Econ 3022: Macroeconomics Spring 2020 Final Exam - Due April 24th 11:59pm 1 Multiple Choice Questions (5 points each) Question 1 What is Ricardian Equivalence? (a) The economic hypothesis that agents’ decisions are una↵ected by the timing of taxation and government spending (b) The economic hypothesis that agents’ decisions are a↵ected by the timing of taxation and government spending (c) The economic hypothesis that taxation must be equal every period. (d) The economic hypothesis that it is impossible to individually identify taxation today and taxation tomorrow. Question 2 Consider the consumer problem from the microeconomic foundations we dis- cussed in class. Suppose the wage decreases. What do we expect to happen to house- hold labor supply? (a) Unclear (b) Increase (c) Decrease (d) Stay constant 1 Question 3 Consider the consumer problem from the real intertemporal model. Which of the following conditions must be satisfied at the solution? (a) MRSl,c = w (b) MRSc0,l0 = 1 w0 (c) MRSl,l0 = w(1+r) w0 (d) All of the above Question 4 If total factor productivity tomorrow, z0, increases. What should happen to investment? (a) Unclear (b) Increase (c) Decrease (d) Stay constant Question 5 Consider the standard Solow model from class where the production function is zF (K, N) = zK↵N1�↵. What is the golden rule savings rate? (a) sgr = 1 � ↵ (b) sgr = ↵ (c) The savings rate that leads to a steady state with the highest level of income per capita (d) The savings rate that leads to a steady state with the lowest level of income per capita 2 2 Economic Growth (20 points) Consider the Solow Growth Model seen in class where the production function is Cobb- Douglas and given by: Y = zK↵ (N) 1�↵ where 0 < ↵ < 1 and z is a constant. Let s be the savings rate of this economy, so that aggregate savings is just a constant fraction of aggregate output: S = sY . Let n be the rate of population growth, so N 0 N = 1 + n. Finally, let d be the depreciation rate, and assume the law of motion for aggregate capital is given by: K 0 = (1 � d) K + I (a) (5 pts) Find an expression for the steady state level of capital per capita (k⇤) that only depends on parameters of the model. Clearly show your work. (b) (5 pts) Discuss how per capita variables (consumption and income) as well as aggregate variables (consumption, capital stock, output, and savings) behave in steady state. Now, suppose that we have a linear production function given by Y = zK where z is a constant. Let s be the savings rate of this economy, so that aggregate savings is just a constant fraction of aggregate output: S = sY . Let n be the rate of population growth, so N 0 N = 1 + n. Finally, let d be the depreciation rate, and assume the law of motion for aggregate capital is given by: K 0 = (1 � d) K + I (c) (5 pts) Find an expression for the level of per capita capital stock today as a function of per capita capital stock tomorrow. Clea.