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In a two-period world, the government has committed to never using seignorage to repay the debt, so only taxes and government purchases matter for the intertemporal government budget constraint. In this country, the constitution says that taxes = T = 150 each period, and current government purchases are 250 now. The interest rate (r) is 40% (as usual, think of a big interest rate like this as a generational interest rate if you find that helpful). What will government purchases be in the second period?  Answer with a number: If you think the answer is 400, just write 400 as usual. 

In the traditional Keynesian model, what happens to GDP (Y) and consumption (C) when government purchases (G) rise? 

In Friedmania, a new nation that wants to follow the Friedman Rule, the real interest rate is 5% per year, real GDP grows at 1% per year, and the capital share of GDP is 30%. If the country wants to follow the Friedman rule, what annual inflation rate should the central bank aim for on average?  Answer in percent, but leave out the percentage sign. So if you think the inflation rate should be 15% per year, write 15, not 0.15. If you think the answer should be -30% per year, write -30, not -0.3. 

Kling emphasizes that “Specialization and Trade” are the province of only a small minority of participants in the economy. 

In a typical two-period endowment economy, a rise in government purchases (G) will _________ the interest rate (r) and __________ real output (Y).  

The Quantity Theory of Money (QTM) predicts that a 10% increase in growth rate of money (M) will cause a _____ increase in the growth rate of real GDP (Y). 

In Androvia, output is made using this Cobb-Douglas production function: Y = 7K0.4 What is the marginal product of capital in Androvia? 

A country’s production function works like this each year: Y = 4K0.5 It rents capital from the rest of the world at a cost of r per unit of capital per year. Fortunately for us, capital doesn’t depreciate in this country, and since firms are profit maximizing, then MPK=r. The marginal benefit of a unit of capital is the MPK and the marginal cost of a unit of capital is r.  If the rental rate of capital is 0.1 (or 10% per year), how much capital will it rent this year, if firms in this country are profit-maximizers? 

Year to year, within a country, consumption (C) is more volatile than investment (I). 

Consider a Baby Solow economy where TFP = 1, capital starts off at K0=1, the savings rate is 50%, and the annual depreciation rate of capital is 10%. What is the steady-state capital stock?