Intermediate Macroeconomics II Assignment 1
■ TRUE/FALSE QUESTIONS (30%)
___1. Business cycle activity is represented graphically as deviations of real GDP from trend in GDP.
___2. The trend in GDP is a smooth curve that represents the part of GDP that can be explained by long-run growth factors.
___3. The persistence of deviations in GDP from trend implies that the duration of recessions and expansions tends to be consistent.
___4. Economists generally agree that the government can play a useful role in providing public goods.
___5. Any market in which individuals purchase the amount of a good they desire is considered to be a market that clears.
___6. The key implication of the Solow growth model is that a country's standard of living cannot continue to improve in the long run in the absence of continuing increases in total factor productivity.
___7. A country that increases its savings rate will experience higher long-run growth in income.
___8. The data reveal that convergence is occurring among the poor countries of the world.
___9. The Solow growth model is used to describe economic growth but not actually explain it.
___10. Increasing the savings rate will result in a higher per capita income for a country.
■ SHORT ANSWER QUESTIONS (40%)
1. In what ways are business cycles irregular, and in what ways are they regular?
2. In what sense does a tax on wage income create a wedge between consumer and firm optimization?
3. What are the three broad factors that lead to GDP growth in modern economies?
4. What is steady about the steady state?
5. What happens to a model Solow economy when n = –1?
■ PROBLEM-SOLVING (30%)
Suppose that the economy is initially in a steady state and that some of the nation’s capital stock is destroyed because of a natural disaster or a war.
(a) Determine the long-run effects of this on the quantity of capital per worker and on output per worker.
(b) In the short run, does aggregate output grow at a rate higher or lower than the growth rate of the labor force?
(c) After World War II, growth in real GDP in Germany and Japan was very high. How do your results in parts (a) and (b) shed light on this historical experience?