ECN 302 Study Guide - Midterm Guide: Consumption Function, Parsec, Autarky

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4 Dec 2018

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Homework ii: ecn 302 macroeconomics: answer key: laing. In the exam you will be expected to answer (all the parts of ) only two of three questions. Consider a closed economy in which aggregate output, y0, is given by. Y0 = f (k0, l0), where k0 and l0 are the xed (exogenous) supplies of labor and capital. ( a) some basic concepts. ( i ) output. Equation ( ) says that output, y0, is constant. Is it exogenous or endogenous in this model? ( ii ) income and expenditure. According to the national accounts identity, in a closed economy, income and expenditure are related as. Y e c + i + g. Solution. ( i) exogenous variables are constant and not determined within the given model. However, ( ) is a model of the determination of output, y . Therefore, although y0 is constant, it is endogenous. ( ii ) this has been dealt with at length.

Related Questions

Country A is located on a small island that is isolated from the outside world. The country
has one representative consumer, whose preference is represented by:
U(c, l) = ln(c) + ln(l)
There is one representative fi rm in the economy which is owned by the consumer, it produces
one type of good that can be used for consumption or government expenditure using capital
and labour as inputs. The fi rm owns the capital it uses and it's production technology is
represented by
F(K;N) = zK^aN^1-a
where z is the total factor productivity, and a is the capital share of income. The fi rm pays
all of its profit back to consumer as dividend.
The government of country A spend a predetermined G amount of goods to provide public
services, and it taxes consumer through a lump-sum tax t to finance the expenditure. the
government's budget is balanced:
G = t
Now, suppose that the firm cannot change its capital stock, or improve its production technology in the short period, such that z and K are given.
(a) When describing this economy as an macroeconomic model, what is the set of exogenous
variables? What is the set of endogenous variables that can be determined given the set
of exogenous variables using the concept of Competitive Equilibrium?
(b) Defi ne the competitive equilibrium for this economy, be specific about what it is, what
conditions have to be satisfied who solves what problem and etc.
(c) List the set of equations that will be used to determine all of the endogenous variables.
Which four of these endogenous variables are essentials, such that once you know these
four, all other endogenous variables can be obtained easily?
(d) Write down the four equations that can be used to solve for these four essential endogenous variables, and describe where do they come from. Describe in details the steps of
how would you solve for the competitive equilibrium (without actually solving for it ).
(e) Setup the Social planner's problem for this economy. What is the marginal condition
that pins down the planner's choices.
(f) Now, describe what would happen to c, l, and w if the firm had more capital, such
that Knew > Kold.

In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of

	100
	110
	120
	90
	105

The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

ECN 302 Study Guide - Midterm Guide: Consumption Function, Parsec, Autarky

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