1. Consider a production function Y (JAN + K): . (a) Does the function exhibit constant returns to scale? Try doubling the inputs, see how the output value will be affected. (b) We want to know the relationship between WAN and KIAN. Please derive this relation from the above function. (c) Use a diagram to explain what would happen if the constant annual growth rate of technology g, is higher. You should indicate what happens to the steady-state levels of YIAN and KIAN. (d) Given the same growth rate in working population, what would happen to the steady-state growth rate in YIN and KIN, after the change specified in (c) happens? (e) By inspecting growth data, some famous economists argue that capital per capita accumulation is the major driving force for output per capita growth because the growth rate in the former is correlated to the growth rate in the latter very closely. From your answer in (d), will you say this view is supportable or debatable? Briey explain. 2. When the economy booms, businessmen normally find it easy to make money. There are many more profitable firms than unprofitable firms. Bankers are much certain that many dients are able to return the principal and pay interests. Now, suppose a clear sign appears that the economy starts recovery and will boom. (a) Suppose the economic recovery is resulted from a higher confidence of investors. How will this affect the IS curve? You should first indicate which element in the goods market is affected, using a Keynesian cross diagram. Then, discuss how this will change the IS curve. (b) How will this confirmation of recovery affect the money multiplier? Briey explain. (c) Suppose the central bank does control the monetary base at the fixed level. How will the LM curve be affected by (b)? You should first indicate which element in the money market is affected, using a money demand-supply diagram. Then, discuss how this will change the LM curve. (d) Use an IS-LM diagram to illustrate what will happen to the equilibrium output and interest rate. 3. AssumeX=IM=0, G=GG,T=tY,andI=abi. (a) In the short run, assuming xed interest rate, consumption function is C = c0+c1(Y-T). (i) Solve the total saving function (including private and public saving). (ii) Solve the equilibrium output, using the 5:1 approach. (iii) Using (ii), assess the effect on output by a higher tax rate. (b) In the short run, assuming exible interest rate, consumption function is the same as (a) while Md =PY(u )a11dMS=MG. (i) Solve the IS function. Put i on the left side and anything else on the right side. (ii) Solve the LM function. Put i on the left side and anything else on the right side. (iii) How will a higher tax rate I shift the IS and LM curves? Use a diagram to illustrate the impact on output Y and interest rate
