Topic: Money and Banking

1.Which of the following would be automatic stabilizers? Explain.

a.Employment insurance.(2)

b.Cost-of-living wage provisions in government contracts.(2)

2.An economy is described by the following production function:

whereYis the output (real GDP),Kis the amount of capital,Nis labour (number of workers), andAis the total factor productivity.

a.Does it exhibit the diminishing marginal product of capital? Explain.(2)

b.Does it exhibit the constant returns to scale? Explain.(2)

3.Two economies, A and B, had the same level of output, $200,000, in the year 1920. Economy A has grown 2% a year on average. By the year 1992, B has reached the output twice as large as A. What is B's output in 1992? Use the rule of 72 to answer this question.(2)

4.Find an example of something people historically used as money (some examples: cowries, cigarettes, Rai stones). Evaluate how well it has served each of the three functions that makes it a candidate for money (e.g., "it works as a store of value very well, because..."). As a rough expectation, your answer should be (there is no formal limit).(2)