Assignment

Part 1

1. What are the three approaches to calculating Gross Domestic Product? Why are there three separate approaches to calculating Gross Domestic Product (provide an example of when you would want to use each)?

2. Considering the Permanent Income Hypothesis, what happens to current consumption, savings, and income if you expect to have an increase in your income in the future?

3. Explain how the corn experiment we did in class illustrated the production function and how is this related to the labor market? Draw and explicitly label the production function-including inputs-the marginal product of labor, and the labor market. Show graphically what would have happened if there were additional pieces of chalk given to students?

4. Considering the labor market and production function: what would happen to wages, employment, and output if during a recession firms do not have funds to take care of their capital and some of it becomes worthless due to depreciation.

5. In the Solow growth model show what happens to the steady state when there is an increase in the amount of foreign aid that the country receives.

6. Throughout the early 1900s more women entered into the labor market increase labor force participation. Using the labor market model, what should we expect to happen to wages, employment, and national output if this trend continues?

7. Considering a closed economy, a small open economy, and a large open economy. In which economy is the effect of an increase in MPK greatest on the level of savings in the economy. Show the change in level of savings graphically for these three economies.

8. Say the home country is a large country, like China, what are the assumptions do we make for the large open economy that are different from the closed and small open economies? Also, what happens to Shome, Ihome and rw when government expenditure increases in the United States (representing the rest of the world in this example)?

Part 2

1. Consider the goods market.

a. Following the previous two recessions the government gave tax rebates back to Americans hoping to increase consumption. What is Ricardian Equivalence and why is it important in understanding what this policy may have done to the economy? Show graphically what happened to saving, investment, and interest rates when Ricadian Equivalence holds and when it does not hold. (You can assume a closed economy for simplicity)

b. During the last recession the personal consumption in the United States drop significantly. Considering the United States is a large open economy what would happen to the United States' savings, investment, and net exports when their consumption dropped? How is the rest of the world impacted? Provide a chain of causation to explain what is happening including specific points of interest on the graph.

2. Using the Solow model for a country with the production function Y=K.5N.5.

a. Show graphically what happens to kss and yss when a country starts in steady state equilibrium in 1990. Suppose that they institute government policy that encourages savings and limits the number of children that a family can have to only one per household. What are some potential economic or social costs (make sure to be complete) to instituting these policies?

b. Calculate steady states: k1990, k2008, c1990, c2008, y1990, and y2008 Assuming the following values: in 1990 with a savings rate of 10%, population growth of 10%, and depreciation of 5%, and by 2008 the savings rate is 25%, population growth is 5%, and depreciation is 5%.