Assignment

1) Explain how crowding out works, using the one-period model as an example.

2) If total factor productivity rises in the one-period model, explain what happens to the real wage

in equilibrium, and why.

3) In the one period model, suppose, that there is a decrease in government spending, and that

government spending is also productive. Explain what the effect is on employment, and explain

why we get this effect.

4) Explain, mathematically, why a proportional tax on consumer’s wage produces a competitive

equilibrium that is not Pareto Optimum.

5) In the Solow growth model, what happens in the steady state if total factor productivity

declines?

6) In the Solow growth model suppose that the economy is initially in a steady state. Then, some

capital is destroyed by a major earthquake. What are the effects in the short run and in the steady

state?

7) In the Solow growth model, suppose that the population growth rate declines. Explain what

the steady state effects are, and why.