I.

Multiple choice questions(18%=3%*6)

1. In early 2010, Molly paid $200,000 for a house built in 2000. She spent $30,000
on new materials to remodel the house. Although Molly lived in the house after
she remodeled it, its rental value rose. Which of the following contributed to
real GDP in 2010?
A) The price of the house, the cost of remodeling materials, and the increase in
rental value.
B) The price of the house and the cost of remodeling materials, but not the
increase in rental value.
C) The cost of the remodeling materials and the increase in rent, but not the
price of the house.
D) Only the costs of the remodeling materials, not the price of the house or
increase in rental value.

2. A Bozeman, Montana, household receives a Social Security check for $800,

which it uses to purchase a $599 television made in Korea by a Korean firm, as
well as pay a local mechanic $191 to fix the family car. The household spends
the remaining $10 on ice cream from Town and Country. As a result, U.S. GDP
________.
A) does not change
B) increases by $201
C) increases by $800
D) increases by $1,001

3. The value of production generated by a country's factors of production in

foreign countries during a particular year was $51,000, and the value of
production generated by foreign factors of production in the country during that
year was worth $80,000. Which of the following is likely to be true in this case?
A) The GDP of the country is higher than its GNP.
B) The GDP of the country is lower than its GNP.
C) The GDP of the country equals its GNP.
D) The GDP of the country equals its trade balance.

4. An international agency uses the prices of iPads in different countries to

compute the exchange rate between the currencies of these countries. Which of
the following measures is based on a similar idea?
A) The Big Mac Index
 B) The GDP deflator
C) The midcap index
D) The Human Development Index

5. Consider a closed economy without a government. According to the Solow

Model, if the saving rate in the economy is 20 percent and the aggregate saving
is $10,000, the aggregate consumption in the economy is ________.
A) $8,000
B) $10,000
C) $40,000
D) $50,000

6. Consider two countries, Country A and Country B. Both countries have identical
aggregate production functions, populations, and efficiency units of labor, but
they have different technologies. The technology used in Country B is more
advanced than that used in Country A. If the size of the population is the same
in both countries, at the steady-state equilibrium, ________.
A) the physical capital stock will be the same in both countries
B) the GDP per capita will be the same in both countries
C) the GDP per capita of Country A will be higher than that of Country B
D) the GDP per capita of Country B will be higher than that of Country A

II. Short answer questions (80%)

1. Determine how each of the followings might change Taiwan’s GDP. Explain your
answers briefly (please identify which approach you have used to calculate the
GDP). (4 points each)
(1) A billionaire marries his gardener and stops paying for the gardening work.
(2) Two mothers in different households make a deal to take care of each
other’s kids with payment.
(3) A Japanese tourist spends on a dinner at the Taipei 101.
(4) An old car is transferred from a father to his daughter.
(5) The government spends more on health services as the air pollution
becomes a more serious issue.

Ans:
(1) Using income approach, GDP decreases as labor income decreases. (Using
expenditure approach, GDP decreases as consumption of services decreases.)
 (2) Using income approach, GDP increases as labor income increases. (Using
expenditure approach, GDP increases as consumption of services increases.)
(3) Using expenditure approach, GDP increases as export of services increases.
(4) No effect on GDP. The value of the car would have been counted in the GDP
of the year it was produced.
(5) Using expenditure approach, as government spending increases, GDP
increases.

2. Given the following Cobb-Douglas production function: 𝑌 = 𝐴𝐾 !.# 𝐻!.$ , where

Y is output, A is technology, K is capital stock and H is efficiency units of labor.
(1) Please compute the labor share based on the production function. (3 points)
(2) Derive the growth accounting equation, be specific about the value of 𝛼
(you can use log approximation): (6 points)

(3) Suppose that the growth rate for physical capital increases by 2 times, while
the total factor productivity grows 5 times. Assume all else being equal.
According to the equation above, please predict how many times will total
output increase? (3 points)

Ans:
(1) Labor share = MPH*H/Y=0.3
(2)

(3) 5+0.7*2 = 6.4

! ! &
% &
3. Let 𝑌 = 10 × +$ 𝐾 " + $ 𝐻" - be an aggregate production function, where H

and K denote human capital and physical capital, respectively. Answer the
following questions. (5 points each)
(1) Does the production function exhibits more is better in human capital?
 (2) Does the production function exhibits a constant return to scale feature?
(3) Does the production function exhibit diminishing productivity of human
capital?
(4) What is the meaning of diminishing productivity of human capital?
(5) Why do we need to impose such a restriction?

Ans:
(1) Yes, MPH > 0

(2) Yes, 𝑎𝑌 = 𝑌(𝑎𝐾, 𝑎𝐻)

'" (
(3) Clearly, ') "
< 0

(4) As H increases, the marginal product of H decreases, meaning the

contribution of every one extra unit of labor is becoming less and less.
(5) This law implies that we cannot increase the output limitlessly by simply
putting in more human capital.

4. Consider United Kingdom without technological progress and population

growth. A final good in the economy is produced according to production
function, where A is the technology level, K is the predetermined capital stock
and L is the units of labor. The capital stock evolves according to accumulation
where accumulation function. The resource constraint is Y=C+I where C is the
consumption. Suppose the economic agent saves s fraction of their production
each period. Please apply the Solow Growth Model to answer to following
questions briefly. (5 points each)
(1) Define the capital stock per worker, k=K/L and derive a first-order difference
equation in k.
𝑘*+% = 𝑠𝐴𝑘*, + (1 − 𝛿)𝑘*
(2) Solve for steady state level of capital per worker k, output per worker y, and
consumption per worker c.
(3) From part (2), let other things being equal, if UK has reached a steady-state
with a fixed saving rate s, compute the ratio of physical capital stock to GDP (i.e.,
K/Y ).
(4) Based on the Solow Growth Model, UK can increase its equilibrium output
by increasing its savings rate, improving the technology or utilizing more human
capital. If UK wants to pursue a sustained growth, which one would you suggest
and how does it differ from the other two options?
(5) During World War II, much of the physical capital stock had been destructed.
Assume UK was in steady-state equilibrium K* before the war and nothing else
changed, use a graph to show how UK reaches its steady-state physical capital
level after World War II.

Ans:
(1)
(2)

- /
(3) At steady state, we have 𝑠 ∗ 𝑌 = 𝛿 ∗ 𝐾 ⟹ . = ( . Thus, if the saving rate is

fixed, then the ratio of physical capital stock to GDP keeps unchanged.
(4) Improving the technology. The saving rate and the human capital (e.g.
education) have their own upper bounds, thus, both of them can not be a
source of sustained growth in real GDP. While an increase in technology raises
productivity, which allows physical and human capital to produce more output.
As a result, technology progress will lead to a sustained growth in real GDP.
(5) The graph below shows the dynamics of the Solow growth model. Assume
𝐾! is the physical capital level after World War II.