Midterm 2 HW Questions

Question 1

In the 2-sided search model, an increase in productivity does not

a. reduce the unemployment rate
b. increase the vacancy rate
c. reduce labor market tightness
d. increase the size of the labor force

Answer 1

c. reduce labor market tightness

Higher productivity increases the firm benefit if it forms a match, so there is more entry of firms into the market, increasing j (labor market tightness)

Question 2

A decrease in matching efficiency

a. is not related to sectoral shocks
b. can explain the shift in the Beveridge Curve
c. is due to a change in productivity of firms
d. can never happen

Answer 2

b. can explain the shift in the Beveridge Curve

A change in “e” changes the relationship between u (=1-em(1,j)) and v (=1-em(1/j,1) and shifts the Beveridge curve

Question 3

In the 2-sided search model, a decrease in matching efficiency

a. has no effect on vacancies
b. reduces the unemployment rate
c. increases labor market tightness
d. decreases the size of the labor force

Answer 3

d. decreases the size of the labor force

As the odds of matching falls, the payoff from search falls and fewer people enter the labor force (they stay home and do non-market work)

Question 4

A market failure associated with Keynesian economics is

a. pollution externalities
b. economic agents cannot agree on prices and wages that are socially efficient
c. banking panics
d. insurance is imperfect

Answer 4

b. economic agents cannot agree on prices and wages that are socially efficient

This is the particular “coordination failure” that Keynesian economists think cause business cycles to have such lasting impacts on labor markets. In the DMP framework this coordination failure is the result of imperfect information about what the correct wage/price should be.

Question 5

In the Keynesian 2-sided search model, if the wage is high then

a. the vacancy rate is low
b. No answer text provided
c. labor market tightness is high
d. the unemployment rate is low

Answer 5

a. the vacancy rate is low

cost/benefit of the match from the firm perspective is high therefore we move along the matching function to a low j. v = 1 - e(1/j,1) so the vacancy rate falls.

Question 6

Consider the effects of an increase in the job-separation rate s in the one-sided search model.

a. The reservation wage is unaffected because the separation rate doesn’t affect MPN
b. The reservation wage falls because there is more unemployment and workers get more desperate
c. The reservation wage rises in order to bring the Value of employment back up to equilibrium

Answer 6

c. The reservation wage rises in order to bring the Value of employment back up to equilibrium

The immediate impact of a rise in “s” is that the value of unemployment rises relative to the value of employment–jobs don’t last as long so they aren’t as valuable. The value of unemployment is unchanged, so although V(e) fall we know w* must adjust so that V(e) = V(u) in equilibrium. If job separation rates are higher that reduces the value of employment and firms must offer a higher wage in order to attract workers in compensation–this is reflected in a higher reservation wage (lowest wage workers will accept in equilibrium)

Question 7

Consider the one-sided search model from Chapter 6 and the effect of a decrease in the probability of getting a job offer. The most likely outcome is

a. upward pressure on wages to compensate workers for the lower probability of finding a job
b. a reduction in the job separation rate to bring the market to equilibrium
c. downward pressure on wages as the Value of unemployment falls

Answer 7

c. downward pressure on wages as the Value of unemployment falls

Question 8

Consider the one-sided search model from Chapter 6. If the government makes it more difficult to collect unemployment benefits or reduces the amount of the benefit, we would expect

a. An decrease in the real wage and a decrease in the unemployment rate
b. an increase in the real wage and an increase in the unemployment rate
c. an increase in the real wage and a decrease in the unemployment rate
d. a decrease in the real wage and an increase in the unemployment rate

Answer 8

a. An decrease in the real wage and a decrease in the unemployment rate

The value of unemployment falls, reducing w*. As wages fall more people accept jobs and the transitions out of unemployment are higher (less unemployment)

Question 9

If N is the working-age population, Q is the labor force, and U is the number of unemployed, then the employment/population ratio is measured as

a. U/Q
b. Q/N
c. (Q-U)/N
d. N/Q

Answer 9

c. (Q-U)/N

Question 10

In the one-sided search model, the welfare of an unemployed worker

a. increases with the size of the unemployment insurance benefit
b. increases with the size of the unemployment benefit if they are unemployed
c. decreases with the size of the unemployment insurance benefit

