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# A few questions from old exams; I deleted questions that were on completely irrelevant topics, but I havent rewritten

questions to conform to Spring 2012 course materials. Economics 615 Spring 2008 Professor Jones [With partial answers] Thoroughly answer six of the following seven questions. Credit is based on throughness and accuracy. Phone with questions: 314-973-7243. Due: 8:30 pm, Friday, via e-mail. 1. The economy of Perelandra is described as follows: Production Function: Y = zK1/2N1/2 Representative Agents Utility function: U = L + 3C Time constraint: N + L = 100 In Perelandra, there are no government purchases, and no investment. In this one-period economy, completely solve for: Consumption as a function of z and K U = (100-N)+3(zK1/2N1/2) maxU : -1+1.5zK1/2 N-1/2 := 0 N1/2 = 1.5zK1/2 N = 2.25z2K Y = zK1/2(2.25z2K)1/2 Y = 1.5z2K The wage as a function of z and K w = MPN = .5zK1/2N-1/2 = .5zK1/2(2.25z2K)-1/2 Profits as a function of z and K = 1.5z2K - .75z2KN = 1.5z2K - .75z2K(2.25z2K) Also, answer the following: If z doubles, what exactly (quantitatively) happens to consumption and the wage? If z doubles, both consumption and the wage will quadruple exactly. One key to solving this is realizing which variables are endogenous and which are exogenous. If C, L, or N are in any of your responses, you have made a mistake. (Cobb-Douglas)

## Sales (to BurgerCo) 30 (to Public) 10

There are two businesses, CowCo and BurgerCo. BurgerCo only buys one input, and it buys it from CowCo. There is no government. What is GDP in this economy? Product approach: CowCo = 30 + 10 = 40 BurgerCo = 200 30 = 170 GDP = 40 + 170 = 210 Income approach: Wages = 100 + 50 = 150 CowCo Profit = 30 + 10 50 = -10 BurgerCo Profit = 200 100 30 = 70 GDP = 150 + -10 + 70 = 210 Expenditure approach = 10 + 200 = 210 GDP = 210 GDP = 210 What is the capital share of output? 70 + -10 = 60 60/210 = 2/7 What is the labor share? 50 + 100 = 150 150/210 = 5/7 What is the value added by each sector of the economy? CowCo value added = 40 BurgerCo value added = 170 Also, how is governments share of GDP actually calculated for the actual U.S. economy? There is no measure of value added by the government, so it is assumed to be equal to government wages. (Because they pay us government employees exactly what were worth.) Economics 615 MA Macroeconomics Spring 2008 Final Exam

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## Part 1: Long Answer. (weight: 50% of exam)

Answer exactly 10 of the following 11 questions. 1. Assume an economy where there are two producers: A wheat producer and a bread producer. In a given year, the wheat producer grows 40 million bushes of wheat of which 30 million bushels are sold to the bread producer at \$3 per bushel, and 10 million bushels are stored by the wheat producer to use as seed for next years crop. The bread producer produces and sells 100 million loaves of bread to consumers for \$3.50 per loaf. Determine GDP in this economy during this year using the product (i.e., value-added) approach and the expenditure approach. 5. In the [two-period, fancier than in Spring 2012] real business cycle model, suppose that firms become infected with optimism and they expect that total factor productivity will be much higher in the future. a. Determine the equilibrium effects of this on the current real wage, investment, real output, and the real interest rate. b. If waves of optimism and pessimism of this sort cause GDP to fluctuate, does the model explain the key business cycle facts? Which facts does it fit? Which does it fail to fit? Short answer (Weight: 50% of exam) Answer all of the following: 1. Determine the effects of an increase in the separation rate s on the reservation wage and on the long-run unemployment rate in the search model of unemployment. 17. Does money lead the business cycle or lag it? 19. Is the Solow residual procyclical, countercyclical, or acyclical? Practice Midterm with answers. Economics 615 Spring 2011 Professor Jones 8. In a standard [Cobb-Douglas] model without technological progress (A=1), what is the marginal product of labor, expressed in terms of the capital-to-labor ratio? MPL=Wage = (1-alpha)(K/L)alpha Note this means that more capital raises your wage.