Homework #3

1. True or False Questions

a. When output grows more slowly than does population, then GDP per capita will rise.

b. Achieving a higher rate of growth in the long run for an economy generally requires some sacrifice in the short run.

c. Adult literacy rates appear to be positively correlated with high levels of GDP per capita.

d. Economic growth is a result of a increase in employment, an increase in the capital stock, and/or a change in technology.

e. When the labor demand curve shifts out holding everything else constant this will result in economic growth and an increase in labor productivity.

f. When the labor supply curve shifts out holding everything else constant this will result in economic growth and a decrease in the wage level.

g. An increase in the labor demand curve holding everything else constant will cause the aggregate production function to shift upwards.

h. A decrease in the income tax rate holding everything else constant will cause a movement along the labor supply curve.

i. A subsidy for education holding everything else constant will cause the labor supply curve to shift outwards away from the origin.

j. The flatter the slope of the ray from the origin to a point on the aggregate production function the greater the labor productivity.

k. An increase in the capital stock holding everything else constant will result in an increase in labor productivity and a higher level of equilibrium employment in the labor market.

l. As the amount of capital per worker increases this will lead to greater productivity.

m. If investment equals depreciation the capital stock will not increase over time.

n. A decrease in the corporate profits tax holding everything else constant will cause a movement along the supply of funds curve and an increase in interest rates.

o. When households decide to save more, holding everything else constant, we can anticipate that interest rates will fall and that the demand for investment funds curve will shift out due to this lower interest rate.

p. Deficit reduction, although it may lead to reduced interest rates, is not necessarily a pro-growth policy.

q. A tax cut may increase the rate of economic growth but that increase comes with two potential costs: the cost associated with the redistribution of the tax burden and the cost due to the reduction or loss of the government programs that must be cut due to the reduction in funding.

r. Economic growth results in consumption costs since it is not possible to maintain current consumption standards while still increasing investment in human and physical capital.

s. One way for a poor country to attain economic growth is through force where the country's leaders mandate lower current consumption in order to make higher capital production possible.

t. In a boom the level of production in the economy is greater than the full employment level of output.

u. The Classical Model explains booms and recessions as occurring as a result of shifts in labor demand or labor supply.

v. The Classical Model provides an excellent understanding of booms and recessions in the long run.

w. In a recession the benefit of hiring an additional hour of labor is greater than the opportunity cost of working an additional hour.

x. In a recession the labor market is not in equilibrium: both workers and firms would benefit from an increase in employment.

y. Spending shocks push the labor market away from equilibrium and therefore push the economy into booms and recessions.

z. The recovery process for the economy is relatively fast in a recession situation and relatively slow in a boom situation.

2. Fill in the table below using what you know about Keynesian Models. Assume taxes are autonomously given to you.

a. In the above example, autonomous consumption equals ___________.

b. In the above example, the marginal propensity to consume equals __________.

c. The consumption function for the economy represented in the above table can be written as ____________________________________.

d. The saving function for the economy represented in the above table can be written as ____________________________________.

3. Fill in the table below using what you know about Keynesian Models. Assume taxes are autonomously given to you.

a. In the above example, autonomous consumption equals ___________.

b. In the above example, the marginal propensity to consume equals __________.

c. The consumption function for the economy represented in the above table can be written as ____________________________________.

d. The saving function for the economy represented in the above table can be written as ____________________________________.

4. Fill in the table below using what you know about Keynesians Models. Assume taxes are a function of income: e.g., T = tY + w, where T is total taxes, Y is aggregate income, t is the marginal tax rate that is assumed to be constant and w is the autonomous level of taxes (thus, w is the amount of taxes that are paid when income equals 0).

a. The marginal tax rate t equals _____________.

b. The marginal propensity to spend with respect to disposable income equals ______________.

c. The marginal propensity to spend with respect to aggregate income equals ________________.

d. The consumption function as a function of disposable income can be written as ______________________________ (make sure that your equation includes a C term as well as a (Y-T) term).

e. The consumption function as a function of income can be written as ______________________________ (make sure that your equation includes both a C term as well as a Y term).

5.  Fill in the table below using a Keynesian Model where aggregate expenditure equals consumption spending plus investment spending plus government spending. (All numbers in table are given in dollars.)

• Assume taxes are autonomously given to you and that they equal $0.
•  Furthermore, assume that autonomous consumption spending equals $50.
• Assume investment spending is autonomously given to you and that it equals $20.
• Assume government spending is autonomously determined and is equal to $10.

a. The marginal propensity to save with respect to income is equal to _____________.

b. The marginal propensity to consume with respect to income is equal to ___________.

c. In the last column of the table fill in the numbers for each variable for this economy when it produces the equilibrium level of GDP.

d. Sketch a graph illustrating the equilibrium you found in (d).  In your graph label your lines clearly: indicate where C, I, and G are on your graph. Also make sure you label the equilibrium level of output on your graph as Y_e.