Question

Q1)

i) Suppose an economy experiences a 6% increase in  K,  N, and  H (human capital). Given this information, we know with certainty that:

Select one:

a. Y will increase by exactly 6%.

b. Y will not change.

c. Y will increase by less than 6%.

d. Y will increase by less than 12% but more than 6%.

e. Y will increase by more than 6%.

ii) Which of the following will occur when the capital stock falls?

Select one:

a. There will be an ambiguous effect on profit per unit of capital.

b. There will be no change in profit per unit of capital.

c. Profit per unit of capital will decrease.

d. Profit per unit of capital initially decreases followed by increases.

e. Profit per unit of capital will increase.

iii) Which of the following must occur for the nominal interest rate to be equal to the real interest rate?

Select one:

a. Expected inflation is equal to the nominal interest rate.

b. The nominal and real interest rates can never be equal.

c. Expected inflation is equal to twice the real interest rate.

d. Expected inflation is equal to the real interest rate.

e. Expected inflation is equal to zero.

Answer 1

Q ( 1 )

( I )

The correct answer is ( e ).

We know that Y= ( K, N )

Increase in human capital increases productivity of labor which in turn help increase Y ( National Income ).

Thus contribution per unit of labor has increased than before. Also, increase in K and N by 6 will reult in increase of Y by 6. But, now since productivity per unit of labor has also increased, it will result in increasing Y by more than 6%.

( II )

The correct answer is ( a ).

When capital stock falls it is not possible to completely guage the effect on the profitability of the firm unless more information is provided as to whether the production process was capital intensive or labor intensive i.e. whether the firm uses more capital in the production process or more labor.

( III )

The correct answer is ( e ).

Nominal interest rate refers to the interest rate with inflation.

And the real interest rate excludes inflation.

In order for both to be equal inflation has to be zero.