Question

1.Suppose an economy experiences a 4% increase in each of the following variables: N, K, and H (human capital). If the production function is Y=K^αN^(1-α)H^β, where α<1 and β<1, we know with certainty that

Y will increase by less than 4%.

none of the other answers is correct

Y will increase by less than 12% but by more than 4%.

Y will increase by exactly 4%.

Y will increase by more than 4%.

2. Why do banks maintain a certain level of bank capital?

These funds are reserved as salary bonuses for top management.

These are funds to be invested in emerging market economies.

These precautionary funds are held against the illiquidity risks of loans and bonds.

These funds are required to satisfy shareholders in annual statements.

These funds are set aside for taxation purposes

3. For this question, assume that equilibrium output is determined in the ZZ-Y diagram. Further assume that policy makers' goals are: (1) to achieve balanced trade (i.e., NX = 0); and (2) to achieve the natural level of output, say Yn. Now suppose that the initial level of equilibrium output is equal to Y_n (i.e., Y = Y_n) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?

A decrease in government spending.

A decrease in taxes and increase in the real exchange rate.

Convince the country's trading partners to pursue policies that will cause an increase in foreign income.

A decrease in the real exchange rate.

None of the other answers is correct.

4. In Solow model where it is assumed that the state of technology does not change, what parameters and/or variables cause changes in steady state output per worker?

all of other answers are correct

savings rate

human capital per worker

production function parameters

depreciation rate

5. Suppose there are two countries that are identical with the following exception: the saving rate in country A is greater than the saving rate in country B. Given this information, according to Solow model without technological progress, we know that in the long run:

economic growth will be higher in A than in B.

output per capita will be greater in A than in B.

output per capita will be the same in the two countries.

output per capita will be greater in B than in A.

economic growth will be higher in B than in A.

Answer 1

Q1) option A)

Returns to scale = 1+1-a+b

= 2+b-a > 1

So if all variables rise by 4%, Y will rise by more than 4%

Q2) option 5)

As nominal GDP = Price level*Real GDP

So as nominal GDP rises, so both P or real GDP could rise

Q3) option 2)

As NCO : net capital outflow = Net exports NX

As Budget deficit decrease, so NX rises

Q.5)

output depreciation line (country A) depreciation line (country B) investment УАЗ Ув ka= kB capital per worker While each country starts with the same amount of capital per worker (and therefore starts with the same output per worker), we can see that country B has the higher steady state. Notice also that at this initial position, Akg > Ak A. Therefore country B will grow faster as well.