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(ECON112)[2010](f)final~2390^_10022.pdf
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The Hong Kong University of Science and Technology
ECON 112 (L1, L2)
Macroeconomics
Final (Fall 2010) *
*Solution and marking scheme**

Instructor: Prof. Li, Yao Amber TA: Fok Pik Lin, Astor December 14, 2010
Part II
INSTRUCTION:
1.
PLEASE PUT YOUR NAME, STUDENT NUMBER AND SECTION NUMBER IN THE SPACE BELOW.

2.

3.
YOU NEED TO WRITE DOWN NECESSARY STEPS TO DERIVE RESULTS.

4.
THERE ARE 12 PAGES IN PART II.

STUDENT NAME
STUDENT NUMBER

SECTION NUMBER

General reminder: when you draw diagrams, remember to label the axes.

Question 1: Long Run Growth Model (17 marks)
Consider an artificial economy, the Republic of Solowakia, which has the following production function: Yt = At Kt Nt(1-) where <1. Assume for now that At is constant over time (there is no technological progress in this economy, so At=A), n is the growth rate of N and n>0, is the rate of depreciation in this economy, and s is the saving rate.
a). Rewrite the production function as per worker version, using lowercase letter as per worker term.

[as long as you get the last equation/formula correct, you get full credit.]
b) Write down one single equation/expression which characterizes the feature of Golden Rule steady state of this economy. (2 marks)
MPK = +n
c) Write down one single equation to characterize the steady state condition for this economy. For a given saving rate s, a depreciation rate, , and a positive population growth rate n, give expressions for the steady state values of capital per worker (k*), output per worker (y*), consumption per worker (c*), and the steady state value of break-even investment, in terms of those given parameters: s, , n, and A. Draw a diagram that shows all these steady state values you calculated (Hint: You just need to indicate in the diagram which part or which position denotes c*, or y*, or k*, or the break-even investment). (5 marks)

at the steady state, you should write down one equation to characterize it: (1 mark)
s f(k*) = (+ n) k* (1)
or kt+1 -kt = s y -(+ n) k =0 (you must denote it is equal to 0) or any other variant form of the previous two equations, for example, Kt+1/N -Kt/N = s y -(+ n) k =0

c) Consider an open economy with flexible exchange rates. Briefly explain your answers with
necessary words/equations/diagrams (no calculations required). What are the effects of a
monetary contraction abroad on domestic income and domestic net export (NX)? What are the
effects of a fiscal contraction abroad on domestic income and domestic NX? (6 marks)

(You don't have to draw diagrams as long as you show the following effects.)