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# Homework 2 – Ceteris paribus, a small, open economy

## Homework 2 – Ceteris paribus, a small, open economy

Homework 2Due Thursday, May 1 (At the beginning of class)1. (10 points) Ceteris paribus, a small, open economy decides to reduce tariffs. What willhappen to exports, net exports and the real exchange rate in the long run? Illustrate graphically.(Be sure to label curves, axes and equilibria. Clearly show the direction of any shifts)2. (10 points) Ceteris paribus, a small, open economy increases government spending. Beforethis change in policy NX=0. What will happen to S, I, r, net capital outflow, NX and the realexchange rate in the long run? Illustrate graphically. (Be sure to label curves, axes andequilibria. Clearly show the direction of any shifts. There should be at least 2 graphs.)3. (10 points) It rains so much in the country of Tropicana that capital equipment rusts out(depreciates) at a much faster rate than it does in the country of Sahara. If the countries areotherwise identical, in which country will the Golden Rule level of capital per worker be higher?Illustrate graphically.4. (20 points) In a Solow growth model, production is defined by the constant returns to scale)production function, (. A constant fraction, 1/5, of income is saved eachperiod and capital depreciates at the constant rate of 12% per year. The labor supply, L, grows ata rate of 3% per year. Solve for the steady state level of capital per worker. What is the growthrate of capital in the steady state? What is the growth rate of output per worker in the steadystate?5. (10 points) Label these as structural unemployment, frictional unemployment, or neither.a. Haruhiko quits his job in order to find a new job. He is currently searching for a job,but hasnât found a job that he likes yet.b. Mario is laid off during a recession. He is having a hard time finding a job because theeconomy is struggling and firms are hesitant to hire new workers.c. Janet is a carpenter and the carpentry union will not allow her into their union.Because of how high the wages and due to the fact that she isnât in the union, she cannotfind someone to hire her.d. Ben recently retired. He does not have a job and he would not like a job. He wouldrather sit on the beach all day.e. Mark quits his job in order to go back to college. Because his EC 313 instructor issuesso much homework, he decides that he will not look for a new job.Extra Credit (4 points, no partial credit) Using the Romer Model, defined as below, derive thegrowth rate of output per worker (donât just calculate a number, but show how you gotthere)? In the 100th period, what is the level of output per worker?Yt At LytAt 1 .0001At LatLyt Lat LLat 0.1LA0 200L 1, 000

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