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1. Assume that the per-worker production functionis . The saving and depreciation raterates are estimated at 0.2 and 0.04, respectively.
a) Calculate the capital-labor ratio steady
state for this economy.
b) Calculate consumption per worker at the
steady state.
2.Suppose government purchases amount to $2.5 trillion, transfer payments amount to$1 trillion, net interest payments are $0.5 trillion and tax revenue is valued at $3 trillion.
a) Calculate the government deficit.
b) Calculate the primary deficit
3.Assume that the expenditure and tax multipliers can be estimated to be 0.75 and 0.5 respectively.
a) Would you recommend expansionary fiscal
policy based on tax cuts or increased
government expenditures?
b) Suppose now that there is substantial evidence
that supports the hypothesis of a
crowding out effect in this economy. How
would your answer to b) change?
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