Macro 352 - Selo

what is the difference between gross investment and net investment

net investment = gross investment - depreciation

What is the difference between the nominal interest rate and the 'expected' real interest rate?

nom rate - expected rate = expected inflation

What is the difference between the nominal interest rate and the real interest rate?

nominal rate - real rate = inflation rate

Consider the function Y=A K1/2 L1/2 , where A is total factor productivity (TFP). Suppose that K=9, L=16 and Y=18. What is the value of TFP.

A=1.5

Suppose that the production function is characterized by constant returns to scale. If we increase all production inputs by 5 percent, how much does output change?

+ 5%

Is the value of nominal GDP different from the value of real GDP in the base year?

In the base year the value of nominal GDP and value of real GDP are the same.

how would a sharp price increase in oil prices effect productivity?

shifts labor demand left, and the unchanging labor supply curve reduces equilibrium employment and real wage

Assume that the production function takes the usual form Y=A Kα L1-α . Suppose A = L = K = 1, α=0.4, δ=0.1 (the depreciation rate), and s=0.15 (the saving rate). (a) What is output Y ? (b) What are saving, S, and investment I?(c) What is next period's capital stock?

(a) Since A=L=K=1, production is Y=1. (b) Saving is equal to S=s Y. Given the saving rate of s=0.15 and Y=1, we have that S=0.15. The same for investment, I=0.15. (c) The next period capital stock is Kt+1=(1-δ) Kt + I = 0.9 + 0.15 = 1.05.

A profit-maximizing firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N, and the marginal productivity of labor given by MPN = 50 - 2N + K. The price of a unit of capital is $5000, the real interest rate is 10%, and capital depreciates at a 15% rate. The real wage rate is $15. (a) Calculate the user cost of capital. (b) Find the firm's optimal amount of employment and the size of the capital stock.

(a) User Cost: �$ = (� + �)�% = (0.10 + 0.15) × 5000 = 1250. (b) We have two equilibrium equations (w=MPN and uc=MPK) and two unknowns (K and N). Setting w = MPN gives 15 = 50 - 2N + K, or 2N = 35 + K. Setting uc = MPK gives 1250 = 10,000 - 2K + N, or N = -8750 + 2K, or 2N = -17,500 + 4K. Setting -17,500 + 4K = 35 + K gives 3K = 17,535, which yields K = 5845. Then N =-8750 + 2K = 2940

Last year, Linus earned a salary of $25,000 and he spent $24,000, thus saving $1000. At the end of the year, he received an unexpected bonus of $1000 and he spent $500 of it, saving the other $500. What was his marginal propensity to consume?

.5 MPC measures the response of current consumption to changes in current income. Here consumption increased by $500 in response to a $1000 additional income, hence the MPC=500/1000=0.5

What are the three methods used to measure GDP?

1) Production (or Value Added) approach. 2) Expenditure approach. 3) Income approach.

Consider the production function Y=A K0.3 L0.7. If K increases by 3%, L by 5% and Y by 6%, what is the percentage increase in A?

1.6% This is because 6% increase in output is equal to the contributions of the three components (A,K,L) multiplied by elasticities. More specifically, 6% = g + 0.3x3% + 0.7x5%. Solving for g we obtain 1.6%

Calculate the user cost of capital of a machine that costs $5000 and depreciates at a 25% rate, when the nominal interest rate is 5% and the expected inflation rate is 10%.

1000 � = � − � = 0.05 − 0.1 = −0.05. User Cost: �$ = (� + �)�% = (−0.05 + 0.25) × 5000 = 1000.

Calculate the user cost of capital of a machine that costs $5000 and depreciates at a rate of 25%, when the expected real interest rate is 5%.

1500 User Cost: ue = (r + �)pk = (0.05 + 0.25) × 5000 = 1500.

Multiplier Effect of GDP

A change in any component of autonomous spending creates a larger change in GDP.

The GDP of South Africa in 1950 was 77,836.88 million dollars. In 2019 it was 748,861 million dollars. What has been the average annual growth rate of GDP for South Africa during the period 1950 to 2019? Use growth compounding to calculate the number.

