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ECON202midterm2_s08_answerkey

ECON202midterm2_s08_answerkey - ECON 202 SPRING 2008 Malhar...

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ECON 202, SPRING 2008 Malhar Nabar April 17, 2008 MID TERM II - ANSWER KEY Instructions. The maximum score is 60. Please answer all THREE questions. Show all your work. Simply writing down an answer (even if it happens to be the correct one) without adequate demonstration of how you arrived at your answer will not get you full credit. You may use a scienti°c calculator. GOOD LUCK! 1. ( Twenty points ) In°ation State True or False and provide your reasons (no credit if no reasons are provided). Ten points for each part. a. If labor productivity grows at a faster rate than wages, the tradeo/ between in±ation and un- employment worsens (i.e. every rate of unemployment will now be associated with a higher rate of in±ation). False. If labor productivity grows at a faster rate than wages, this eases cost pressures. In particular, unit labor costs (labor cost per unit of output produced) fall. Due to this favourable supply-side e/ect, the tradeo/ between in°ation and unemployment improves (i.e. every rate of unemployment will now be associated with a lower rate of in°ation). This appears to have been the case with the US economy in the late 1990s, for example. The cause of the fast pace of labor productivity growth in the late 1990s was the combination of internet, computing and telecom-related innovations that enabled businesses to upgrade technologies and raise the e¢ ciency of their workers. b. The root cause of hyperin±ations is entirely monetary, i.e. the money supply grows at an extremely rapid rate and this causes prices to rise at an equally rapid rate as suggested by the Quantity Theory of Money.
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