AMERICAN UNIVERSITY
Department of Economics
Comprehensive Examination
ECON-06A Political Economy II
June 2006
Instructions: This examination has two sections, Micro and Macro. You must answer both
sections and follow the directions in each. Each section receives equal weight in the overall
grading; be sure to allocate your time according to the suggested times for each part. Please
make sure that all math is intuitively explained, all diagrams are clearly labeled, and all answers
are focused on the specific questions asked.
MICRO SECTION
Directions: This section has two parts, A and B. Answer one (1) question in each part for a
total of two (2) questions.
Micro Part A. Answer one (1) of the following (about 60 minutes):
1. Assume a two-sector economy defined by the technology below:
a11 = 0.2 a12 = 0.3
a21 = 0.3 a22 = 0.2
L1 = 0.2 L2 = 0.1
a. Suppose the conditions of class struggle are such that capitalists receive a 50% rate of
profit (0.5). Making good 2 our numeraire, that is letting p2 = 1, what would p1 and the
wage rate be under these social conditions?
b. Under these conditions, if capitalists in sector 1 discover the new CU-LS technique
below, will they replace their old technique with this new one? Show your work and
explain.
a11' = 0.4
a21' = 0.3
L1' = 0.1
c. Will capitalists in sector 1 serve or not serve the social interest by doing what you
concluded they will do? Show your work and explain.
d. What does the Sraffa model reveal about Adam Smith’s hypothesis that there is a second,
beneficent invisible hand at work in capitalist economies, namely that profit maximizing
capitalists can be relied on to always choose more socially efficient technologies? Briefly
explain the intuition behind this result.
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2. The price equations for a two sector economy with one primary input, homogeneous labor,
can be written in matrix notation as (1+r)pA + wL = p.
a. Solve these equations for the equilibrium price vector for the economy if r = 0.
b. What special characteristic do these relative prices have?
c. Briefly explain what labor values represent in a model with one primary input,
homogeneous labor?
If b is the real wage bundle then w = pb and the price equations can be rewritten as:
(1+r)pA + pbL = p, or as: (1+r)p[A+bL] = p. Letting [A+bL] = A* = (a(1)*, a(2)*), the
price equations can be rewritten again as: (1+r)pA* = p. Assume A* is non-negative and
indecomposable and that dom(A*) < 1.
d. What do you know about the uniform rate of profit, r, in the economy? How do you
know?
e. Define retrogressive technical change, capital-using, labor-saving technical change, and
viable technical change.
f. Suppose capitalists in sector 1 discover a new CU-LS technology. If pa(1)*' < pa(1)*
will capitalists in sector 1 replace a(1)* with a(1)*' ? How do you know?
g. What will happen to the relative prices of the two goods? How do you know?
h. What will happen to the uniform rate of profit in the economy? How do you know?
i. What will happen to the efficiency of the economy? How do you know?
Micro Part B. Answer one (1) of the following (about 60 minutes):
1. Norms in a population:
Player 2
Player 1
Self-seeking
Altruist
Self-seeking
.5 (v-c)
v
Altruist
0
.5 v
The above game represents the interaction when self-seekers and altruists in a population meet;
v is the prize while c is the total cost of two self-seekers clashing. Note that v < c.
a. Which (pure) strategies are ESS, which are evolutionarily viable?
b. Write an expression for the payoffs gained by adopting each strategy, showing this to be
dependent on the fraction of self-seekers, p, in the population (there are 1-p altruists). Use
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c.
d.
e.
f.
the notation E (SS, p) to indicate the expected value of playing SS in a population with
composition p (and analogously for A).
Find p*, the equilibrium share of SS in the population.
Is this equilibrium stable? Explain.
If a player can adopt a mixed strategy, playing SS with probability f, is there any value of
f for which the mixed strategy is ESS? If so, what is it?
Explain how Altruism can survive in a population of Self-seekers. What does this
suggest about the Walrasian concept of long run equilibrium?
2. Choose Your Model:
a. List three premises of the Walrasian model that are rejected by the evolutionary Political
Economy approach.
b. Give two examples of how the change in assumptions results in predictions distinct from
those used in neo-classical models. Explain the models in detail (remember, this
question is meant to take one hour), using graphs, equations, etc. where appropriate.
c. Discuss empirical evidence which supports the alternative assumptions (carefully linking
the evidence to the models).
