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State whether you think each of the following questions is true (T), false (F), or uncertain
(U) and briefly explain your answer.
(a) If bread is produced by using a constant returns to scale (CRS) production function,
then if the number of workers doubled, twice as much bread will be produced.
(b) A competitive, pro t-maximizing rm hires capital until the marginal product of labor
(MPL) equals money wage (W).
Consider an economy described by the aggregate production function
Y = F(K,L) = K^0.3L^0.7
(a) Does this production function have constant returns to scale (CRS)? Why?
(b) What is the marginal product of capital (MPK)?
(c) What is the marginal product of labor (MPL)?
(d) Use your answers in (b) and (c) above to show that this production function displays
diminishing marginal product (DMP).
(e) Are K and L "complements"? Explain in some detail.
(f) What is the capital share?
(g) When capital per worker rises, what happen to labor share of national income?
Use Table 1 to answer the following questions.
(a) Graph the production function holding K constant.
(b) Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis. Is
MPL diminishing?
<Table 1: Output, Labor, and MPL>
L Y MPL
0 0 -
1 5 5
2 9 ()
3 () 2
4 12 1
Use the neoclassical theory of distribution to predict the impact on the real wage (w) and
real rental price of capital (r) of each of the following events.
(a) A wave of immigration increases the labor force.
(b) An earthquake destroys some of the capital stock.
1. The success of your forthcoming budget will be a crucial factor in the next election.

2. Do you expect next year’s demand to be so large that there will be a labour shortage or do you expect output to be so small that there will be unemployment?

3. I see that the National Institute has forecast unemployment on the basis of unchanged government policies. If this is the case, it is imperative that we adopt a policy to produce full employment next year.

4. It seems to me that we have to choose between increasing government expenditure or reducing taxations. We should choose the option which causes the smaller increase in the budget deficit.

5. You will of course ensure that the attainment of full employment does not run us into a balance of payments deficit.
Consider the following statement in the short-run and the long-run: “The quantity theory of money (quantity equation) states than an increase in the money supply will lead to an equiproportionate increase in the price level”. Is this true or false? Explain.
Suppose the CFO of a British corporation with surplus cash flow had 40 million pounds sterling to invest last March 20, 2016 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1-year CD deposits in US banks was 1%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 1.5% at the time. Suppose further that the exchange rate at that time was $1.50 per British pound. Assume that the CFO of the British company invests in US CD deposits and holds them until maturity 1 year later.

A) What must the CFO have expected about change in the value of the British pound over the year to believe in March, 2016 that investment in 1year US CD’s would be more profitable than investment in British CD’s.
(You need not supply a specific numerical answer in this part. Simply identify the direction of change in the pound’s value that the CFO was expecting.)
Write short notes on the following.
a) Ineffectiveness of fiscal policy under flexible exchange rate
b) Nominal rigidity in wage rate and prices
multiplier effect occurs when an initial change in government spending lead to a larger change in the level of ?
An Increase in Government Expenditure (Fiscal Policy) will be off-set by an equal decrease in private consumption, leaving aggregate demand unchanged.' Critically discuss with reference to theory and evidence