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ECON7040 Macroeconomic Analysis
Quiz I
Your answer should be typed. For questions with many equations, if you can’t type, you can
handwrite. Diagrams can be drawn by hand or by digital tool and inserted in your answer.
You are not allowed to copy and paste diagrams from textbook or lecture, tutorial
materials. Submit your answer as ONE file (pdf or word but pdf is recommended).
Part A: Multiple Choice Question (15 marks)
1. Assume we are in the basic Solow model. Two economies are in the transition to
their long-run equilibrium. Economy 1’s GDP per-capita is growing at 4% while
Economy 2’s GDP per-capita is growing at 3%. Both economies have: = 0.2, = 1/3,
= 0.1, and a current level of capital per-capita of = 1. Using the lecture notes’
formula for the growth rate of , what is the level of technology of Economy 1 (1)
and Economy 2 (2)?
A. 1 = 1.1 and 2 = 1.
B. 1 = 1.1 and 2 = 0.95.
C. 1 = 0.95 and 2 = 0.8.
D. 1 = 0.8 and 2 = 0.9
2. What are predictions about the evolution of per-capita variables (, , , ) and input
prices (, ) in the basic Solow model when the economy is hit by a positive shock to
technology A (assume Cobb-Douglas production function and the economy is initially
at the steady state)?
A. At the time of the shock, , , , , , and increase and then smoothly converge to
the new higher steady state level.
B. At the time of the shock, , , , and increase, while and decrease. They then
converge to the new steady state with higher ∗, ∗, ∗, ∗, and lower ∗ and ∗.
C. At the time of the shock and increase. In the next period, , , , , , and start
to increase. Then, all variables converge to the new steady state with higher ∗, ∗,
∗, ∗, ∗and ∗.
D. At the time of the shock , , , , and increase. In the next period, , , , , and
increase smoothly until they converge to a new higher equilibrium. In the next
period, starts to decrease and it converges to initial long-run level.
3. Which of the following is false about the growth facts discussed in Lecture 1?
A. Few percentage points difference in average growth can make an important
difference in long-run GDP per-capita levels.
B. The post-war growth rate of GDP per-capita in developed economies is steady and
close to 2%.
C. Even though there are differences in the evolution of GDP per-capita, all countries
appear to converge to the same level of GDP per-capita.
D. Growth miracles and growth disasters exist.