ECN 503 – Midterm || with 100% Correct Answers.
Big "3" Concepts correct answers 1. Unemployment (goal = low)
2. Inflation (goal = low & stable)
3. Productivity growth aka GDP (goal = to show growth)
Long Run v. Short Run correct answers Long Run = economic growth
Short Run = ups & downs of business cycle (aka fluctuations)
GDP of US Economy (1947-2020) correct answers Trend = upwards, positive
Recessions in unpredictable intervals (11 total recessions)
Problems Calculating GDP correct answers 1. Quality Changes (we have 3 revisions to get it
right)
2. Underground Economy (i.e. illegal activities or legal activities that avoid taxation, big in
Brazil & India)
3. Non-market Production (i.e. cleaning your yard or fixing your roof)
Which "Problems Calculating GDP" lower GDP? correct answers Underground economy & non-
market production
TFP correct answers total factor productivity
Cobb-Douglas Production Function correct answers A basic way of determining labor
-Constant returns to scale (CRS)
i.e. 1st plant has 100 workers and 100 machines. Build a 2nd plant and it will also have 100
workers and 100 machines. Output doubles.
Formula shows that: 1/3 of national income goes to captial, 2/3 of national income goes to labor
Per Capita = Per Person = Per Worker correct answers Represented by lower case letters in
formulas
Production Function (model) correct answers How any amount of capital and labor can be
combined to generate output, not just the particular amount that a toy economy possess.
K correct answers capital
L correct answers Labor
To increase GDP... correct answers Must increase productivity, capital or labor
Marginal Product of Labor (MPL) correct answers When do you ask for a raise? When you feel
that you're doing more than your job description
, The additional output that is produced when one unit of labor is added, holding all other inputs
constant
Proportional to output / labor (or wage is proportional to productivity!) Higher productivity =
higher wages
Marginal Product of Capital (MPK) correct answers The additional output that is produced when
one unit of capital is added, holding all other inputs constant
As we increase capital, GDP decreases (aka Diminishing Marginal Returns)
There is a limit to how much you can increase output by increasing capital (really depends on
how much capital a country has accumulated)
Supply and Demand in the Capital and Labor Markets correct answers If we allow markets to
work, supply and demand for inputs will find an equilibrium (no monopoly, no government
dictation, no intervention)
If there is an excessive amount of workers for long enough, we can expect wages to be lower
On the flip side, when they're aren't enough workers, there are higher incentives (wages)
Implied: Firms employ all the supplied capital and labor in the economy
1/3 of national income goes to lob, 2/3 of national income goes to labor
Equilibrium correct answers All income is paid to capital or labor
Results in zero profit in the economy
Verifies that there is perfect competition
Also verifies that production = spending = income
w*L+r*K*=Y* (income = production)
Tip: don't get confused by what you see in the real world
Analyzing the Production Model correct answers 1. The model can be used to explain
differences in incomes across countries
2. Setting the productivity parameter = I
Empirical fit:
Big "3" Concepts correct answers 1. Unemployment (goal = low)
2. Inflation (goal = low & stable)
3. Productivity growth aka GDP (goal = to show growth)
Long Run v. Short Run correct answers Long Run = economic growth
Short Run = ups & downs of business cycle (aka fluctuations)
GDP of US Economy (1947-2020) correct answers Trend = upwards, positive
Recessions in unpredictable intervals (11 total recessions)
Problems Calculating GDP correct answers 1. Quality Changes (we have 3 revisions to get it
right)
2. Underground Economy (i.e. illegal activities or legal activities that avoid taxation, big in
Brazil & India)
3. Non-market Production (i.e. cleaning your yard or fixing your roof)
Which "Problems Calculating GDP" lower GDP? correct answers Underground economy & non-
market production
TFP correct answers total factor productivity
Cobb-Douglas Production Function correct answers A basic way of determining labor
-Constant returns to scale (CRS)
i.e. 1st plant has 100 workers and 100 machines. Build a 2nd plant and it will also have 100
workers and 100 machines. Output doubles.
Formula shows that: 1/3 of national income goes to captial, 2/3 of national income goes to labor
Per Capita = Per Person = Per Worker correct answers Represented by lower case letters in
formulas
Production Function (model) correct answers How any amount of capital and labor can be
combined to generate output, not just the particular amount that a toy economy possess.
K correct answers capital
L correct answers Labor
To increase GDP... correct answers Must increase productivity, capital or labor
Marginal Product of Labor (MPL) correct answers When do you ask for a raise? When you feel
that you're doing more than your job description
, The additional output that is produced when one unit of labor is added, holding all other inputs
constant
Proportional to output / labor (or wage is proportional to productivity!) Higher productivity =
higher wages
Marginal Product of Capital (MPK) correct answers The additional output that is produced when
one unit of capital is added, holding all other inputs constant
As we increase capital, GDP decreases (aka Diminishing Marginal Returns)
There is a limit to how much you can increase output by increasing capital (really depends on
how much capital a country has accumulated)
Supply and Demand in the Capital and Labor Markets correct answers If we allow markets to
work, supply and demand for inputs will find an equilibrium (no monopoly, no government
dictation, no intervention)
If there is an excessive amount of workers for long enough, we can expect wages to be lower
On the flip side, when they're aren't enough workers, there are higher incentives (wages)
Implied: Firms employ all the supplied capital and labor in the economy
1/3 of national income goes to lob, 2/3 of national income goes to labor
Equilibrium correct answers All income is paid to capital or labor
Results in zero profit in the economy
Verifies that there is perfect competition
Also verifies that production = spending = income
w*L+r*K*=Y* (income = production)
Tip: don't get confused by what you see in the real world
Analyzing the Production Model correct answers 1. The model can be used to explain
differences in incomes across countries
2. Setting the productivity parameter = I
Empirical fit:
