Question

Q1 A permanent reduction in the saving rate will: A. increase the growth of output per...

Q1

A permanent reduction in the saving rate will:

A. increase the growth of output per worker only temporarily.

B. increase the steady state growth of output per worker.

C. decrease the growth of output per worker only temporarily.

D. decrease the steady state growth of output per worker.

E. increase or decrease the steady state growth of output per worker, depending on the level of saving to begin with.

Q2

Suppose the Phillips curve is represented by πt - πt-1 = 20 -2ut. Given this information, we know that the natural rate of unemployment in this economy is:

A. 4%.

B. 6%.

C. 8%.

D. 10%.

E. 12%.

Q3

An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

A. The interest rate will not change.

B. Output will increase.

C. The money supply will not change.

D. The interest rate will increase.

E. Output will decrease.

Homework Answers

Answer #1

Ans 1. Option b

Increase in savings rate increases the investment and thus, capital per worker which in turn increases output per labour but it has a level effect and not growth effect.

Ans 2. Option d

Philips curve equation,

Present inflation rate - Expected inflation rate = -Constant*(Unemployment- natural unemployment)

Changing the given equation into this form,

pie(t-1) - 1 = -2*(ut - 10%)

Thus, Natural Rate of Unemployment is 10%

Ans 3. Option A

This is because liquidity will decrease in the economy but as economy is in liquidity trap, so, interest rate won’t be affected

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