Long-run+Midterm

=Answers= A copy of the midterm has been posted on SmartWork. Also, see the updated Syllabus for [|regrade policy].

=Format=
 * Multiple choice except for some short answer questions (choose 2 out of 3, and answer each with 2-3 sentences each)
 * Content (Chapters 1-8)
 * Roughly 2/3 of the exam will test basic comprehension of the material - the Summary, Key Concepts, and Review Questions are helpful guides for these questions
 * Around 1/3 of the exam will require more involved analysis and application of the material, like the Exercises at the end of chapters
 * 75 minutes
 * Only non-graphing calculators allowed - and no phone calculators either
 * Formulas: No need to memorize all the formulas related to the various models - they will be provided on the exam as needed. Focus on understanding what they mean and how to use them instead.  However, you do need to know more basic formulas like those on page 60 listed under "Growth Rules" and the Fischer equation.

=Notes from Lecture=

Thurs, Feb 24

 * Finishing up Inflation slides (Section 8.5)
 * Review of Chs 1-8
 * [|Circular Flow Diagram]
 * Source of the growth rate vs. democracy graph: [|Democracy, Dictatorship, and the Variance of Growth]
 * See the page on the Midterm

=Review Notes/Suggestions/Discussion=

Principle of Transition Dynamics
A student asks: > The top of pg 119 in the textbook says, "...the farther below its steady state an economy is (in percentage terms), the faster the economy will grow; similarly, the farther above its steady state, the slower it will grow." I thought that if the economy is above its steady state level it will contract and not continue to grow slowly as this quote suggests. Any help would be appreciated. That quote is referring to the "principle of transition dynamics" which is broader and not specific to the Solow model. It's true that in the Solow model, an economy above the steady state would contract, so the statement does not apply directly to the Solow model. However, the statement of the principle of transition dynamics makes more sense in the context of the combined Solow-Romer model, our more complete model of economic growth - see the top of page 167. 1298866427

Returns to Scale
In answer to [|the question here]. The key is to compare two expressions: F(2K,2L) and 2F(K,L). So for your first example: math F(K,L) = \bar{A} + K^{\frac{1}{3}}L^{\frac{1}{3}} math The result of doubling the outputs simplifies to: math F(2K,2L) = \bar{A}+(2K)^{\frac{1}{3}}(2L)^{\frac{2}{3}} = \bar{A}+2^{\frac{1}{3}}2^{\frac{2}{3}}K^{\frac{1}{3}}L^{\frac{2}{3}} = \bar{A}+2K^{\frac{1}{3}}L^{\frac{2}{3}} math while math 2F(K,L) = 2(\bar{A}+2K^{\frac{1}{3}}L^{\frac{1}{3}})=2\bar{A}+2K^{\frac{1}{3}}L^{\frac{1}{3}} math So F(2K,2L), that is, the output from doubling all the inputs, is less because the A term doesn't get doubled if A is not an input. So this function exhibits decreasing returns to scale - doubling the inputs yields less than double the output.

For your second example: math F(K,L) = K+L math Compare the result of doubling the inputs: math F(2K,2L) = (2K)+(2L) = 2K + 2L math while doubling the original output gives: math 2F(K,L) = 2(K+L) = 2K + 2L math They're the same - that means constant returns to scale.