Answer all the questions. Due this midnight. Send it back at 23:59. The lecture slide was also uploaded. Do the homework after reading the slide.
Topic 6- Solow Growth Model
1. Derive the expressions for steady-state capital K* and steady-state output Y*.
2. Suppose that the investment rate decreases by 20%. What is the impact of it on steady-state capital K* and steady-state output Y*? Show algebraically.
3. Illustrate the above scenario using the complete Solow diagram. Also draw the transition dynamics assuming that the investment rate decreased only in the year 2010.
4. What is the prediction of the Solow growth model about the determinants of capital-output ratio? Is it consistent with the data?
5. Suppose that due to a new invention of advanced microprocessor, TFP increases by 10%. What is its impact on K* and Y*? Show both algebraically and graphically.
6. In addition to advancement in TFP, suppose that capital depreciation rate increases. Illustrate the impact of these two simultaneous events using the complete Solow diagram.
Topic 7- Introduction to Economic Fluctuations
7. Explain the following components of LEI index: a. Average workweek in manufacturing b. Index of stock prices c. Index of consumer expectations d. M2
8. Explain the slope of the aggregate demand (AD) curve using the quantity theory equation.
9. Suppose that the government reduces the money supply to reduce inflation. Using graphs, illustrate the impact of this policy on output and inflation both in the short-run and in the long run. State what would happen to unemployment. 10. Read the case study titled “A Monetary Lesson from French History” from Chapter 10 (Mankiw). Was the government successful in its goal to reduce inflation? Why was the government successful/unsuccessful?
11. Suppose there is an exogenous increase in the velocity of money. Show graphically what would happen to output and inflation in the short-run and in the long run. Also mention what would happen to unemployment.
12. Suppose workers have unionized and have bid up their wages. Explain graphically the impact of this event on output and inflation. What sort of stabilization policy would you suggest to restore the economy?
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