quiz2_soln - Quiz 2 Solution Set 14.02 Macroeconomics April...

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Quiz 2 Solution Set 14.02 Macroeconomics April 20, 2006 I. Answer each as True or False, and explain your choice. 1. The equilibrium real wage in the labor market is independent of the bargaining power of workers. Ans: True. The real wage is determined by the price setting relation and depends only on the markup. Extra point: Uncertain. The price setting relation can be upward sloping due to decreasing returns to labor. 2. The credibility of the Central Bank determines whether money is neutral in the medium run. Ans: False. The neutrality of money always holds in the medium run. The credibility of the Central Bank determines the speed at which the economy adjusts to the new medium-run equilibrium in response to a monetary policy action. 3. In the medium run, positive nominal money growth always leads to in f ation. Ans: False. In f ation in the medium run is equal to nominal money growth minus normal output growth (adjusted money growth). Thus, an economy has de f ation in the medium run if output is growing faster than money. Read Table I carefully, and answer questions 4 and 5 based on the evidence provided by the table. 4. The slowdown in growth of output per worker starting in the mid-1970s is due to a sharp drop in the saving rate. Ans: False. Compare Columns 3 and 6 of Table I. In all four countries, the decrease in technological progress has been larger than or equal to the decrease in the growth rate of output per worker. If lower saving was to blame for the growth slowdown, the numbers would’ve been reversed. 1
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5. Convergence of the growth rate of output per worker across countries during 1973- 2000 has come from higher technological progress, rather than from faster capital accumulation, in the countries that started behind. Ans:
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quiz2_soln - Quiz 2 Solution Set 14.02 Macroeconomics April...

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