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macroeconomics ec 205 assignment, Assignments of Macroeconomics

Bogazici UniversityMacroeconomics
Prof. Orhan Torul

macroeconomics ec 205 assignment orhan torul

Typology: Assignments

2013/2014

Uploaded on 11/13/2021

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Department of Economics
Boğaziçi University
EC 205 Macroeconomics I
Fall 2014
Problem Session 2
Q1. Use the neoclassical theory of distribution to predict the impact on the real wage and
the real rental price of capital of each of the following events:
a. A wave of immigration increases the labor force.
b. An earthquake destroys some of the capital stock.
c. A technological advance improves the production function.
Q2. Suppose that an economy’s production function is Cobb–Douglas with
parameter α =0.3.
a. What fractions of income do capital and labor receive?
b. Suppose that immigration increases the labor force by 10 percent. What happens to total
output (in percent)? The rental price of capital? The real wage?
c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. What
happens to total output (in percent)? The rental price of capital? The real wage?
d. Suppose that a technological advance raises the value of the parameter A by 10 percent.
What happens to total output (in percent)? The rental price of capital? The real wage?
Q3- Consider an economy with Cobb-Douglas aggregate production function given by
𝑌=𝐹𝐾,𝐿=𝐾!
!𝐿!
!
a. Prove that this production function exhibits constant returns to scale.
b. Solve for the MPK and MPL.
c. Prove that this function exhibits diminishing MPK and diminishing MPL
pf2

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Department of Economics Bo ğ aziçi University EC 205 Macroeconomics I Fall 20 14 Problem Session 2 Q1. Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events: a. A wave of immigration increases the labor force. b. An earthquake destroys some of the capital stock. c. A technological advance improves the production function. Q2. Suppose that an economy’s production function is Cobb–Douglas with parameter α =0.3. a. What fractions of income do capital and labor receive? b. Suppose that immigration increases the labor force by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage? c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage? d. Suppose that a technological advance raises the value of the parameter A by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage? Q3- Consider an economy with Cobb-Douglas aggregate production function given by 𝑌 = 𝐹 𝐾, 𝐿 = 𝐾 ! (^)! 𝐿 ! ! a. Prove that this production function exhibits constant returns to scale. b. Solve for the MPK and MPL. c. Prove that this function exhibits diminishing MPK and diminishing MPL

Q4- Consider an economy described by the following equations: Y=C+I+G Y= G= T= C=250+0.75(Y-T) I=1000-50r a. In this economy, compute private saving, public saving and national saving. b. Find the equilibrium interest rate. c. Now suppose that G rises to 1250. Compute private saving, public saving and national saving. d. Find the new equilibrium interest rate. What happens to investment? What is the phenomenon called? Q 5 - The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving b. Private saving c. National saving Q 6 - Suppose in 2006, the CPI equals 100. That year, John borrows a nominal value of $1, 000 from the bank. Suppose the expected rate of inflation is 3%. Both parties agree the loan will be repaid in one year along with a real interest rate of 2%. a. What is the CPI in 2007, the year in which the loan is repaid – if expectations are realized? b. What is the nominal payment John must make to the bank in 2007? c. What is the real payment John must make to the bank in 2007 (take 2006 as the base year)? d. Suppose actual inflation in 2007 unexpectedly realized 7%. What is the nominal payment that John should make to the bank in 2007 if the inflation were known to be 7%? e. Who, if anyone, benefits from the unexpected inflation? f. What would be the macroeconomic effects of such unexpected inflation? Is this socially costly? If so, why?