Consider the simple (one-period) production model. The production function is Cobb-Douglas, exhibits constant returns to scale, and the exponent on capital equals 0.50. Suppose also that all households in the economy are composed of two adults so that household income is the sum of the wages received by both adults in the family. Suppose also that all households have young children.

What is the change in overall GDP between the two years?

A 5% increase.

A 5% reduction.

An 8% reduction.

An 8% increase.

Draw diagram for the capital market. Depict the initial equilibrium as point A and the final equilibrium as point B. Make sure you label the curves and axes carefully. Which of the statements below is correct?

The demand for capital will shift to the left and the supply will stay the same.

Both the demand and the supply will shift to the right.

Both the supply and the demand will shift to the left.

The demand for capital will shift to the right and the supply will

Draw the diagram corresponding to the questions in this section. Make sure you label equilibrium points A (year 2019) and B (year 2020). Include also a short written description