Annual growth rate is (748,861/77,836.88)^(1/69)-1 = 0.033355 or 3.3355 per cent per year. (gdp yr2 / gdp y1)^(1/yrs)-1

Demand for Loanable FUnds

As the real interest rate falls, borrowing becomes less costly, and large investment projects become more attractive to firms.[Saving, lending]

the desired level of the capital stock will increase if the A) user cost of capital increases. B) future marginal product of capital increases. C) effective tax rate increases. D) price of capital increases.

B) future marginal product of capital increases.

An increase in the price of capital goods will A) increase the expected future marginal product of capital B) reduce the expected future marginal product of capital C) increase the user cost of capital D) increase the interest cost but not affect the depreciation cost of capital

C) increase the user cost of capital

Marginal Propensity to Consume (MPC)

Change in consumption caused by a change in disposable income. MPC = Change in Consume / Change in Disposable Income = Slope of consumption function

Marginal Propensity to Save (MPS)

Change in saving caused by a change in disposable income. MPC = Change in Saving / Change in Disposable Income = Slope of saving function

The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true? A) In response to the stock market crash the government reduced income taxes B) Most stocks were owned by insurance companies C) Most stocks were owned by foreign investment firms D) Many individuals had invested in the stock market immediately prior to the crash

D) Many individuals had invested in the stock market immediately prior to the crash

Desired national saving would increase unambiguously if there were A) an increase in both current output and expected future output. B) an increase in both expected future output and government purchases. C) an increase in both expected future output and the expected real interest rate. D) a fall in both government purchases and expected future output.

D) a fall in both government purchases and expected future output. (A) may increase saving due to higher current output but reduce saving due to higher future output. (B) government purchases may crowd out saving. (C) may increase saving due to higher interest rate but reduce saving due to higher future output.

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve A) raises the profitability of investment for firms. B) causes the amount of firms' investment to increase. C) increases the total amount of saving because of the increase in the real interest rate. D) causes the total amounts of saving and investment to fall

D) causes the total amounts of saving and investment to fall.

You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as A) the future marginal product of capital is positive. B) the future marginal product of capital is greater than or equal to the present marginal product of capital. C) the future marginal product of capital is greater than the expected marginal product of labor. D) the future marginal product of capital is greater than the user cost of capital.

D) the future marginal product of capital is greater than the user cost of capital.

Consider again South Africa where the GDP in 1950 was 77,836.88 million dollars and in 2019 748,861 million dollars. The population in 1950 was 13.2 millions and in 2019 it was 58.5 millions. What has been the average annual growth rate of per-capita GDP for South Africa during the period 1950 to 2019? Use growth compounding to calculate the number.

First we calculate per-capita GDP. In 1950 it was 77,836.88/13.2=5,896.733 in 2019 it was 748,861/58.5=12,801.04. Annual growth rate is (12,801.04/5,896.733)^(1/69)-1 = 0.011297 or 1.1297 percent per year.

What is Gross Domestic Product or GDP?

GDP, is the market value of final goods and services newly produced within the geographical boundary of a country in a particular period of time.

Consider again the same production function Y=A KαL1-α with α=0.4. Suppose that A=1, L=1, gl=0 (population growth), ga=0 (TFP growth), s=0.2 (saving rate), δ=0.1 (depreciation rate). What are the steady-state levels of output, investment, and consumption?

In the steady state with no TFP and population growth, capital is constant. Therefore, the following condition needs to be satisfied: K=(1-δ)K+I. This can be rewritten as I = δ K. We also know thaht I=S=sY. Therefore, δ K = s Y = s A KαL1-α. We can now substitute the numbers provided in the problem. 0.1 K = 0.2 Kα . Solving this equation for K we obtain K=3.1748.

What is the "value added" created by a company?

It is the difference between the value of revenues generated by sales and the cost of intermediate inputs needed for production. value added = sales revenue - input costs

Suppose that the marginal product of labor for a company is MPL=0.6 A (K/L)0.4. Assume that A=3 and K=10. How many workers will the company hire if the wage is 1.8?

It will hire 10 workers. In fact, if L=10, we have MPL=0.6x3=1.8, which is equal to the wage.

relationship between MPC and MPS

MPC + MPS = 1

net exports

NX = ca - nfp - nut

s = y - c - g

National Saving Formula

Consider two countries. In 1950 the first country had a GDP per capita of 5,000 dollars and the second country had a per capital GDP of 10,000. Suppose that per-capita GDP grew at 4% in the first country and at 2.5% in the second country. What are the per-capita GDP in the two countries in 2000 (fifty years later)?