Answer 10

a. increases with the size of the unemployment insurance benefit

As V(U) increases, w increase, so workers gain whether or not they are employed

Question 11

The labor force participation rate is

a. a leading economic variable
b. pro-cyclical
c. more variable than GDP
d. counter-cyclical

Answer 11

b. pro-cyclical

Although income and substitution effects may cancel out in the long run (no relationship between GDP and labor force participation), in the short run it is clear that as GDP rises, the employment rate rises more than the unemployment rate falls and the labor force participation rate increases. It doesn’t have to be this way in theory but it turns out this way in the data.

Question 12

The labor force participation rate was higher in 2012 than in 1948 because

a. the unemployment rate became less variable over time
b. the labor force was larger in 2012 than in 1948
c. of the Great Moderation
d. the participation rate of women rose during that time period

Answer 12

d. the participation rate of women rose during that time period

Total labor force participation rates increased over this period even though male labor force participation rates have trended downward since the 1950’s (this is the “missing men” issue we talked about in class)

Question 13

From 2009 to 2012 the Beveridge Curve

a. became flat
b. shifted to the right
c. shifted to the left
d. could not be discerned in the data

Answer 13

b. shifted to the right

This is best explained in our labor search model by a fall in match efficiency (e), as firms began searching for higher-skilled workers to complement new capital technologies.

Question 14

In the two sided search model

a. There are N consumers, Q is the labor force, and j is the number of job openings relative to the number looking for jobs
b. There are Q consumers, N is the labor force, and j is the vacancy rate
c. There are Q consumers, N is the labor force, and j is the number of consumers relative to the number of job openings
d. There are N firms, Q is the labor force, and j is the vacancy rate

Answer 14

a. There are N consumers, Q is the labor force, and j is the number of job openings relative to the number looking for jobs

Question 15

The matching function m(job searchers, job openings) captures the idea that

a. firms are profit-maximizing
b. supply and demand determine the market wage
c. it is costly and time-consuming to get firms and workers together to produce output
d. consumers have to be paid to work

Answer 15

c. it is costly and time-consuming to get firms and workers together to produce output

the production function for the matching technology implies that worker-firm matches are endogenous (depend on the economic environment) rather than exogenous (automatic) they way they are assumed to be in “standard” efficient models

Question 16

An important feature of the 2-sided search model is that

a. workers can choose to shirk on the job
b. firms can fire workers
c. firms maximize revenue
d. would-be workers care not just about the market wage but about the chances of finding work

Answer 16

d. would-be workers care not just about the market wage but about the chances of finding work

Question 17

In the 2-sided search model

a. the firm threatens the worker with separation and takes all the surplus from the match
b. when a match occurs, the firm is indifferent between continuing with the match and letting the worker go
c. the firm earns zero profits in a match
d. the firm’s surplus from a match is equal to a constant fraction of total surplus

Answer 17

d. the firm’s surplus from a match is equal to a constant fraction of total surplus

z-w = (1-a)(z-b)

Question 18

In the 2-sided search, a decrease in the unemployment insurance benefit

a. reduces labor market tightness
b. increases the unemployment rate
c. reduces the unemployment rate
d. reduces the vacancy rate

Answer 18

c. reduces the unemployment rate

u = 1-em(1,j)

j is determined in the firm’s labor demand graph where em(1/j,1) = k/{(1-a)(z-b)}

Intuitively if the unemployment insurance benefit falls it reduces worker outside options and the firm does better, which causes more entry of firms and makes it easier for workers to find a job.

