MACROECONOMICS

ASSIGNMENT
(Due Date: 20/12/2018)
1- An economy has the production function

Y = 0.2 ( K + √N).

In the current period, K = 100 and N = 100.

a. Graph the relationship between output and capital, holding labor constant at its current
value. What is the MPK? Does the marginal productivity of capital diminish?
b. Graph the relationship between output and labor, holding capital constant at its current
value. Find the MPN for an increase of labor from 100 to 110. Compare this result with
the MPN for an increase in labor from 110 to 120. Does the marginal productivity of
labor diminish?
2- Hula hoop fabricators cost $100 each. The Hi-Ho Hula Hoop Company is trying to decide how
many of these machines to buy. HHHHC expects to produce the following number of hoops each
year for each level of capital stock shown.

Hula hoops have a real value of $1

each. HHHHC has no other costs besides the cost of fabricators.

a. Find the expected future marginal product of capital (in terms of dollars) for each level
of capital. The MPKf for the third fabricator, for example, is the real value of the extra
output obtained when the third fabricator is added.
b. If the real interest rate is 12% per year and the depreciation rate of capital is 20% per
year, find the user cost of capital (in dollars per fabricator per year). How many
fabricators should HHHHC buy?
c. Repeat Part (b) for a real interest rate of 8% per year.
d. Repeat Part (b) for a 40% tax on HHHHC's sales revenues.
e. A technical innovation doubles the number of hoops a fabricator can produce. How
many fabricators should HHHHC buy when the real interest rate is 12% per year? 8% per
year? Assume that there are no taxes and that the depreciation rate is still 20% per year.
3- An economy has full-employment output (Y) of 9000, and government purchases (G) are 2000.
Desired consumption and desired investment are as follows:

a. Why do desired consumption (Cd) and desired investment (Id) fall as the real interest
rate rises?
b. Find desired national saving for each value of the real interest rate.
c. If the goods market is in equilibrium, what are the values of the real interest rate,
desired national saving, and desired investment? Show that both forms of the goods
market equilibrium condition Equations Y = C d + Id + G and Sd = Id, are satisfied at the
equilibrium. Assume that output is fixed at its full-employment level.
d. Repeat Part (c) for the case in which government purchases fall to 1600. Assume that
the amount people desire to consume at each real interest rate is unchanged.

4- Desired consumption and investment are

Cd = 4000 - 4000r + 0.20Y;
Id = 2400 - 4000r.
As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.
a. Find an equation relating desired national saving, S d, to r and Y.
b. What value of the real interest rate clears the goods market when Y = 10,000? What
value of the real interest rate clears the goods market when Y = 10,200?
c. Government purchases rise to 2400. How does this increase change the equation for
national saving in Part (a)? What value of the real interest rate clears the goods market
when Y = 10,000?
5- Acme Widget, Inc., has the following production function.
 a. Find the MPN for each level of employment.
b. Acme can get $5 for each widget it produces. How many workers will it hire if the
nominal wage is $38? If it is $27? If it is $22?
c. Graph the relationship between Acme's labor demand and the nominal wage. How does
this graph differ from a labor demand curve? Graph Acme's labor demand curve.
d. With the nominal wage fixed at $38, the price of widgets doubles from $5 each to $10
each. What happens to Acme's labor demand and production?
e. With the nominal wage fixed at $38 and the price of widgets fixed at $5, the
introduction of a new automatic widget maker doubles the number of widgets that the
same number of workers can produce. What happens to labor demand and production?
f. What is the relationship between your answers to part (d) and part (e)? Explain.

6- In a particular economy the real money demand function is

Md/P = 3000 + 0.1 Y - 10,000i.
Assume that Md = 6000, P = 2.0, and πe = 0.02.
a. What is the real interest rate, r, that clears the asset market when Y = 8000? When Y =
9000?
b. Repeat Part (a) for M = 6600.
c. Use Md = 6000 again and repeat Part (a) for π e = 0.03.