Macroeconomic Analysis
Spring 2014 Homework #6
(Final, Fall 2013)
1. Assume the country of Freedonia has $500 of capital per worker and has a workforce of 20 million. Also
assume that labor and capital split output evenly between themselves.
a. Ignoring total factor productivity. What is output per worker? What is total output?
b. If actual output per worker is $1000 what is total factor productivity? What is the wage rate? What is the
return to capital?
c. Suppose a wizard appears and suddenly makes half of the capital stock disappear. What is output per
worker? What is the wage rate? What is the return to capital? (Assume everything for question 1b holds
initially) Do you think that perhaps the wizard owned some of the capital stock left over? Why?
d. Suppose aliens visit earth and bring with them technological advances that double total factor
productivity. What is output? What is output per worker? What is the wage rate? What is the return to
capital? (assume everything for question 1b holds initially)
2. Assume that in the country of Freedonia b=1 v=1/2 and the marginal product of capital is 8% and the
inflation rate is 3%. Also assume that initially the Central Bank of Freedonia has set the nominal interest rate
at 11%. Also assume unemployment is at the natural rate of unemployment for Freedonia: 6%. The
following questions will need graphs and equations.
a. Suppose that after the aliens have landed and supposedly given their advanced technology they decide to
enslave the human race. This causes Freedonia to increase military spending to 10% of output because
Freedonians love their freedom. Show this using an IS-MP graph.
b. What will this do to the unemployment rate?
c. What will this do to inflation? What will this do to the change in inflation?
d. What will this change in inflation do to the real interest rate? What effect will this have on the economy?
e. What does the Central Bank of Freedonia have to do to bring the output gap back to zero?
NOT ON FINAL (yes you have to answer it)
3. The economy of Freedonia’s GDP is 4 trillion a year and there are 200 million workers in the economy and
a capital stock of 12trillion. Assume the capitalist control the country any take 3/4th of output for
themselves.
a.
b.
c.
d.
e.
f.
What is output per worker and how much capital is there per worker?
How much of output per worker is explained by the amount of capital per worker in the economy?
What is TFP, then?
What is the wage rate and the return to capital?
Suppose there is a revolution and workers manage to redistribute 3/4ths of the economy to
themselves but nothing else changes? Now what is the wage rate and the return to capital.
What happens if the capitalist are successful and they wipe out half of the workers in the course of
repressing the revolution but there is no damage to the capital stock?