Q2. Consider an economy that produces three goods: gadgets1 hooks. and tulips. The following table consists of quantity (in millions) and prices of each between 2005 and 2008. 2005 2006 I 2007 2008 l _ Q Pea) Q Po) Q Po) . Q Po) 1 Gadgets 10 200 11 205 12 210 13 200 Books 100 20 100 20 110 20 90 22 'I'ulips 1000 2 990 2 900 2 1000 1.9 (a) Evaluate the following statements. Use 2005 as a base year. [5] - Since this country is producing more gadgets each year and it is the most expensive good, the economy must be growing over time. . Since the prices of each good largely remain the same or are increasing for the most of the time, the economy must be growing over time. (b) Suppose the Central Bank increased money supply by 3.89% between 2005 and 2006. How much do you expect the change in prices he".J 4xplain it by using an appropriate theory. [5] (c) The survey result shows that an average household consumes 2 gadgets, 50 books, and 10 tulips a year. Does the purchasing power of an average household with an annual income of $50000 in 2005 remain same in 2008'? If yes, explain. If not why? (Hint: Use CPI to nd out the purchasing power). [5] Q3. Consider a simple Solow-Swan growth model with a production function of y : 10k1/3. The savings rate is s and the physical capital depreciates at the rate of 6. (a) Write and explain the capital accumulation equation for the economy. Illustrate a transition dynamic in a diagram. [5] (b) Show and explain a transition path of the economy when a technological parameter, A, changes to 20. Assume the country was at the steady-state before. [5] (c) Explain the golden rule of savings. Why it is important? [5] The exam continues in the next page