Assignment 2 (25 points)

1. True or false? Restrictive fiscal policy reduces consumption and investment. Use
the IS-LM graph to support you argument (5 points).
2.True or false? In the neo-classical growth model, countries with different savings
rates but the same population growth rates will achieve the same standard of living.
Please explain with the use of graph (5 points).
3. The labour share of output = 75%. Assume constant return to scale, no government,
no net exports and no technological progress. Use this information to
a. a) write the Cobb-Douglass production function (1 point);
b. b) write the output per worker function (2 points);
c. 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.
a. Find 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:

M d/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 velocity (1 point).