Per-capita GDP country 1 in 2000 = 5,000 x 1.04^50 = 35,533.42 Per-capita GDP country 2 in 2000 = 10,000 x 1.025^50 = 34,371.09

If the current account is negative (CA<0), is the national saving of the country, S, bigger or smaller than domestic investments, I?

S = I + CA. Therefore, if CA<0, it must be that S<I.

Sally will earn $30,000 this year and $40,000 next year. The real interest rate is 20% between this year and next year; she can borrow or lend at this rate. She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can. She would like to consume the same amount this year as next year. The inflation rate is 0%. (a) How much should Sally save this year? How much will Sally consume in each of the two years? (b) How would your answers change if the real interest rate was 40%?

S = Y(1) - C(1). So in year 2, she has consumption equal to (1 + r)[Y(1) - C(1)] + Y(2) = C(2). • Since C(1) = C(2), then (1 + r)[Y(1) - C(2)] + Y(2) = C(2). This can be solved for C(2) to get C(2) = [(1 + r)Y(1) + Y(2)]/(2 + r). (a) With r = 0.2, then C(2) = [(1.2 × $30,000) + $40,000]/2.2 = $34,545 = C(1). Then S = $30,000 - $34,545 = -$4545. So Sally will borrow. (b) With r = 0.4, then C(2) = [(1.4 × $30,000) + $40,000]/2.4 = $34,167 = C(1). Then S = $30,000 - $34,167 = -$4167. So Sally will borrow, but less than before because borrowing is more expensive with a higher interest rate

Labor demand is given by N = 400 - 2w and labor supply is given by 300 + 8w. The former is a demand relationship since there is an inverse relationship between N and w.

Set supply equal to demand, i.e. 400 - 2w = 300 + 8w. This gives you w=10. Plug w=10 into the supply or demand function to obtain 300 + 8 × 10 = 380 laborors

If the saving rate s decreases, starting from the steady state, what happens in the short-run (few periods after the change) to the level of (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

Starting from the next period, per-capita capital and per-capita ouput will decrease. Per-capita consumption, however is ambiguous in the very short-run. It will decline in the long-run though.

(a) Goods and services must be newly produced. (b) Goods and services used to produce other goods and services during the same period contribute to GDP. (c) Goods and services that where produced last year but are still usable contribute to this year GDP. (d) Goods and services must be for final uses. (e) Goods and services must be produced within the geographical boundary of a country. (f) All goods and services produced by residents, even if produced abroad contribute to GDP? true or false?

T, F, F, T, T, F

What is the Consumer Price Index (CPI)? To compute the CPI do we keep fixed the quantities or the prices?

The CPI is the cost of a fixed basket of consumption goods. The composition of the basket is kept constant over time. Therefore, if the cost of the (fixed) basket changes, this is due to the change in the prices of the items contained in the basket.

What is the GDP Deflator? How do we compute real GDP. Do we keep fixed the quantities or the prices?

The GDP deflator is the nominal price of real GDP. Real GDP = quantities produced in every period (ex. every year) x prices in the base year Therefore, we keep the prices fixed, not the quantities.

What is the Gross National Product (GNP)?

The Gross National Product or GNP is the value of final goods and services produced by domestically owned factors of production independently of their location (at home or abroad), during a period of time.

If the GNP of a country is bigger than its GDP, are the Net Factor Payments (NFP) of the country positive or negative?

The Net Factor Payments (NFP) are positive. The relation between GNP and GDP is the following: GNP=GDP+NFP. Thus, if GNP>GDP, it must be that NFP>0.

If national saving is positive, what happens to next period national wealth? Does it increase or decrease?

The change in national wealth is equal to national saving. Therefore, if national saving is positive, national wealth increases.

If the level of TFP decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

The level of TFP does not affect the long-run growth rate of these variables.

If the rate of population growth gl decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

The long-run growth of these variables is not affected by population growth

If the rate of depreciation δ decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

The long-run growth of these variables is not affected by the depreciation rate.

