NAME: ____________________________

SECTION NUMBER: ____________________________

ECON 202 MACROECONOMICS

FALL 2020

MIDTERM II

PART A

INSTRUCTIONS

1. Please don't forget to write your name and section number.

2. The document has five pages including this page.
3. In this part, there are four questions including Bonus Question. You can earn 50 points in
total. Points assigned to each question are given in square brackets.
4. In this part, you are expected to submit your handwritten answers. The answers typed in
Microsoft Word or any other formats will NOT be graded in any case.
5. You are expected to upload your scanned handwritten answers to the assignment
"ECON 202-Fall 2020-Midterm 2-Part A," which is posted on Blackboard under the
folder "Exams."
6. The scanned answers submitted after due time 11:15 am will NOT be accepted by the
system.
7. Before submitting your answers, please take time to review your answers and make sure
all words and numbers are clear and readable and you have matched the right question to
the right answer.
8. IMPORTANT: Don't forget to add the below honor code certification statement to
your handwritten answers and sign it.

I hereby certify that I have completed this exam on my own without any help from
anyone else. I understand that the only sources of authorized information in this
open-book exam are (i) the course textbook and (ii) the material that is posted at
Blackboard for this class, available to all other students. I have not used, accessed or
received any information from any other unauthorized source in taking this exam.
The effort in the exam thus belongs completely to me.

Part A Q1 Part A Q2 Part A Q3 Bonus

Question

/10 /15 /20 /5

This study source was downloaded by 100000802129654 from CourseHero.com on 03-16-2022 07:28:45 GMT -05:00
1

https://www.coursehero.com/file/102241294/ECON-202-Fall-2020-Midterm-2-Part-Apdf/
 Question 1 [10 points, 2.5 points each] Suppose that the equation for the marginal productivity
of capital is given by: MPKf= 1,000−10K. The price of a unit of capital is 2,000. The rate of
depreciation is: 2% per year. The real interest rate is: 3% per year. (MPKf: future marginal product
of capital)

a. What is the user cost of capital?

b. What is the desired capital stock?
c. If the existing level of capital Kt is equal to 50 units, what is the level of gross investment?
d. Suppose that energy prices will be relatively higher permanently. Do profit maximizing firms
keep choosing the same amount of capital stock at margin? Show your answer using
necessary graph(s).

This study source was downloaded by 100000802129654 from CourseHero.com on 03-16-2022 07:28:45 GMT -05:00
2

https://www.coursehero.com/file/102241294/ECON-202-Fall-2020-Midterm-2-Part-Apdf/
 Question 2 [15 points in total, 5 points each]: Consider the Solow model with population growth
and technological progress. The population grows at rate of 𝛼 and the technology grows at rate of
𝛽. The depreciation rate of capital is ψ.

The Cobb Douglas aggregate production function is given as Y=200 𝐾d [(1 − 𝑢)𝐿]g where Y, K,
L, d ,g and u refers to aggregate output, aggregate capital stock, aggregate labor, output elasticity
with respect to capital, output elasticity with respect to labor, and natural rate of unemployment,
respectively.

Draw a well-labeled graph that illustrates what happens to steady-state capital per worker, income
per worker and consumption per worker over time in response to each of the following exogenous
changes. (Hint: Plot per worker variables on y-axis against time on x-axis to show both their
immediate and gradual responses to the relevant exogenous change)

a. The establishment of a computerized national job bank by the government

b. A significant decline in the maintenance and repair expenses of machinery and equipment

c. A permanent reduction in transportation costs

This study source was downloaded by 100000802129654 from CourseHero.com on 03-16-2022 07:28:45 GMT -05:00
3

https://www.coursehero.com/file/102241294/ECON-202-Fall-2020-Midterm-2-Part-Apdf/
 Question 3 [20 points, 4 points each] Consider the Solow model with population growth and
technological progress. The population grows at rate of θ and the technology grows at rate of λ.
The depreciation rate of capital is ϕ. The Cobb Douglas aggregate production function is given as
Y=25 𝐾! 𝐿" where Y, K, L, 𝜌 and 𝜂 refers to aggregate output, aggregate capital stock, aggregate
labor, output elasticity with respect to capital and output elasticity with respect to labor,
respectively.
a. Explain what is meant by the golden rule level of capital per worker.
b. Derive a condition for when golden rule level of capital per worker is reached and
write down the resulting condition explicitly using the related parameters given in
the question.
c. Illustrate your answer in a diagram and label the axes precisely.
d. Policymakers often try to improve long-run living standards with policies aimed at
increasing the capital-labor ratio by stimulating saving and investment. However,
there are limits to this strategy. Why? Explain in words or use any diagrams.
e. What restriction should we put on 𝜌 to avoid from diminishing marginal productivity
of physical capital? [2 points] Why does this kind of modification on output
elasticity matter for sustainability of long-run economic growth? [2 points]

This study source was downloaded by 100000802129654 from CourseHero.com on 03-16-2022 07:28:45 GMT -05:00
4

https://www.coursehero.com/file/102241294/ECON-202-Fall-2020-Midterm-2-Part-Apdf/
 Bonus Question [5 points] Regarding each of the below questions, support your argument from
the perspective of growth theory. In your answers, please be precise and to the point in short-
essay form (at most one paragraph)
i. Do you agree with the following statement “Geography is destiny”? [2.5 points]
ii. What policies should developing countries including Turkey design in order to catch
up with living standards of high prosperous countries such as the United States? [2.5
points]

This study source was downloaded by 100000802129654 from CourseHero.com on 03-16-2022 07:28:45 GMT -05:00
5

https://www.coursehero.com/file/102241294/ECON-202-Fall-2020-Midterm-2-Part-Apdf/
Powered by TCPDF (www.tcpdf.org)