Question No. 1

Use the long-run model from Chapter 3 the answer this question.

A) Suppose there is a permanent increase raises the labor force (L).
a) What will be the impact on the long-run level of real GDP (Y)?
b) What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)?
c) What will be the impact on private saving (Sprivate), public saving (Spub), national saving (S), and consumption (C)?
d) What will be the impact on real interest rate and investment?

B) Suppose a technological advance improves the production function (i.e. A↑)

a) What will be the impact on the long-run level of real GDP (Y)? )
b) What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)?
c) What will be the impact on private saving (Sprivate), public saving (Spub), national saving (S), and consumption (C)?
d) What will be the impact on real interest rate and investment?

Question No. 2

Consider an economy described by the following equations:

Y = 10K.3L.7 (round Y to the nearest 1000) K and L are raised to the 0.3 and 0.7 power, respectively.

C = 250 + 0.75(Y-T)
I = 1000 - 50r
G = 1000
T = 1000
K = 500
L = 500

a. Compute private saving, public saving, and national saving.

b. Compute total labor income and total capital income.

c. Find the equilibrium interest rate. Compute C and I.

d. Scenario 1: Suppose the government spending (G) increases to 1250. Compute national saving (S) and the new equilibrium interest rate (r). Present a graph showing the impact on S, I and r. Compute C and I. How do the new levels of C and I compare to the values computed in (c)?

e. Scenario 2: Set G back to 1000. Suppose immigration increases the labor force to L = 600. Compute: private saving, public saving, and national saving.

f. What happens to the real rental rate (the rental price of capital) and the real wage.

g. Compute total labor income and total capital income.

h. Find the equilibrium interest rate.