Economics 2 - Explain the logic of separation of GDP

Economics 2

Total 170 points

Question I. 50 pts. Explain the logic of separation of GDP into three parts: increase in output due to higher efficiency; increase in output due to expanded fixed capital; and increase in output due to expanding labor inputs. 

I.1. 10 pts. Introduce notation, write down the production function (see class notes), and explain its logic.

YOUR ANSWER

I.2. 10 pts. Write down the production function without a ‘residual’ and explain its logic.

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           I.3. 10 pts. Write down the production function with a ‘residual’ and explain its logic.

YOUR ANSWER

I.4. 20 pts. Suppose that you computed relative (in percentages) contributions of higher efficiency, expanded fixed capital, and expanded labor inputs into growth of GDP. What is a typical range of these contributions for top industrialized national economies and for least developed national economies? Explain your answer.

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Question II. 45 pts. Explain how the Federal Reserve System influences the lending activities of its member banks.

           II.1. 15 pts. Explain the mechanism of fractional reserves and deposit creation.  

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           II.2. 15 pts. Explain how the Federal Reserve System (FED) influences the lending activities of its member banks during recessions.

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          II.3. 15 pts. Explain how the FED influences the lending activities of its member banks during the states of the US economy, which FED diagnoses as ‘overheating.’

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          III. 75 pts Explain the core intermediate transactional phases that influence the levels of macroeconomic demand and supply in the U.S. economy.  

III.1. 30 pts. Explain the circular flows of income and capital at the macroeconomic level. The overall diagram should illustrate your explanations. If needed, in addition to the overall diagram apply diagrams of specific intermediate transactional phases.  

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          III.2. 45 pts. Uncertainty about future inflation may ruin a particular intermediate transactional phase. Describe this phase and explain conditions under which transactions inside this phase are facilitated or become prohibitively costly. 

                      III.2.1. 15 pts. Describe and explain the phase.

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                      III.2.2. 15 pts. Describe and explain how banks set interest rates on typical loans.

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                      III.2.3. 15 pts. Describe and explain conditions under which borrowing is facilitated or become prohibitively costly. 

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