Question

Briefly explain after you decide if the statement is True, False or Uncertain

1. The Original Philips Curve (before 1970s) uses expected inflation as last year’s inflation

2. Using the Solow growth model, with or without technology, an economy that increases its saving rate will always experience faster growth

3. When labor force is constant, if the number of employed workers in a country decreases, the unemployment rate in the country will increase

4. The zero lower bound refers to the situation that risk premium is 0 %.

Please explain why each answer was chosen.

Answer 1

1) False, there was no expectations in the Philips curve before 1970s. it was only after the stagflation of 1970s that expectations were introduced in Philips curve

2) False, with technology, the long term growth depends only on the growth of technology. Savings can only influence short term growth.

3) True, unemployment rate = (labor force - employed)/ Labor force

Thus, when employed decreases, the numerator increases and the unemployment rate increases

4) False, zero lower bound is a situation when the nominal interest rates have hit the 0 level. It is not the risk premium which is the premium for holding a risky asset which will still be > 0