>	Econ 100b Created 4/30/1996 Go to Brad De Long's Home Page

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Production and Distribution

Problem Set #2

Economics 100b; Spring 1996; Brad DeLong

1. What are the economic inputs--the factors of production--used by the economy to produce goods and services? Which of these are the most important determinants of the economy's productive potential?

2. What--in the model of Mankiw's chapter 3--are the principal determinants of the average real wage level?

3. What is the difference between "income" and "disposable income"?

4. Define "diminishing returns" and "marginal product of ___".

5. If the nominal interest rate is 6 percent and inflation is expected to be 2.5 percent, what is the expected real interest rate?

6. In 1993, President Clinton spent a lot of his political capital pushing a relatively unpopular deficit reduction program through Congress. The deficit reduction program reduced federal spending by about $70 billion a year relative to what had been planned before, and increased taxes by about $50 billion per year. In the context of the model of Mankiw's chapter 3, would you expect such a program to raise or lower interest rates? What effect do you think it would have on the national savings rate, and on investment? What would be its long-term effect on American standards of living?

7. Suppose a sudden explosion of invention increases the amount of investment that firms wish to undertake at any given real interest rate. If government spending and consumption remain unchanged, what happens to investment (in the context of the model of Mankiw's chapter 3)? What happens to real interest rates?

8. Define "marginal propensity to consume".