Midterm 2

Consider the Phillips Curve Δπt = 1/4  Yt

Suppose the economy is booming and output is 2% above potential for two years. If inflation started at a (long-run) rate of 2%, what will the inflation rate be after two years?

In 1972 US real GDP was $5,383 bn. If potential output was $5,151bn, what was short-run output in 1972?

If the growth rate of money supply is 4 percent per year, real GDP growth is 2 percent per year and velocity is constant, the quantity theory predicts that the inflation rate is ________ percent

In the US, the fraction of men who work has declined from around 80% in 1960 to 65% in recent years. Suppose this is caused by fewer male workers being able and willing to work. If this is the only change happening in the economy, what does the labor supply/labor demand model predict will happen to wages and the employment-to-population ratio?

Consider the following data for two countries:

In the bathtub model, the steady state level of unemployment is given by

What is the natural rate of unemployment in Country A and is this larger or smaller than in Country B?

The solution for the growth rate of ideas in the Romer model is given by .

Between 1948 and 1973, real GDP per capita grew by 2.5% per year in the US. Between 1973 and 1995, real GDP per capita only grew at 1.8% per year in the US. If the number of researchers has been constant over time, the Romer model can explain this change in GDP per capita growth:

An important step towards ending a hyperinflation is to:

Suppose that, due to a global pandemic, there is a sharp decline in consumer spending. According to the IS curve model, if real interest rates are unchanged, what will happen to the economy?

Section B: Labor Markets Question 1

Consider the bathtub model, which is given by two equations:

Where s and f are exogenous parameters. Ut is the number of unemployed workers, Et is the number of employed workers. Assume , L the total labor force, is exogenous.

Briefly explain equation (2) above and discuss how this model can be used to examine the natural rate of unemployment. Make sure you briefly explain what the natural rate of unemployment means. You do not need to derive anything for this question.

Section B: Labor Markets Question 2

Again consider the bathtub model. As before this is given by two equations:

Where s and f are exogenous parameters. Ut is the number of unemployed workers, Et is the number of employed workers. Assume , L the total labor force, is exogenous.

Historically, young French workers (under age 25) have had relatively high unemployment rates: 21 percent in 2005. In 2006, the French government proposed to allow employers to fire young employees without cause.

In the context of this bathtub model, explain how and why this might affect unemployment rates in France in the long-run.

You should be able to answer this question by discussing the model, its solution and its predictions in words.

The Romer model can be described by 4 equations:

Briefly explain why there is long-run growth in GDP per capita in this model. Why is the distinction between objects and ideas important?
You should be able to answer this question by discussing the model and its predictions in words. You do not need to derive anything for this question.

This question is also about the Romer model. Again, this can be described by 4 equations:

Consider the following scenario. Suppose a catastrophic computer virus destroys a large number of blueprints for various technological inventions. The result is that the stock of existing ideas falls dramatically
(assume that there is no change in the size of the workforce, the research share or the ability of researchers to produce additional new ideas).

Carefully explain what the Romer model predicts will happen to the level and growth rate of GDP per capita over time and why.

For your answer, make use of one of the following ratio scale figures. Only one figure is correct. Before explaining your answer, state which figure you are referring to. You should be able to answer this question by explaining the relevant diagram and the solution to the model in words.