Short Answer Problem Set #1
Completely answer all questions.
Question 1
a. Graphically illustrate and explain the exchange rate regime over a 15-year period for two
small open Cari
ean economies. One must have an exchange rate system that is fixed or
pegged and the other a floating exchange rate system. (6 marks)
. Use the Mundell-Fleming model with perfect capital mobility, for each economy, analyze
why the effectiveness of monetary, fiscal, and trade policies depend on the exchange rate
egime in place in a country. (9 marks)
Question 2
Describe and illustrate the concept of the ‘Impossible Trinity’. (6 marks)
Using three countries and highlighting their policy structures, examine the three options that are
available under the impossible Trinity. (9 marks)
Question 3
Consider two countries: St. Lucia and Ba
ados, labelled as L and B). In both countries the
production function is Co
--Douglas:
Y = AK1/3L2/3
The population growth rate is 0.1, physical capital depreciates at the rate of 0.1, and A=1. In
Guyana the savings rate is sL=0.2 and in Ba
ados it is sB=0.4.
a. Write the production function in terms of output per capita (Y/N). (2 marks)
. Find the steady-state values of the capital-labor ratio (K/N) in both countries. (6 marks)
c. Find the steady-state values of the output per capita (Y/N) in both countries. (4 marks)
d. In which of the countries is consumption-per-capita higher in the steady‐state? (4 marks)
Question 4:
a. Identify two assumptions of the basic Solow Growth Model. (2 marks)
. Why are these assumptions important in supporting the Solow Model? (4 marks)
c. You are given the following information about an economy.
Y = C + I
Y = F(K, L)
The aggregate production function for this economy exhibits constant returns to scale and
the marginal products of labor and capital are both subject to diminishing returns.
s = saving rate (assume this is constant) per year
δ= depreciation rate (assume this is a constant) per year
y = Y/L
k = K/L
k* = steady state of capital per worker (K/L) and sf(k) < δk.
i. What is sf(k)? (1mark)
ii. What is δk? (1mark)
iii. Interpret the meaning of sf(k) < δk? (2mark)
iv. Graphically illustrate sf(k), δk, and k*. Indicate on your graph where sf(k) < δk.
(4marks)
v. Explain what happens in this economy when sf(k) < δk. (2marks)
Question 5
a. According to Solow Growth model, capital stock is a key element of the economy’s
output. Despite this, capital stock changes over time, where those changes can lead to
economic growth. Given the two forces that influence capital stock, show graphically and
mathematically how a steady state level of capital is determined. (8marks)
Question 6
a. Graphically depict the Golden rule level of capital. Label all points clearly. (4 marks)
. Explain the concept of the Golden rule level of capital. (2 marks)
c. Why might the Golden Rule steady state be prefe
ed to the initial steady state? (3 marks)
d. Look at the hypothetical data in the table below:
Real GDP per capita
Nigeria $1,000
Mexico $8,000
China $15,000
United States $33,000
Fact is, changes in income over time explains economic growth of a country. Using two sources
of growth, account for the large differences in income per capita across these countries?
(8marks)
e. Discuss three policies governments can use to promote economic growth. (6 marks)
Ru
ic for assessing Problem Set
Assessment will be graded out of 100 with conversions of total score /100 to award of marks as
follows:
Criteria Excellent
(80 – 100)
Good
(60 – 79)
Acceptable
(30 – 59)
Unacceptable to
poor quality
(0 – 29)
Understanding
of question
equirements
(60)
Demonstrated
a very good
understanding
of what the
questions are
asking and
equire.
Answers were
logically
presented.
Demonstrated a
good
understanding
of what the
questions are
asking and
equire.
Answers were
attempted
logically but
final answer
inco
ect with
espect to some
parts of the
question.
Demonstrated a
fair understanding
of what the
questions are
asking and require.
Some answers
were attempted
logically but final
answers were
mostly co
ect.
Demonstrated a
poor
understanding of
what the questions
are asking and
equire.
Final answers
largely inco
ect
and incoherent
logic presented or
the question was
not attempted at
all.
Clarity of
argument (20)
Excellent
expression
and argument
in terms of
explaining
answers
and/or giving
easons for
answers.
Good
articulation and
argument given
and/or giving
easons for
answers.
Fair articulation
and argument in
terms of
explaining answers
and/or giving
easons for
answers.
Argument is
unclear.
0 points where no
explanations are
provided.
Graphs and
equations
provided
where
appropriate
(20)
Provided
appropriate
graph which
included title,
co
ect axes,
and co
ect
curves.
Provided
appropriate
graph which
missed one of
the following
elements: title,
co
ect axes,
and co
ect
curves.
Inappropriate
graph provided.
0 points if no
graph is provided
at all.
Score Breakdown:
• The maximum points you will be awarded for this assessment item total 100 points.
• However, note that your final grade will be out of 15%.
• You will see this final grade listed against your name on the course page. For example, if
you are awarded 70/100 points your final grade for this assessment item will be 10.5%
(70/100 * 15)