Consider a typical production function with two inputs: capital and labor. What is the marginal product of capital? What happens to the marginal product of capital as more capital is used in production?

The marginal product of capital is the increase in output if we increase capital by one unit. As we use more and more capital, the marginal product of capital declines.

If the saving rate s decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

The saving rate does not affect the long-run growth of these variables.

What are the main properties of a typical production function? What happens to output if we increase one of the production inputs?

The typical production function is increasing in the input of production. Therefore, if we increase one of the production inputs, output increases. it is made of TFP, capital, and labor

Consider another economy where consumers purchased consumption goods for $10,000; companies purchased investment goods for $3,000; the government purchases goods and services for $2,000; foreigners purchased locally produced goods for $4,000 (exports); of the consumption and investment expenditures, $2,000 were purchased abroad (imports). What is the value of GDP for this economy?

The value of GDP is $17,000. This resuld from 10,000 (consumption) + 3,000 (investment) + 2,000 (government purchases) + 4,000 (exports) - 2,000 (imports).

Consider an economy where there are only three producers. Producer 1 makes sales for $10,000 after purchasing intermediate inputs of production for $3,000. Producer 2 makes sales for $20,000 after purchasing intermediate inputs of production for $5,000. Producer 3 makes sales for $30,000 after purchasing intermediate inputs of production for $10,000. What is the value of GDP for this economy?

The value of GDP is $42,000. This is the sum of the value added for producer 1 (10,000-3,000=7,000), producer 2 (20,000-5,000=15,000) and producer 3 (30,000-10,000=20,000),

Consider yet another economy where local workers received wage payments for $50,000 in compensation of their labor services provided domestically and $3,000 for temporary labor services provided abroad; companies operating locally earned profits for $10,000; the government received taxes on production for $5,000. What is the value of GDP for this economy?

The value of GDP is 65,000. This is the sum of wages earned locally (50,000), profits earned locally (10,000) and government taxes on production (5,000). The wages earned abroad do not contribute to GDP. They contribute to GNP.

Six months later, productivity increases by 20 percent, that is, A=3.6. The stock of capital and the wage rate remain the same as in the previous question. What is the optimal employment after the increase in productivity?

We equalize the marginal product of labor to the wage, that is, 0.6x3.6 (10/L)0.4 = 1.8. Solving for L we find L=15.7744.

Consider a country with the following production function Y = A K0.36 (hLH)0.64. Y is GDP, A is TFP, K is capital, h is the average hours worked by each worker, L is the number of workers employed and H is human capital. Suppose that A increases by 1%, K increases by 2%, h increases by 0.2%, L increases by 1% and H increases by 3%. What will be the percentage increase in GDP?

We use the general rule of growth rates and compute the growth rate of Y as gY = (gA + 0.36) * (gK + 0.64) * (gh + 0.64) * (gL + 0.64) * gH = 1% --> 1% + (0.36 * 2%) + (0.64 * 0.2%) + (0.64 * 1%) + (0.64 * 3%) = 4.408

working age population declines, and labor force participation rate rises in a country --> effects

at firsT: shifts labor supply to left, reducing employment and raising wage then: shifts labor supply to right, if bigger change than before then labor supply curve will shift to right overall ---> raising employment and reducing wage

The net foreign wealth of a country is the difference between foreign assets and foreign liabilities. What happens to the net foreign wealth of the country if the current account is negative (CA < 0)?

change in the net foreign wealth = current account balance Therefore, if CA<0, the net foreign wealth of the country decreases.

CA = NX + NFI CA = s - i

current account from net exports and net for imp

If TFP decreases, starting from the steady state, what happens in the short-run (few periods after the change) to the level of (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

current: Per-capita output and per-capita consumption would both decrease later: Per-capita capital will decrease

Consider the following production function Y=K0.3 L0.6. Does the production function display increasing, constant or diminishing returns to scale?

decreasing returns to scale because the sum of the exponents (0.3+0.6) is smaller than 1.

