Instructions: Problem Set 3 is due at my office by 2:00pm Tuesday October 11. You may turn in the problem set early to me or to the TAs. NO late submissions will be accepted. Answer all questions on these pages. You must show all work legibly to receive credit. Make sure all pages are stapled together and your name is on each page. Country A has real GDP per person of 10,000 and a growth rate of 6%. Country B has real GDP per person of 15,000 and a growth rate of 3%.

Instructions:   Problem Set 3 is due at my office by 2:00pm Tuesday October 11.  You may turn in the problem set early to me or to the TAs.    NO late submissions will be accepted.

Answer all questions on these pages.  You must show all work legibly to receive credit. 

Make sure all pages are stapled together and your name is on each page.

 

 

1.     Country A has real GDP per person of 10,000 and a growth rate of 6%.  Country B has real GDP per person of 15,000 and a growth rate of 3%. 

a.     Which country has a higher real GDP per person after 24 years?  ______________________

b.     What is the real GDP per person in each country?

Country A________________

Country B________________

 

 

 

2.     The population of Wolverine is increasing 3% every year.  Wolverines Growth rate of Real GDP 4% per year.  

a.     What is the approximate growth rate of the real GDP per person?________________

b.     What happens if the population growth rate slows?(one sentence)

____________________________________________________________

____________________________________________________________

 

 

 

 

 

 

3.     Wolverine and Spartan both have populations of 40,000, the same level of human capital and the same natural resources.  Both have the same production function with constant returns to scale and diminishing returns. Spartan has 10,000 machines and Wolverine has 5,000 machines.

a.     Which country will have a bigger increase in productivity from an additional 100 machines, and no other changes?  Wolverine or Spartan  (circle)

b.     Draw a graph showing the effect of the increase of the 100 new machines on the productivity.  Be sure to label the productivity curve, the initial K/L and Y/L and the changes to K/L and Y/L for both Wolverine and Spartan.

Y/L

 

 

 

 

 

                                                                                    K/L

 

 

 

 

 

4.     Identify which are saving (s) and which are investment (i)

a.     Purchasing shares of Apple Computer                __________

b.     Purchasing a mower for a mowing business       __________

c.      Purchasing a house                                              __________

d.     Purchasing a General Motors bond                     __________

e.     Purchasing a Certificate of Deposit from the bank_________

 

 

5.     Below is a graph for the market for loanable funds for the country, Hawkeye.

 

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a.     Draw the supply curve and demand curve for the market for loanable funds.  Label axes and curves, and identify which curve represents saving and which curve represents investment.

b.     The Hawkeye government currently has a balanced budget.  Show the change on the graph if the government reduces taxes on consumers and does not change government purchases. 

c.      Does the government now have a deficit or a surplus?­­­­­­­­­­­­­­­­­­­­­­­______________________

 

 

6.     The country, Hoosier (a closed economy), has the following data:  GDP = 12,000, Consumption = 7,000, Taxes = 3,000, Government purchases = 4,000.  The investment demand is I = 4,000 – 1,000 r (where r is the real interest rate, and for real interest rate 5%, r= 5.)

a.     What is private saving? ­______________________

b.     What is public saving?_______________________

c.      What is national saving?______________________

d.     What is investment?________________________

e.     What is the real interest rate?___________________

f.       List 2 policies the Hoosier government could do to increase investment

_______________________________________

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