Practice Questions 4-

1. Assume that the production function is of the form

Y ^- = AK^-αL^-1-α

a. Write productivity as a function of MPL.

b. If productivity increases does the MPL necessarily also increase? Explain using your answer to part a.

2. Again suppose that the economy's production function is Y ^- = AK^-αL^-1-α. A recession is a period in which output is decreasing.

a. What would need to happen for a recession to occur in this model?

b. Are any of the causes above plausible explanations?

3. Again suppose that the economy's production function is Y ^- = AK^-αL^-1-α. Economic growth is defined as increasing output.

a. What would cause increasing output in this model?

b. For GDP to grow at 5% per year, how must the other variables change?

4. Again suppose that the economy's production function is Y ^- = AK^-αL^-1-α.

Using algebra only show that the production function is homogeneous of degree one by demonstrating that Y = MPL · L + MPK · K.

5. On pages 78-79 Mankiw describes a possible means of evolving from a commodity money to a fiat money. His last step seems to be weak. Accepting fiat money is more than a social convention as we could not suddenly switch to some other method of exchange if we all agreed. Why?

6. Describe the method the Federal Reserve uses to increase and decrease the money supply.

7. In the last half of the 1990s there was sizable economic growth accompanied by minimal inflation. Using the quantity theory of money explain why this might be odd and how banking innovations such as ATMs and check cards could help explain this observation.

8. According to the quantity theory of money with fixed V, if the goal of the central bank is to have an inflation rate of 0, at what rate should the money supply grow?