In a closed economy, onerous regulations on businesses that take effect next year reduce businesses' expected future marginal product of capital. As a result, the real interest rate ________ and saving ________.

falls, declines As expected future MPK is reduced, the investment curve shifts to the left. This reduces the equilibrium r and equilibrium level of saving/investment

Consider two countries, Greece and Ireland. In 2019 the two countries were characterized by the data reported in the following table. Employment,Human capital,Capital,GDP Greece: 4.23, 3.13, 2,565.7, 302.2 Ireland: 2.26, 3.18, 1,868.6, 499.8 Suppose that both countries have the production function Y=AK0.4(LH)0.6. What explains the differences in per-worker GDP between Greece and Ireland? The question asks about the differences in TFP, capital per-worker and human capital.

first rewrite in per worker terms: y= Ak^.4 * H^0.6 then divide production functin for freece by production function for ireland ygreece/ yireland = agreece/aireland * kgreece/kireland^0.4 * hgreece/ hireland^0.6 plug in numbers and get confused heres the end: What this tells us is that the large difference in per-worker GDP between Greece and Ireland is largely explained by TFP differences. Capital deepening is also important while human capital plays a minor role.

National saving is the sum of private and government savings. How is government saving defined?

gov saving = gov revenues - gov expenses its also the same as the govt budget balance

An increase in expected future output while holding today's output constant would A) increase today's desired consumption and increase desired national saving. B) increase today's desired consumption and decrease desired national saving. C) decrease today's desired consumption and increase desired national saving. D) decrease today's desired consumption and decrease desired national saving

increase today's desired consumption and decrease desired national saving.

how will an increase in the expected real interest rate effect desired capital stock

it will decrease it bc an increase in re increases the user cost of capital, reducing the desired capital stock

structural unemployment

job loss due to lack of education/skills

Frictional unemployment

job loss due to search/matching frictions

natural unemployment

job losses in declining industries

If the rate of TFP growth decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Aggregate capital. (b) Aggregate output. (c) Aggregate consumption.

long-run growth will all drop. In this case, also the long-run growth rates of the per-capita values of capital, output and consumption will fall.

If the rate of population growth gl decreases, what happens in the long-run (new steady state) to the growth rate of the following variables? (a) Aggregate capital. (b) Aggregate output. (c) Aggregate consumption.

long-run growth will drop. Notice the difference with the previous question. The long-run growth rate of the per-capita variables is not affect, but the growth rate of aggregate variables is affected. For example, per-capita output is Y/L. The growth rate of Y/L does not change with a smaller population growth. However, since L grows less, this means that Y grows less.

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, machine B costs $10,000 and depreciates at a rate of 20%, machine C costs $20,000 and depreciates at a rate of 10%, and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%.

machine B Using uc=(r+&)pk , you can find that it is the lowest for machine B.

suppose a good productivity shock shifts labor demand to the right, --> how are employment and wage affected

moving employment, and real wage to the right

Consider again a typical production function with two inputs: capital and labor. What is the marginal product of labor? What happens to the marginal product of labor as more labor is used in production?

mpl = is the increase in output generated by one unit increase in the input of labor. For a typical production function, the marginal product of labor declines as we use more and more labor.

If the rate of depreciation δ decreases, starting from the steady state, what happens in the short-run (few periods after the change) to the level of (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

per capita capital, output, and consumption all increase starting the next period

If the rate of depreciation increases, then user cost ________ and the desired capital stock ________.

rises, falls an increase in & increases the user cost of capital, reducing desired capital stock

whats if a good supply of productivity shock happens?

shifts labor demand to right. equilibrium real wage and employment rise. if theres an increase in labor force participation rate, the supply curve will go right and the real qage will lower but raise equil employment

The desire to have a relatively even pattern of consumption over time is known as

the consumption-smoothing motive.

In a goods market equilibrium in an open economy the desired amount of national saving equals

the desired amount of domestic investment plus the amount lent abroad. The equilibrium definition says Id = Sd + FA, or Id - FA= Sd , and if FA is negative it means that the country is lending

If the rate of population growth gl decreases, starting from the steady state, what happens in the short-run (few periods after the change) to the level of (a) Per-capita capital. (b) Per-capita output. (c) Per-capita consumption.

they all increase starting from the next period

In the City of Hope, there are 20 times 12 = 240 short duration unemployment In addition, there are 50 times 3 = 150 long duration unemployment how many total spells and how long

total spells 390, mostly of short duration