Michaelmas

Question 1

Define ‘bubble’

Answer 1

Asset prices based upon an unrealistic view of the future

Question 2

Define ‘parameter’

Answer 2

Fixed value fired in by the model builder

Question 3

What is the rough proportion of income on capital and labour?

Answer 3

Capital 1/3, Labour 2/3

Labour down slightly in recent years after this has been long established

Question 4

How do Laspeyers index and Paasche index differ?

Answer 4

Real GDP measures L: Initial year prices, P: Final year prices

Question 5

What is CRS

Answer 5

If Y=F(K,L),

aY=F(aK,aL)

Question 6

What two things are assumed for neoclassical production function?

Answer 6

CRS and diminishing marginal returns

Question 7

What is Cobb-Douglas production function?

Answer 7

Y=AK^αL^(1-α)

Question 8

What are neoclassical assumptions about firms other than they are small, price takers?

Answer 8

Profit max

Profit = P*F(K,L) - RK - WL

Question 9

When solving neoclassical production function, what is real wage?

Answer 9

(W/P)*=MPL (as profit max)

=(1-α)x(Y/L)

Question 10

When solving production function, what is real capital cost?

Answer 10

(R/P)*=MPK (as profit max)

=(α)x(Y/K)

Question 11

In the neoclassical production function how are labour and capital supplied?

Answer 11

In a fixed quantity, perfectly inelastically

Question 12

Derive the share of capital income of GDP

Answer 12

(R/P)=αx(Y/K)
so (R/P)K= αY
so α

Question 13

Derive the share of labour income of GDP

Answer 13

(W/P)=(1-α)x(Y/L)
so (W/P)L= (1-α)Y
so (1-α)

Question 14

Why is total economic profit = 0 nationally according to neoclassical prod. function?

Answer 14

Profit = Y - MPLxL - MPKxK and Y=F(K,L)=MPLxL+MPKxK

Perfect competition drives profits to zero

Question 15

What proportion of GDP/capita difference is explained by capital per person and what by TFP?

Answer 15

k: 1/4
TFP: 3/4

Question 16

Order investment, consumption and NX by volatility

Answer 16

Consumption > Invesment <> NX

As MPC is reasonably close to 1

Question 17

Expected consumption is equal to what?

Answer 17

Disposable income / (1-c)

Question 18

In production function (and in reality) what is supply of loanable funds?

Answer 18

Model: perfectly inelastic in r
Reality: Depends positively on r (especially more long term)

Question 19

What equilibrates AS and AD in production function?

Answer 19

r
AD: Y=C(Ybar-Tbar) +I(r) + Gbar
AS: Ybar=F(Kbar,Lbar)
so only available adjustment is in r

Question 20

Total savings equals what? (must be able to derive)

Answer 20

Y-C-G

Question 21

What is the SGM eqn of motion

Answer 21

Δk=sf(k)- 𝛿k

Question 22

What is LR determinants of output under SGM

Answer 22

A, s, 𝛿, L, a

Question 23

Other than homogenous output and profit max, what are assumptions of SGM?

Answer 23

Exogenous tech growth and (K,L) may grow over time

Question 24

What is k*? Must be able to derive (MBD)

Answer 24

k*=A^(1/(1-a))x(s/ 𝛿)^(1/(1-a))

Question 25

When will golden rule output occur?

Answer 25

MPL = ( 𝛿+n+g)

Gradient of two lines equal so max gap.

Question 26

What is savings rate in golden rule? (MBD)

Answer 26

s=a

Question 27

Is s>a dynamically efficient?

Answer 27

No. k>k*gold.

No sacrifice of C required in SR

Question 28

s less than a dynamically efficient?

Answer 28

Yes. SR sacrifice of C would be required (as saving more)

Question 29

Define dynamic efficiency?

Answer 29

Impossible to make one generation better off without sacrifice from another

Question 30

What does conditional convergence depend on?

Answer 30

s, n, 𝛿, g, (a largely the same for all countries so not really)

Question 31

Derive the fundamental equation of Augmented Solow Growth Model? (On paper)

Answer 31

Change in k = sxf(k) - k(n+g+𝛿)

Question 32

Romer finds (n+g+ 𝛿) roughly equal to what?

Answer 32

6%

Question 33

Roughly how much convergence per year to steady state output is typically observed?

Answer 33

2%