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Name: __________________________ Date: _____________’ Exam 1 – Econ 3080 Fall 2011 There are 15 multiple choice questions worth

60 points total, and 3 short answers worth 40 points total. Be sure to be clear, concise, and show your work on the short answer questions and put a box around your final answer. You may keep your exam and compare your answers to the answer key. Multiple Choice – 4 points each 1. When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange.

D) flow of value.

2. The investment component of GDP includes all of the following except: A) purchases of corporate stock. B) spending on new plants and equipment. C) purchases of new housing by households.

D) changes in business inventories. 3. In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases.

D) average labor productivity decreases.

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The consumption function in the Solow model assumes that society saves a: A) constant proportion of income. The production functions in both economies exhibit diminishing marginal product of capital. C) tax breaks for research and development. C) by the same amount in Highland and Lowland. A) prices B) income C) transactions D) nominal GDP . D) subsidies given by the National Science Foundation. C) larger proportion of income as it becomes richer. An extra unit of capital per worker increases output per worker: A) more in Highland. the level of ______ is determined by M. 6. but not in Lowland. B) the temporary monopoly granted by the patent system. D) larger proportion of income when the interest rate is higher.4. but no other assumptions are made. D) in Highland. If income velocity is assumed to be constant. Public policies in the United States designed to stimulate technological progress do not include: A) tax breaks to encourage homeownership. Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. B) smaller proportion of income as it becomes richer. 7. B) more in Lowland. 5.

In this case. the value included in GDP should be: A) $0. To determine whether an economy is operating at its Golden Rule level of capital stock. then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____ percent. C) $2. 11. B) increase by 1 percent. If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2 percent. D) $3. 9. D) largest output per worker. C) largest consumption per worker.50.8. A) 0 B) 2 C) 8 D) 10 Page 3 . B) smallest depreciation rate. If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent. B) $1. a policymaker must determine the steady-state saving rate that produces the: A) largest MPK. D) decrease by 1 percent. the nominal interest rate must: A) increase by 2 percent. Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. 10. C) remain constant.

starting from capital– labor ratio k1. where r is the real interest rate in percent. Use the following to answer question 13: (Exhibit: Capital–Labor Ratio and the Steady State) 13. C) increase. Empirical evidence supports the theory that free trade: A) increases economic growth. . C) increases imports.000. D) increases both imports and exports.000. 14.160 – 100r. the capital–labor ratio will: A) decrease.6 (Y – T).12. the equilibrium real interest rate is: A) 5 percent. Assume that equilibrium GDP (Y) is 5. Taxes (T) are equal to 600. Consumption is given by the equation C = 500 + 0. In this case. D) 13 percent. Investment is given by the equation I = 2. Government spending is equal to 1. B) decreases economic growth. B) 8 percent. but decreases exports because of greater global competition. but does not contribute to overall economic growth. D) first decrease and then remain constant. B) remain constant. C) 10 percent. (Exhibit: Capital–Labor Ratio and the Steady State) In this graph.

Assume that 10 percent of capital depreciates each year. Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed and the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. Based on the Solow growth model. If the saving rate equals the steady-state level. Extra Credit – What was the podcast I suggested to you about? Page 5 . Assume that a country's production function is Y = K1/2L1/2. Be clear and concise.G = G. and carefully explain how these policies produce this result. What is Y? What is output per worker? c. and capital for new effective workers.K= K. the break-even level of investment must cover: A) depreciating capital. what is consumption per worker? 17. C) depreciating capital and capital for new effective workers. What gross saving rate is necessary to make the given capital per worker the steady–state capital per worker? (Hint: In this case we are assuming the capital level is the steady state level and solving for the savings rate that makes this true) d.15. capital for new workers. suggest four possible explanations for this gap in living standards. a.000 in many countries.000 units of capital and 10. The economy can be described by the following set of equations: L = L.T = T . D) depreciating capital. and BE SURE TO BOX YOUR FINAL ANSWERS 16. Assume that the country possesses 40. Y = AKa L(1–a) Y=C+I+G C = C (Y – T) I = I (r) Suggest two policies that a government could use to increase the equilibrium quantity of investment in the economy.000 units of labor. 18. but is below $1. Short Answer – Write on your own paper. B) depreciating capital and capital for new workers. In the Solow growth model with population growth and technological change.000 per person in many other countries. Income per person exceeds $25. What is the per-worker production function y = f(k)? b.

6. 4. Y = 20. lower capital-depreciation rates. 2. 9. s = 0. Consumption per worker will be 1. 3. which would increase national saving (Y-C-G). and produce an increase in the equilibrium quantity of investment.6. Extra Credit Answer: Hyperinflation in Germany . 8. 7. 13.Answer Key 1. 5. higher rates of technological progress. lower the equilibrium interest rate. Y/L (y) = 2 c. b. The government could increase taxes (T). The government could cut spending (G). a. 10. 15. lower population growth rates.000. 14. 18. y = k1/2. which would increase national saving (Y-C-G) by reducing consumption. or institutions that better facilitate economic growth. B A B B A A D C B C C D C A D 16. 12. 11.2. d. 17. Possible explanations include: richer countries have higher saving rates.

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