1. In the Solow model, if the first unit of capital increases output by one unit
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Question
1. In the Solow model, if the first unit of capital increases output by one unit, then the second unit of capital will cause total output to?
A.increase, but by less than one unit.
B. double.
C. remain the same as with one unit of capital.
D. increase exponentially.
2. A small country has capital stock equal to 900 units, and human capital and technological ideas are set equal to 1. This year it produced 20 units of new capital goods, with a depreciation rate of 20 percent, and a production function of Y = K1/2. What will its level of capital stock per labor hour be next year?
920 units.
720 units.
900 units.
740 units.
3. Admati and Hellwig maintain that the fact that banks were highly leveraged played a key role in the financial crisis of 2007-2008. What is leverage? What are the dangers that accompany leverage generally, and specifically how did high levels of bank leverage arise and play such a damaging role in the financial crisis?
A.920 units.
B.720 units.
C.900 units.
D.740 units.
Explanation / Answer
Graph is not straight line so in 2nd unit increase output will increase less than the previous unit.
if capital decreases by 20% then capital level will be (900-180) =720 and capital increased by 20 and level will be (720+20) =740.
Since level of labor is 1 perhead capital will also be 740.
3) A firm is highly leveraged if his debt is much higher than equity.
The main reason of high level leverage is
1) Banks compete with each other and give loan to many institution who are not able to pay it back.
2) Due to worse market situation number of defaulters increases and leverage level become also higher
3) Many institutions find loop holes in the system and claim more loan from banks than they can afford.
Now in 2007 -2008 due to high leverage Big Bnaks lik Leeman brothers has closed their business, USA and almost all the countries got affected due to currency crisis in USA. Now a days many countries are depeneded on US investors so all world got affected due this crisis.
After This recession many regulatory laws are implimented like BASEL3, DODFRANK model, CCAR etc.
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