# Ceteris paribus, a small, open economy

1. (10 points) Ceteris paribus, a small, open economy decides to reduce tariffs. What will happen 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. Before this change in policy NX=0. What will happen to S, I, r, net capital outflow, NX 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. 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 are otherwise 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 each period and capital depreciates at the constant rate of 12% per year. The labor supply, L, grows at a rate of 3% per year. Solve for the steady state level of capital per worker. What is the growth rate of capital in the steady state? What is the growth rate of output per worker in the steady state? 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 hasn’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 the economy 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 isn’t in the union, she cannot find someone to hire her. d. Ben recently retired. He does not have a job and he would not like a job. He would rather sit on the beach all day. e. Mark quits his job in order to go back to college. Because his EC 313 instructor issues so 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 the growth rate of output per worker (don’t just calculate a number, but show how you got there)? In the 100th period, what is the level of output per worker? Yt At Lyt At 1 .0001At Lat Lyt Lat L Lat 0.1L A0 200 L 1, 000

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