Exam 9: Introduction to Economic Fluctuations

Suppose Congress passes significant tax cuts on household income but does not reduce spending, so that the government budget deficit is larger. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of the tax cut on the steady-state capital-labor ratio and the steady-state level of output per worker. Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of a permanent government deficit reduction on the steady-state capital-labor ratio and the steady-state level of output per worker. Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

If productivity growth in the United States had remained at its level before the recent productivity slowdown, real income today would be more than percent higher.

In the Solow growth model with population growth and technological change, the break-even level of investment must cover:

Suggest three explanations for the productivity slowdown experienced since 1972.

What is the Solow residual? b. Compare Prescott's interpretation of the fluctuations of the Solow residual over the business cycle with more standard explanations of these fluctuations.

In the two-sector endogenous growth model, income growth persists because: