Purdue ECON 352 - Intermediate Macroeconomics

Purdue ECON 352 - Intermediate Macroeconomics

Question
ECON 352 Intermediate Macroeconomics
Purdue University
Problem Set 1
Spring 2017

1. [3 point
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Purdue ECON 352 - Intermediate Macroeconomics

Question
ECON 352 Intermediate Macroeconomics
Purdue University
Problem Set 1
Spring 2017

1. [3 points] Consider an economy that produces and consumes bread and automobiles. In
the following table are data for two different years.
Year
Year
2010
2011
Good
Quantity Price Quantity Price
Automobiles
100
$50,000
120
$60,000
Bread
500,000
$10
400,000
$20
a. Calculate Nominal GDP in Year 2010 and 2011, and the nominal GDP growth
rate.
b. Calculate Real GDP in Year 2010 and 2011, with the base year of 2010, and the
real GDP growth rate.
c. Suppose a consumer’s basket consists of 100 Automobiles and 500,000 breads.
Compute the Consumer Price Index (CPI) in 2011 with 2010 as the base year.
Compare it with GDP deflator.

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2. [3 points] Consider the following Production functions. For each production function, (i)
Determine whether each production function has Constant Returns to Scale (CRS),
Decreasing Returns to Scale (DRS), or Increasing Returns to Scale (IRS); (ii) Find
Marginal Product of Capital (MPK) and state whether it has diminishing marginal
product; and (iii) Find Marginal Product of Labor (MPL), and state whether it has
diminishing marginal product.
a. F(K, L) = 2K + 2L
b. F(K, L) = K 1/2 L3/2
c. F(K, L) = K 1/3 L1/2
3. [5 points] Suppose the economy has the production function, F(K, L) = K 1/2 L1/2 . The
economy begins with 100 units of capital and 100 units of labor. 1 a. Show that this production
function is a Constant Returns to Scale production
function.
b. How much output does the economy produce?
c. Suppose output price P=1. What are the wage and rental price of capital?
d. If the plague kills half the population (so now there are only 50 units of labor),
what is the new level of output?
e. What is the new wage and rental price of capital?
4. [4 points] Consider an economy described by the following equations:
Y = Y = F (K, L) = 1200
Y =C + I +G
C = 125 + 0.75(Y ? T )
I = I (r) = 100 ?10r
G = G = 150
T = T = 100 a. In this economy, compute private saving, public saving, and national saving.
b. Find the equilibrium interest rate.
c. Suppose that G rises to 200. Compute private saving, public saving, and national
saving.
d. Find the new equilibrium interest rate.
5. [5 points] Consider a Solow growth model with no population growth. Assume that the
aggregate production function has the form Y = K 1/3 L2/3 . People save 20% of their
income, so their savings rate s = 0.20 and capital depreciates at rate ? = 0.10 . Let per!
!
worker output be = ! , and per-worker capital be = ! .
a. What is per-worker production function? (Express per-worker output as a
function of per-worker capital .)
b. What is savings per worker if capital per worker today is 2?
c. How much capital depreciates per worker if capital per worker today is 2?
d. What is net change in capital? Is the economy at the steady-state when per-worker
capital is 2? If not, what is the steady-state level of capital? 2 e. Draw a well-labeled graph of
savings per worker and depreciation of capital per
worker with per-worker capital on the -axis. On the graph, clearly indicate
where the steady-state level of capital per worker is. 3

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