ANSWER THE FOLLOWING QUESTIONS CORRECTLY

9.     Consider two competitive economies that have the same quantities of labor (L = 400) and capital (K = 400), and the same technology (A = 100). The economies of the countries are described by the following Cobb-Douglas production functions:
North Economy:     Y = A L.3K.7
South Economy:     Y = A L.7K.3

a. Which economy has the larger total production? Explain. (3 points)

b. In which economy is the marginal product of labor larger? Explain. (3 points)

c. In which economy is the real wage larger? Explain. (2 points)



d. In which economy is labor''s share of income larger? Explain. (2 points)

10.     Assume that the demand for real money balance (M/P) is M/P = 0.6Y –100i, where Y is national income and i is the nominal interest rate. The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth.

a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? (5 points)

b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be? (5 points)