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m1 F23 Sola
m1 F23 Sola
Consider an economy that produces and consumes two goods: T (for T ender bacon strips)
and G (for Greatest tonic). The following table contains data for this economy for three
consecutive years:
1. (2.5 points) Calculate the nominal GDP for Year 2. Call it N ominal GDP2 .
2. (2.5 points) Calculate the nominal GDP for Year 3. Call it N ominal GDP3 .
3. (5 points) Using Year 2 as base year, calculate the real GDP in Year 2 (call it
Real GDP2Laspeyres ) and real GDP in Year 3 (call it Real GDP3Laspeyres ).
4. (5 points) Using Year 3 as base year, calculate the real GDP in Year 2 (call it
Real GDP2P aasche ) and real GDP in Year 2 (call it Real GDP3P aasche ).
5. (5 points) Using Year 2 as base year, calculate the growth rate of real GDP between
years 2 and 3. Write in percentages.
100 33600−28800
28800 16.67%
6. (5 points) Using Year 3 as base year, calculate the growth rate of real GDP between
years 2 and 3.Write in percentages.
100 37900−32400
32400 = 16.98%
7. (2.5 points) Get the average of the two growth rates you obtained in the last two ques-
tions: the average of the growth rate between Years 2 and 3 in real GDP when Year 2 is
the base and when Year 3 is the base. Write in percentages.
8. (2.5 points) Rewrite your answer to the previous question in simple units (not percent-
ages) by dividing your answer to the previous question over 100. Call that g chain .
16.82/100 = 0.1682
BONUS. (optional, extra 5 points if correct) Use that growth rate from your last question to
get the value of chain-weighted real GDP in Year 2 that would result in that exact growth rate
if real GDP in Year 3 equals nominal GDP in Year 3. In other words, solve for Real GDP2Chain
in the following equation:
, Solution to Bonus
32442.8
Model A, Page 3 F2023, Econ 3302, Midterm 1
Barbieland is described by the textbook Solow model with a Cobb-Douglas production func-
tion: Yt = ĀKt0.5 L̄0.5 . The productivity parameter is equal to Ā = 1. The economy has an
investment rate of 15 percent or s̄ = 0.15 and a depreciation rate of 5 percent or d¯ = 0.05.
Barbieland has 100 working women, which represent the total population and labor force L̄.
There is no population growth. Answer the numerical questions below.
1. (5 points) Label the following graph (see boxed space in the next page) with the cor-
responding variables in the Solow model that summarizes the development process of
Barbieland. In particular,
• label the x-axis below the text “LABEL X-AXIS HERE”, in the right bottom corner;
• label each of the lines next to the closest arrow. You can use text or a formula, as long
as it is clear;
• label along the x-axis where exactly is the steady-state level of capital.
Just plug in the value you con above for K ∗ into the production function. The book
provides a formula, but it is effectively the same, as long as you use the right α.
Y ∗ = Ā (K ∗ )0.5 L̄0.5
Y ∗ = 1 ∗ 9000.5 1000.5 = 300
4. (5 points) Assume Barbieland is not at its steady state. In particular, this economy is
producing 150 units of output. Write the capital accumulation equation (net investment)
and indicate whether we expect change in capital to be positive or negative.
Barbieland starts at 150, which is below its steady state 300, so net investment
as the transitional dynamics are approaching the steady state from below.
5. (5 points) Now assume Barbieland reaches its steady steady state K ∗ . Discuss whether
we expect output to increase or decrease from there.
Once in steady state, the country does not move. So we expect output to stay the same.
This is the definition of steady state and the main conclusion of the Solow model we have
seen.
6. (5 points) Assume that there is a permanent decrease in the rate of depreciation to 3%.
Add the new depreciation line to the graph in part 1. Clearly label the new line and
call it “new depreciation line.” Discuss whether we expect output to increase or decrease
from the old steady state towards the new steady state. No need to calculate the new
Model A, Page 5 F2023, Econ 3302, Midterm 1
steady state, just discuss what do you expect will happen based on capital accumulation
towards the new steady state.
A decrease in depreciation makes the depreciation line flatter (moves down and to the
right, but still starting at 0), so the crossing point with the investment line is at a higher
steady state. Starting from an old steady state to a higher one, capital will accummulate
again and output will grow until it reaches the new higher steady state.