**Midterm Exam**

Economics 401 Test Number:__________________

Professor Nadenichek

October 12, 2010 Name:________________________

This is a 90-minute exam. There are six questions, each worth 10 points. You are not allowed to use any notes or other materials other than a simple calculator. Show all of your work and thoroughly explain your answers.

1) Two countries are identical in every way except one country has a much higher capital-labor ratio than the other. According to the Solow Model, which country will grow more quickly? Explain and illustrate with a graph. (10 points)

2) An earthquake destroys 10% of Canada’s capital stock. Discuss any changes to the marginal product of capital and the marginal product of labor. Illustrate your answer with a graph relating capital to output and a second graph relating labor to output.

3) A scarcity of oil results in a permanent decrease in total factor productivity. Discuss any changes in the full-employment level and support your answer with a graph of the labor market. Also, discuss how your answer might change if this were only a temporary scarcity of oil.

4) Given: MPKf =1.95-.03K, the nominal interest rate is 6% with expected inflation of 2% and a capital depreciation rate of 11%. Each machine costs one unit of output and there are currently 50 machines (K=50).

a) Calculate the user cost of capital.

b) Calculate the optimal capital stock level,

c) Calculate the gross investment level

d) Calculate the level of net investment

5) Depletion of the world oil supply causes a permanent decrease in total factor productivity. What will happen to the real interest rate? Thoroughly explain your answer and support with a graph.

6) In class, we discussed a model of economic growth attributed to Thomas Malthus. Tell me about the model. (5 points)

7) List and briefly discuss the three approached to measuring economic activity. (5 points)