Assignment 2 (26 points) 1. Suppose the government (in a small open economy) is increasing taxes. Use the ISLM with the interest parity condition,

Assignment 2 (26 points)

For,and show this on the IS-LM graph

2.     In the neo-classical growth model, countries with the same savings rates but different population growth rates will achieve the same standard of living.” Use of a properly labeled graph to explain your answer (5 points).

3.     The capital share of output = 20%. Assume constant return to scale, no government, no net exports and no technological progress. Using this information:

a.   Write (calculate) the Cobb-Douglass production function (1 point);

b.   Write (calculate) the output per worker function (2 points);

c.   Calculate total factor productivity if output grows by 6%, labour by 4% and capital by 2% (2 points).

4.     Assume closed economy and the following:

Population growth n= 1% per year, work force is growing at the same rate as population, consumption C=0.5 (1-t)Y (t is taxation rate and Y is output), production function per worker is y=8k0.5 , the depreciation of capital = 9% per year, government purchases G=0, and taxation rate=0. Use this information to:

a.   Write (calculate) expressions for national saving/worker and the steady-state level of investment /worker as functions of the capital/labour ratio k (2 points)

b.      Calculate steady-state values of capital/worker ratio k (2) points, output /worker (1 point), consumption/worker (1 point) and investment/worker (1 point)

5.     The money demand function has the following form:   Md/P = 400 + 0.25Y – 1000i

 Assume that: P=130, Y=800 and i=0.08. Find real money demand (1 point), nominal money demand (1 point) and the velocity (1 point).