Quiz 3-

1. Hurricane Laura Ann destroys valuable capital and reduces the labor force of country X. At the same time the country experiences an improvement in technology. For country X

a) Labor productivity increases and the level of production decreases.

b) Productivity of capital increases and the level of production decreases.

c) Productivity of labor and the level of production cannot be determined.

d) Productivity of capital and productivity of labor increase.

2. The GDP of the People's Republic of Banania grew 3.5% last year. Using the rule of 70 how many years will it take them to double their GDP?

3. A significant portion of the individuals of country X that live in the part of Cucuta that borders country Y prefer to have a job in country Y because it costs them less to commute. To reverse this situation the government of country X decides to provide free transportation to the inhabitants of Cucuta to jobs in Cucuta. Producers in country X, at the same time, are expecting that the demand for their products this year will increase. Everything else in both countries remains constant. The production function in country X exhibits decreasing marginal returns to labor. It can be said of country X and Y,

a) That labor productivity and the level of production increased in country X while the labor productivity and the level of production decreased in country Y.

b) That directions of change in the wages in country X and Y are indeterminate.

c) That productivity of labor in country X decreased and wages in country Y increased

d) That the level of production and wages in country X increased and wages in country Y increased.

4. In Country X, a closed economy, the government decides to decrease its level of transfers. Assume that individuals in Country X always save a fraction of their net income, which is their income after they pay their taxes and transfers (i.e., this implies that individuals in Country X use their income for consumption spending, private savings, and to pay their net taxes). Furthermore, in Country X annual investment is currently greater than annual depreciation. Given this information and holding everything else constant, analyze the impact of the decrease in transfers according to the Classical Model and loanable funds framework discussed in class:

a) A decrease in investment in the current period, a decrease in interest rates, and a decrease in capital in the next period.

b) An increase in investment in the current period, an increase in interest rates, and an increase in capital in the next period.

c) A decrease in investment in the current period, an increase in interest rates, and an increase in capital in the next period.

d) An increase in investment in the current period, a decrease in interest rates, and an increase in capital in the next period.

5. The production function and labor market equations of country Z are given by:

Y=20L^1/2K^1/2

Labor Demand:  W = 6 - L(1/5)

Labor Supply: (5/4)W = L

The amount of capital in this economy is equal to the amount of labor.

Graph the aggregate production function and then explicitly mark the equilibrium level of real GDP, Y, and the level of labor usage. Briefly discuss what would happen to the aggregate production function you drew if technology changed so that the new aggregate production function was given by Y=10L^1/2K^1/2.