?

The significance of NII is: when measuring the GDP, three different approaches will give us same answer.

What is fundamental identity of national income accounting?

Total Production = Total expenditure = Total income

True of False: The major flaw in the Solow growth model is that it does not explain sustained increases in output per worker and per capita income.

True

Consider the following production function: Y = F (K, L) = A (3K + 4L) Does the production function exhibit CRS?

Yes, just prove F( aK, bL) = tY, and a,b can be any number

A manufacturer of toys is employing 50 workers and using 15 pieces of equipment to assemble toys. Currently, the marginal product of labor is $12, and the marginal product of capital is $20. Assume the market prices for labor and capital are $12 and $20, respectively. Is this firm maximizing its profit? What should this firm do with respect to its employees and its use of equipment?

Yes. So the firm just maintain everything

Consider the effects of an increase in the saving rate in the United States capital labor ratio, according to the Solow model. The immediate effect of a saving rate increase would...

begin to increase the capital-labor ratio, not immediately increase output per worker, and reduce consumption per worker.

The long-run effect of a saving rate increase would...

increase the level of capital per worker and increase the level of output per worker.