Give correct answers

Problem 3. Voting. (23 points) This paper provides a simple model of voting to illustrate the difficulties (and the strength) of an economic model of voting. Consider George, a committed Republican that is deciding whether to vote for Presidential elections. George's utility function is U (P, v) = u (P) - cv, where u( P) equals U if Republicans win the election (P = R) and 0 if Democrats win the election (P = D). The variable c 2 0 is the effort cost of going to vote, which George pays only if he votes (v = 1). If Goerge does not vote (@ = 0), George pays no voting cost. Finally, George believes that there is a probability p that his vote will decide the election, and probability 1 -p that his vote will not affect the elections. In addition, George believes that the average share of Republican voters is .5. 1. Compute the expected utility of George from voting (v = 1) and from non-voting (v = 0). (6 points) 2. Under what condition does George vote? Provide intuition (4 points) 3. Assume that the cost of voting is $10 (an hour's wage) and the value of voting is U is $1,000. What would this imply about the cutoff level of p such that George votes? Is it plausible that George will vote? (5 points) 4. Two empirical facts about votings are that (i) voter turnout is higher in closer elections; (ii) voter turnout is higher for more educated voters; (iii) voter turnout is higher for individuals with higher ernings; (iv) voter turnout is lower for younger people. Interpret these results in light of the model (8 points)This exam has 8 questions on 3 pages; before you begin, please check to make sure your copy has all 8 questions and all 3 pages. Each of the 8 questions will receive equal weight in determining your overall exam score. You can work on the questions in any order, but please be sure to keep your answers to all of the parts of a specific question together in your exam book. 1. Macroeconomists use the story of Robinson Crusoe to identify the determinants of productivity and living standards, both for Crusoe stranded alone on his deserted island and for all of us in the United States today. a. When macroeconomists observe that how many fish Crusoe can catch depends partly on how good he is at inventing new techniques for fishing, what determinant of productivity in the US economy do they have in mind? b. When macroeconomists observe that how many fish Crusoe can catch depends partly on how many fishing poles he has, what determinant of productivity in the US economy do they have in mind? 2. As an alternative to the story of Robinson Crusoe, macroeconomists use the "aggregate production function," written as Y = AF(L,K,H,N), to link economy-wide output Y to the number of workers L, the stock of physical capital K, the stock of human capital H, the stock of natural resources N, and stock of technological knowledge A. With reference to this aggregate production function, please indicate whether each of the following statements is true or false. a. The aggregate production function exhibits "constant returns to scale" if doubling the four inputs - workers L, physical capital K, human capital H, and natural resources N - while holding the stock of technological knowledge A fixed leads to a doubling of output. b. The aggregate production function exhibits "constant returns to scale" if tripling the four inputs - workers L, physical capital K, human capital H, and natural resources N - while holding the stock of technological knowledge A fixed leads to a tripling of output. C. When the aggregate production function exhibits constant returns to scale, it implies that productivity Y/L is determined by the stock of physical capital per worker K/L, the stock of human capital per worker H/L, the stock of natural resources per worker N/L, and the stock of technological knowledge A. d. The aggregate production function shows that productivity may still increase, even in the face of dwindling stocks of natural resources N, if the stock of technological knowledge A continues to grow. 2 3. Please indicate whether each of the following statements is true or false (you don't need to explain why). a. Although economists believe that access to natural resources helps increase productivity, they also point out that some countries, most notably Japan, have achieved high levels of productivity and living standards without access to abundant natural resources. b . Physical capital accumulation and the "catch-up effect" are particularly important in explaining why a number of Asian economies, especially South Korea's, grew very rapidly in the second half of the 20th century. C . Real GDP per person in India in 2008 was lower than what real GDP per person was in the United Kingdom in 1870. d. An example of "foreign portfolio investment" occurs when an American company opens up more than one factory in China and operates those factories itself in order to minimize risk. e. Students in the United States who remain in school after they turn 16 years old show a willingness to accept what economists call an "intertemporal trade-off," because staying in school means earning less income today and perhaps consuming less today, in exchange for accumulating knowledge and skills that will help them earn a higher income and enjoy more consumption in the future. 4. Suppose that GDP Y equals 10, consumption C equals 6, government spending G equals 2, tax revenues T equal 3 and net exports NX equal 0. Use this information to answer the following questions. a. What is the numerical value of investment? b. What is the numerical value of national saving? C. What is the numerical value of private saving? d. What is the numerical value of public saving?1. With referencetothe Federal Reserve's M1 and M2 measures ofthe money supply, please indicate whetherfunds held in each of the forms listed below are included only in M1, only in M2, in both M1 and M2, orin neither M1 nor M2. Money market mutual fund shares. Bank reserves. Demand deposits. Small [under $100,000] certificates of deposit; Currency in circulation. PEI-PF?" 1. Suppose that the Federal Reserve conducts an open market operation in which it purchases $100 in US Treasury bonds from a private saver. a. In an economy without banks, by how much, in dollarterms, will the total money supply increase as a result of this open market operation? b. In an economy with banks in which all members ofthe nonbank public immediately deposit allof the currency they receive, butin which all banks engage in 100 percent reserve banking, by how much will the total money supply increase as a result of this open market operation? c. In an economy with banks, in which all banks choose a 10% reserve ratio and in which all members of the nonbank public immediately deposit all ofthe currency they receive, by how much will the total money supply increase as a result of this open market operation? d. In an economy with banks, in which all banks choose a 10% reserve ratio, but in which all members of the nonbanlr public hold 50% ofthe funds they receive as currency and deposit the remaining 5056, will the change in the total money supply resulting from this open market operation be greater than or less than the amountyou answered for part [c], above? 3. Please answer the following questions, regarding the Federal Iteserve's federal funds rate targeting strategy. a. Suppose that the Federal Reserve wants to hold its federal funds rate target constant but banks' demand for reserves decreases at any given interest rate. When faced with this shift in demand, what does the Fed have to do to keep the federal funds rate near its target: does it have to conduct an open market operation in which it buys US Treasury bonds or an open market operation in which it sells U5 Treasury bonds? b. Suppose instead that banks' demand for reserves at any given interest rate remains unchanged, but that the Federal Reserve wants to increase its target for the federal funds rate. What does the Fed have to do to make the equilibrium federal funds rate rise to match the new, higher target: does it have to conduct an open market operation in which it buys US Treasury bonds or an open market operation in which it sells US Treasury bonds? 4. Suppose that two banks the First National Bank and the Second National Bank have balance sheets as shown below. For both blanksI as in our in-class discussions, I"other assets" simply refers to the value of bank buildings, office equipment, ATM machines, and other physical assets thatthe bank owns and uses in the course of its day-to-day operations. First National Bank Assets Liabilities Reserves $10 Deposits $100 Loans $130 Shareholders\" Equity 550 Other Assets 5 1:) Second National lanlr. Assets \"abilities Reserves $50 Deposits $100 Loans $50 Shareholders\" Equity $10 Other Assets 5 m a. Suppose the First National Bank experiences a 540 deposit outflow. Is the First National Bank illiquid, insolvent, or neither? b. Suppose the Second National Bank experiences a $40 deposit outow. Is the Second National Bank illiquidI insolvent, or neither