MIT14_02S14_Exam2_S12_Sol - 14.02 QUIZ 2 Spring 2012 Time...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 14.02 QUIZ 2, Spring 2012 Time Allowed: 90 minutes Name (please print): Recitation time (please circle one): 9am, 10am, 11am, 1pm, 2pm, 3pm 1.Short Questions (7 points each): Determine whether each of the following statements is True, False or Uncertain. Give a brief explanation for each answer. a) 7pts. In an attempt to keep unemployment rate below its natural rate, many Latin American countries used expansionary fiscal and monetary policies heavily. These policy choices were the main reason why these same countries entered difficult periods of high inflation, from which they struggled to get out. True. By keeping u below u n , these countries slowly but firmly changed price expectations, and induced very high levels of inflation. By the time these countries realized they wanted to lower inflation, they had to resort to contractionary policies. Thus, they increased unemployment rate above u n so as to decrease inflation rate over time until it reached more manageable levels. b) 7pts. If the number of employed workers in a country decreases, the unemployment rate in the country will increase Uncertain / False. The unemployment rate is defined as Unemployment / (Employment + Unemployment). When the number of employed workers decreases, the number of unemployment may decrease at the same time if there are a large number of people quitting the labor force. If the decrease in the number of unemployment is sufficiently large, the unemployment rate will decrease. c) 7pts. An increase in the duration of unemployment should be linked to a decrease in flows in and out of unemployment, if one is to keep unemployment constant True. If the duration of unemployment is increasing, it can only be due to people entering unemployment, but not leaving as quickly as they used to (a decreased flow out of unemployment into either employment or out-of-labor-force). Holding every other flow constant, this would immediately increase unemployment. Therefore, if one is to keep unemployment constant, the lower flow out of employment must be accompanied be lower flow into employment. d) 7pts. Workers’ reluctance to take nominal pay cuts offers a feasible explanation of why the Phillips Curve relation breaks down when there is deflation. True. Workers are very likely to accept cuts in real wages that occur when their nominal wages increase more slowly than inflation. However, they are very likely to fight the same cut in real wages if it is done through cutting nominal wages while price level is decreasing more slowly. In these cases, the Phillips Curve relation between the change in inflation and unemployment may disappear when an economy is close to or below zero inflation.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 2. “Animal Spirits” (26 points)
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern