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1. Illustrate and explain how a government budget deficit can lead to a higher real interest rate. Discuss how the effect of a budget deficit on the real interest rate could be altered by an increase in private savings.
2. Assume a Cobb-Douglas aggregate production function in which the capital’s and labour’s shares of income are 0.3 and 0.7, respectively.
a) What would be the effect (on output) of increasing the capital stock by 10 percent?
b) What would be the effect (on output) of increasing the pool of labour by 10 percent?
c) If the increase in labour is due entirely to population growth what would be the effect on per capita output?
d) If the increase in labour is due, instead, to an influx of women (with no increase in population) into the workplace what would be the effect on per capita output?
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