Rutgers Newark Worker Production Function Worksheet


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Econ 302 – Intermediate Macroeconomics
Spring 2020
Assignment 3
Z. Janko
DUE: April 21st
Worth: 25 points total
Covers chapters 6 and 7 only.
REMARK: Note that since there are 4 HWs and each is worth 25 points, each HW is worth 25% of the
total HW score. For the final course grade, each HW is worth 6.25% of your final course grade.
Hence, not completing just ONE assignment can significantly affect your grade (if you lose 6.25% of your
grade, you could potential get a B+ in the class as compared to an A-, or a C+ as compared to a B-, etc.)
HW INSTRUCTIONS: There are three parts to the assignment. Part 1 has Multiple Choice and fill-in the
blank questions. Part 2 has problems and short answer questions. Part 3 requires that you obtain a data
figure from the FRED website and discuss it. It also requires that you read an article posted on iLearn.
Answers to Part 3 MUST be typed. (I take off 2 points if part 3 is not typed).
Part 1: Multiple Choice – 0.5 points each.
3 points total
1. In economics, MONEY refers to
a) Income
b) Wealth
c) Assets used and accepted as payments
d) All of the above
2. According to the Solow Growth model sustained (continuous) economic growth can be attained if
a) Savings rate rises
b) Population growth falls
c) Productivity growth is positive
d) None of the above
Fill in the blank: 0.5 points each.
3. In the Solow Growth model what are 2 factors that can cause the standard of living to rise (i.e. lead
to higher economic growth). Also indicate whether the factor is rising or falling:
the saving rate (rising)
& 2.______________________________.
population (falling)
4. The interest rate that banks charge each other for overnight loans (in the overnight market) is
Federal Funds Rate
referred to as ______________________________,
it is also the instrument of monetary policy for
the FED.
5. The Federal Reserve Bank was established in _____________
(give exact year).
Part 2. Problem & Short Answer Questions. Show all work (derivations)
12 points total
1. (worth 6 points) Suppose yt=4kt0.5 (the per worker production function), d=0.1, n=0.02, and the
aggregate savings function is given by St=0.3Yt.
a. Solve for the steady state level of capital per worker (k), the steady state level of output per
worker (y), the steady state level of consumption per worker (c), and the steady state level of
investment per worker.
b. Suppose that the savings rate falls. What will be the impact on all the steady state values you
calculated in part a)? Discuss the intuition in detail as done in class.
c. Continue with b. Illustrate the impact of the fall in s on the steady state level of capital per
worker (k). Label everything: including all axes and all curves.
2. (worth 3 points) Here you are asked to discuss some specific policies that can be used to increase
economic growth and thus the standard of living. Specifically, discuss 2 policy designed to raise
productivity (TFP) growth. Elaborate on each; do not just list them.
3. (3 points) Use the material of chapter 7 to answer the question belows.
Suppose that
L(Y,i) = 500 + 0.4Y – 1000i
Y = 1500, r=0.08, expected inflation = 0, and P=50.
a) Calculate the real money demand. (show work).
b) Calculate the nominal money demand. (show work).
c) If the market for money is in equilibrium, what is the real money supply?
d) Now suppose expected inflation increases from 0 to 0.01. What is the impact on the
Price Level? Calculate the new P. (show work).
Part 3. Provide TYPED answers to all questions below.
10 points total
1. Read the article posted on iLearn titled: “Consequences of Rising Income Inequality”. 5 points
The Solow Growth Model we use in chapter 6 does not address the issue of inequality. It simply
looks at whether standard of living is higher, lower or same over time, and what can explain rising
living standards (as measured by higher consumption per person) over time. However, it is possible
that while consumption per person rises over time, due to higher income per person, not all
individuals in the economy benefit equally. Hence, even if income per person is rising on average, it
is possible that some gain more and some gain less. The article you are asked to read addresses
rising income inequality in the US.
Read the article and answer the following questions: Provide your responses in essay type
a. What is the time period that the authors are considering? (just give the years).
b. What evidence do the authors provide to support the claim that income inequality in the US has
increased. Specifically, what has happened to the income share of the top 10% and top 20%
over time? Discuss.
c. Discuss figure 2. Make sure to interpret what is presented in the figure.
d. What are the causes of rising income inequality? Discuss (do not just list them).
e. What does the article state about the likely consumption of workers if income inequality had not
risen over time?
f. Lastly, what does the article state about transfers? Specifically, discuss the last 2 paragraphs on
pg. 4.
4. Data – plot and discuss. 5 points. For this question you need to obtain data and briefly
discuss it, just like in Assignment 1. Try to discuss the behavior of the data over the business cycle
(i.e. the fluctuations) as well as the trend. Discuss any interesting/unique behavior you observe.
Obtain the maximum data points possible; always make sure you plot a series that has not been
discontinued. Use data that has been seasonally adjusted (this is specified).
Source: Obtained data from the Federal Reserve Bank of Saint Louise, the FRED database. You
can edit the figures: change the units if needed (from $ to growth rates for example) add multiple
series/variables to the same diagram, etc. It is also possible to download the figure and paste it
into word. Here is the link:
Here is what you need to do: (plot on separate diagrams, unless stated otherwise)
1. Plot and discuss: plot the following 3 series on the same diagram – M1 Money Stock,
Currency component of M1, and M2 Money Stock – all at monthly frequencies. Discuss
what the variables measure and then discuss the behavior of each over time.
2. Plot and discuss: 10-year Treasury Constant Maturity Rate – at monthly frequency. This
is the interest rate on the 10-years to maturity US Treasury bond. Discuss its behavior
over time.
3. Plot and discuss: personal savings rate – at monthly frequency. Discuss what the
variable measures (i.e. define it) and then discuss its behavior over time.

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