Download Problem Set 3

Macro Theory
M. Finkler
Problem Set 3
1.
Application of the Neo-Classical Model to the U.S. economy
a.
The savings rate in the United States is low in comparison with that of other
industrialized nations. If the U.S. were a closed economy, how would a low savings rate
affect domestic (tangible) investment? How do governmental budget deficits affect
investment?
b.
How would the results change if the U.S. is modeled as an open economy?
2.
In 1994 and 1995, the Mexican Economy suffered under the pressure of foreign capital
outflows. Assume that net export demand is negatively related to the real exchange rate
and that all Model 1 assumptions hold including a positive responsiveness of savings to
real interest rates and a negative responsiveness of investment to real interest rates.
a.
How would increased domestic (Mexican) savings affect net exports, the nominal
exchange rate, the real exchange rate, and net capital flows to Mexico?
b.
How would reduced governmental expenditures affect net exports, the nominal
exchange rate, the real exchange rate, and net capital flows to Mexico?
c.
How would increased U.S. purchases of Mexican goods affect the real exchange
rate, the nominal exchanged rate, and net capital flows to Mexico?
d. How would quotas on Mexican imports of U.S. goods affect net exports, the nominal
exchange rate, the real exchange rate, and net capital flows to Mexico?
3.
Use the data in the following table on Japan to answer the indicated questions.
Exchange rates in Yen / Currency unit
Percent of Trade
Country
1995
2000
2008
30%
United States (yen/$)
103
118
100
30%
China (Yen/ yuan)
12.4
14.2
14.3
40%
Europe (Yen/euro)
70
110
160
a.
Calculate the trade weighted exchange rate for each year relative to 1995.
b.
Based on the following data discuss how Japan’s real exchange rate with the
United States changed from 1995 to 2000 to 2008.
Country
Increase in Prices 1995 to 2000
Increase in Prices 2000 to 2008
Japan
2.5%
-1.8%
United States
13%
22%
Use the following data on Thailand’s Economy to part a below.
GDP
I
C
G
eX
Im
S
T
200B
60B
95 B
40B
75B
Determine 62B
Determine
a.
Determine private savings, the trade balance, and capital inflows or outflows.
b.
Assume that the Thai economy is a small open one. How would a decrease in
domestic investment affect net exports, the real exchange rate and capital inflows
or outflows? (Provide appropriate graphics to support your answers.)
4.
5.
Consider an economy described by the following production function Y = 100*K.3L .7
and the remaining equations of Model 1G.
a.
Rewrite the production function in per worker terms.
b.
Assuming no population growth or technology growth, find the steady-steady
levels of income per worker, capital per worker, and consumption per worker.
c.
Determine the savings rate that yields the highest steady state level of
consumption per worker.
d.
Determine the amounts paid to laborers and capitalists if both labor and capital
markets are competitive.
6.
Replace the production function in Model 1G with Y = K.5L .7. Redo parts a – d of
question 1 and indicate whether the results generated for part d are feasible.
7.
Technological progress
a.
Explain why improvements in technological progress might have more influence
on the long run economic growth rate than growth in the stock of capital.
b.
The form of technological progress incorporated in the production function
influences the magnitude of its effect on the long run economic growth rate. Explain.
8.
Consider a Solow-type growth model with the following production function.
Yt = (Kt)1/3(Lt)2/3
where t is the time period so Kt – the capital stock in time t
This production function features capital augmenting technical change
Kt = Techt*Ko and Ko = initial stock of capital
Assume that the growth rate of labor is endogenous, that technology grows at 2% per
year, that the savings rate equals 10%, and that the depreciation rate equals10%.
a.
b.
c.
d.
e.
Write the production function in terms of output per unit of labor.
Determine the steady-state path of output per unit of labor.
Determine the capital-output ratio for this economy. Does it vary over time?
How fast does output per labor grow in this model? (Explain why.)
If the depreciation rate were to double what would be the impact on output per
unit of labor?
On output?