In the U.S. economy in 1991, real GDP was 4861.4 (in billions of 1987 dollars), the capital stock was 13,806.2 (in billions of 1987 dollars), and employment was 118.4 (in millions of workers). In 1992 the numbers were: real GDP 4986.3, capital stock 14,040.8, employment 119.2. Suppose the production function in both years is Y = AK0.25N0.75.(a)Calculate total factor productivity for 1991 and 1992.(b)How much did total factor productivity grow from 1991 to 1992?(c)Calculate the percent increase in real output between 1991 and 1992.(d)Suppose tax incentives had raised the capital stock in 1992, making it 10% higher, to 15,444.9. If employment didn't change, what would have been the percent increase in real output between 1991 and 1992?(e)Instead of the increase in the capital stock in
part d, suppose employment was 10% higher in 1992, making it 131.1. With the capital stock fixed at 14,040.8, what would have been the increase in real output between 1991 and 1992?
What will be an ideal response?
| (a) | 1991: 12.49; 1992: 12.70 |
| (b) | +1.7% |
| (c) | +2.6% |
| (d) | Y = 5107.5, a 5.1% increase |
| (e) | Y = 5356.2, a 10.2% increase |
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