Macroeconomics

Midterm Exam

This is a "take-home" exam, so you may use any resources that you wish, including help from classmates. At the bottom of this page are some "tips and tricks" to help you prepare your submissions. Please submit your answers via BlackBoard on or before Sunday 29 March.

Directions:  Use the Solow Model without technological progress to answer the questions below.

Problem 1

Suppose that an economy was initially in steady state when many of its workers are killed by an infectious disease. Assume that none of its capital stock is destroyed by the disease epidemic.

1. (5 points) What is the immediate impact on total output?
2. (5 points) What is the immediate impact on output per worker?

Suppose that the epidemic leaves both the saving rate and the labor-force growth rate unchanged.

3. (5 points) What will happen to:
   
   • output per worker over time?
   • investment per worker over time?
   • consumption per worker over time?
   Illustrate your answers with a diagram.

Using your answers to the previous question and remembering our assumption that the economy was in steady-state prior to the epidemic, answer the following question:

4. (5 points) Will the growth rate of output per worker be greater or smaller than it was before the epidemic?

Problem 2

Now suppose that prevention of another disease epidemic requires the government to enact new public health programs. Suppose further that these new programs reduce the economy's saving rate.

1. (20 points) Why will reducing the saving rate reduce the steady-state level of capital per worker?
2. (10 points) Illustrate your answer with a diagram.

Suppose that prior to the epidemic, the economy's saving rate was at the Golden Rule level.

3. (15 points) How will reducing the saving rate affect:
   
   • output per worker over time?
   • investment per worker over time?
   • consumption per worker over time?
   Illustrate your answers with a diagram.

Using your answers to the previous question and remembering our assumption that the economy was in steady-state prior to the epidemic, answer the following question:

4. (5 points) Will the growth rate of output per worker be greater or smaller than it was before the epidemic?

Problem 3

This last problem asks you to compare the predictions of Problem 2 with the predictions of Problem 1.

If the saving rate had remained unchanged:

1. (15 points) Would steady-state level of output per worker have been higher?
2. (15 points) Would the growth rate of output per worker have been higher?

Extra Credit

1. (10 points) Which sentence in my Lecture Notes did I tell you to "kill" (i.e. strike from the notes)?
2. (10 points) Why did I tell you to strike that sentence?

...

Tips and Tricks

You will have to find a creative way to incorporate diagrams into your answers. The simplest method is to draw them by hand, take a photo and incorporate that photo into the document with your answers.

For best results, crop your photos so that they only include the diagram with minimal white space. And scale the photo down to a smaller size. The lower resolution will reduce the file size and make your document much easier to work with.

If you can, create a PDF file and submit that. Sending me a PDF file ensures that I will see on my screen what you see on your screen.

Finally, the NYTimes has some tips on how to "Turn Your Smartphone Into a Pocket Scanner."