Answer to Question 1:

Consider an economy that has an aggregate capital stock of 200 billion which depreciates at the rate of 8 percent per year. Suppose that each unit of capital stock produces 0.15 units of output. What is the level of income produced in this economy?


The correct answer is 14 billion. Since the economy produces 1.5 units of aggregate output for every 10 units of aggregate capital stock, the level of output will be 30 billion. Depreciation will equal 8 percent of the capital stock, or 16 billion. Income equals output minus depreciation, or 14 billion.

You had to remember three things to get the correct answer here.

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