PS-1 Free Response - Intermediate Macro

Directions¶

There are 5 FR questions, and each question is worth 7 course points (for 35 out the total 45 points for this problem set).
Type/write in your name(s) at the top of your solutions.
You may work in a group of 3 or less. Do not collude with other groups. Do not “divide and conquer” the questions.
Do not use GenAI; this is exam practice.
Start each answer/solution to a question on a new page (i.e., start Q1 at the top of page 1, Q2 on of page 2, etc...).
Scan/take pics, combine into a PDF, and upload to Gradescape by Tuesday, Sep 16, 9am.

Gradescope Reminders

Only submit one assignment per group (of 3 members or less).
Add all group members to the one submission.
Select all the pages where your solutions appear to each question (i.e., not just the first page for each question).

Q1¶

Assume an economy with two firms. Firm A produces wheat and Firm B produces bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels of wheat to firm B at $3 per bushel, exports 25,000 bushels of wheat at $3 per bushel, and stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread, and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the 50,000 loaves of bread consumers buy from firm B, consumers import and consume 15,000 loaves of bread, and they pay $1 per loaf for this imported bread.

Calculate gross domestic product for the year using:

A) the value-added approach
B) the expenditure approach
C) the income approach

Q2¶

Consider an economy that produces only broccoli and cauliflower. In year 1, 1500 million pounds of broccoli are produced and consumed at $0.50 per pound and 300 million pounds of cauliflower are produced and consumed at $0.80 per pound. In year 2, 2400 million pounds of broccoli are produced and consumed at $0.60 per pound and 350 million pounds of cauliflower are produced and consumed at $0.85 per pound.

A) Using year 1 as the base year, calculate the GDP price deflator in years 1 and 2, and calculate the rate of inflation between years 1 and 2 from the GDP price deflator.
B) Using year 1 as the base year, calculate the CPI in years 1 and 2, and calculate the CPI rate of inflation. Explain any differences in your results between parts (a) and (b).

Q3¶

For each of the following production functions, determine and prove whether they exhibit constant, increasing, or decreasing returns to scale:

A) $Y = K^{0.6}N^{0.2}$
B) $Y = K^{0.7}N^{0.3}$
C) $Y = K^{0.8}N^{0.4}$

Q4¶

Given a reduction in the savings rate, $s$ , in the Solow growth model, answer the following questions:

A) Graph the effects of the change in $s$ .
B) On impact, what happens to $K/N$ , $Y/N$ , $S/N$ , and $C/N$ ?
C) What are the
- short-run effects on the growth rate of $Y/N$ ?
- long-run effects on the growth rate of $Y/N$ ?
- long-run effects on the level of $Y/N$ ?

Q5¶

Suppose that two countries are exactly alike in every respect except that population grows at a faster rate in country A than in country B.

A) Which country will have the higher level of output per worker in the steady state? Illustrate graphically.
B) Which country will have the faster growth rate of output per worker in steady state?