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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? 

If two theories both fit the same set of stylized facts, then those theories are observationally equivalent.  

Which of the following are key elements of the Solow model? 

To a macroeconomist, a key cost of education is the labor input of students. 

In the Augmented Solow Model, a nation given a one-time massive gift of capital will have a higher capital-output (K/Y) ratio in steady state.

Rates of firm entry and firm exit have increased over the last few decades. 

What is observational equivalence? 

Circumstances when external rewards can undermine the intrinsic satisfaction of performing a behavior. What is this referring to?  Ex: you’ve always loved to clean your room, it’s intrinsically rewarding for you. Your parents notice what a great job you’re doing and decide to reward you for cleaning your room. Now you never really feel like doing it anymore, it seems like a chore.