MACRO SECTION
Directions: This section has two parts, A and B. Answer one (1) question in each part for a
total of two (2) questions [please note part A has more weight].
Macro Part A. Answer one (1) of the following (about 75 minutes):
1. There is a country, “LAC,” in which the following changes have been observed:
1) Inequality has increased (as measured by a higher profit share, π)
2) The inflation rate ( P̂ ) has been reduced
3) The labor productivity growth rate (ε) has increased
4) Generally, macroeconomic performance has worsened (for example, capacity
utilization and the growth rate have fallen)
a. Using a conflicting claims model of inflation, analyze the causal relationship between the
first three changes. Which one of these three changes is the cause, and which two are the
effects? You may construct this model using the wage share ψ = 1−π for convenience.
Show how one of these changes causes the other two and explain.
b. Then, use a neo-Kaleckian/structuralist model to analyze the effects of the rise in π (or
fall inψ) on the capacity utilization rate u and growth rate g. Under what sorts of
assumptions (e.g., about parameter values) will the model generate result 4)? Discuss.
NOTE: For this question, you should emphasize graphical analysis and intuitive explanation;
you should provide the basic equations that underlie the models you use, and solutions are
appreciated, but logical discussion of how these models can be applied to the above facts is
more important than complete mathematical derivations.
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2. Does a higher saving rate lead to an increase in the long-run equilibrium rate of growth
(measured by the gross rate of capital accumulation, gK +δ)? Can higher saving lead to a
decrease in the growth rate? Analyze and discuss each of the following cases:
a. A classical-Marxian model with a fixed (“conventional”) wage share, (1 − π ) .
b. A classical-Marxian model with full employment and a “natural rate of growth” (n).
c. A neo-Keynesian/Kaleckian model, in which capacity utilization u is variable, and there
is an independent investment function of the form
giK +δ = α + η(r +δ) + λu
(where α, η, λ > 0).
For all three models, you may assume that the saving function (relative to the capital stock) is
gsK +δ = β(r +δ) − (1 – δ)(1 – β)
where r is the net rate of profit, δ is the depreciation rate of the capital stock (0 < δ < 1), β is
the weight on future consumption in the capitalists’ intertemporal utility function (0 < β < 1),
and there is no saving out of wages. You may use a rise in β to represent an increase in the
saving rate. You may assume that there is no continuous technological change, i.e., labor and
capital productivity (x and ρ) are constant and γ = χ = 0. Give complete mathematical
derivations to prove your results and illustrate each case on an appropriate diagram. Finally,
compare and contrast your results for the three models: under what conditions (assumptions)
is there a positive or negative relationship (or no relationship) between the saving rate (β)
and the growth rate (gK +δ), and why? Try to generalize from your results!
Macro Part B. Answer one (1) of the following (about 45 minutes):
1. Suppose that the central bank of a country (you may call it the “Fed”) targets (i.e., controls
the supply of) “high-powered money” (i.e., the monetary base, H) through open market
operations (i.e., purchases or sales of treasury bills, Tc). Suppose also that there is a fixed
required reserve ratio, and for simplicity you may assume that there is no cash in the
monetary system (all money consists of bank deposits). Does it necessarily follow that the
supply of money (M) to the public (i.e., households and business firms) is “exogenous” or
under the control of the Fed? Why or why not? Analyze by constructing the “T-accounts”
(balance sheets) for the main financial sectors (i.e., households, firms, commercial banks, and
central bank) and using a model of the supply and demand for financial assets (including
bank loans). Show what happens to the money supply M if there is an increase in the
demand for loans and explain why M is exogenous or endogenous in this situation.
2. Many East Asian countries (from Japan in the 1960s and 70s to China today) have been
accused of a “mercantilist” policy of promoting exports while keeping imports (especially of
manufactures) restricted. Is such a policy rational for a country that wishes to achieve a high
rate of growth when its growth is “balance-of-payments constrained” (BPC)? Answer by
presenting the post-Keynesian model of BPC growth and analyzing the effects of higher or
lower values for the income elasticities of export and import demand on the BPC growth rate.
Be sure to highlight and discuss the assumptions under which this analysis is valid.
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