Mathematically,

If b goes down, (z-b) goes up and the ratio = em(1//j,1) goes down. That happens when j goes up (firm earns more from the match so there is more entry and j=A/Q rises)

As j rises, em(1,j) rises and the unemployment rate goes down

Question 19

When we compare rich and poor countries in the world

a. There is much greater dispersion in growth rates in per capita income for the rich countries than for the poor countries
b. The investment rate is higher for poor countries than for rich ones
c. There is much greater dispersion in growth rates in per capita income among the poor countries than among the rich ones
d. Population growth rates are higher in rich countries than in poor countries

Answer 19

c. There is much greater dispersion in growth rates in per capita income among the poor countries than among the rich ones

Although rich countries all have pretty similar institutions as well as similar standards of living, the rest of the world has a lot of variety with some countries seeming to converge toward the rich while others are not

Question 20

The idea that an improvement in aggregate technology causes an increase in population but causes no increase in the average standard of living is attributed to

a. Robert Solow
b. Milton Friedman
c. Thomas Malthus
d. Adam Smith

Answer 20

c. Thomas Malthus

Question 21

In Solow’s model of economic growth, suppose that s represents the savings rate, z represents total factor productivity, k represents the level of capital per worker, and f(k) represents the per-worker production function. Also suppose that n represents the population growth rate and d represents the depreciation rate of capital. The equilibrium level of capital per worker, k*, will satisfy the equation

a. szf(k) = (n + d)k
b. szk* = (n + d)f(k).
c. f(k) = sk/(n+d)
d. nf(k) = sk/(s+d)

Answer 21

a. szf(k) = (n + d)k

The left side of the equation shows the amount of new capital contributions and the right side is the per-period reduction in per capita capital stock. They balance in the steady state so that K/N is unchanging.

Question 22

In the steady state of the Solow model

a. Per capita variables grow at the rate of population growth
b. aggregate consumption grows at a constant rate
c. Consumption equals depreciation
d. Aggregate Output is constant

Answer 22

b. aggregate consumption grows at a constant rate

Consumption grows at the population growth rate so that per-capita Consumption is unchanged

Question 23

In the Golden Rule steady state, the marginal product of capital is equal to the

a. population growth rate plus the depreciation rate
b. savings rate divided by the marginal product of labor
c. depreciation rate plus the savings rate
d. savings rate plus the population growth rate

Answer 23

a. population growth rate plus the depreciation rate

The Golden Rule steady state is the one chosen by the social planner. The social planner choose savings so that we end up at a level of capital where mpk = n+d

Question 24

In the steady state of Solow’s exogenous growth model, an increase in the growth rate of the labor force

a. increases output per worker and increases capital per worker
b. increases output per worker and decreases capital per worker
c. decreases output per worker and increases capital per worker
d. decreases output per worker and decreases capital per worker

Answer 24

d. decreases output per worker and decreases capital per worker

Question 25

In the steady state of Solow’s exogenous growth model, an increase in the savings rate

a. increases output per worker and decreases capital per worker
b. decreases output per worker and increases capital per worker
c. increases output per worker and increases capital per worker
d. decreases output per worker an decreases capital per worker

Answer 25

c. increases output per worker and increases capital per worker

Question 26

According to the Solow growth model, an increase in TFP will most likely lead to a(n) __________ in the golden rule level of the per capita capital stock and a movement to the ________ along the new savings curve

a. decrease; left
b. increase; left
c. decrease; right
d. increase; right

Answer 26

d. increase; right

As TFP increases, mpk increases. mpk is now >n+d at the original golden rule level of k. mpk must fall back down to equal n+d (which is unchanged), which happens as k increases (diminishing returns)

Question 27

Assume there is a slowdown in the population growth rate n and that policymakers want to accelerate the path to the new golden rule level of the per capita capital stock. The best policy would most likely be

a. to tax current savings
b. to tax current consumption
c. to tax labor income
d. to use lump-sum taxes

Answer 27

b. to tax current consumption

mpk = n+d at the golden rule. n has fallen so to get mpk to fall policymakers will choose a policy that will increase the per capita capital stock k and mpk to fall (diminishing returns)

Question 28

All of the following are found in the data to contribute to rising average standards of living except

a. patent protection enforcement
b. literacy rates
c. protection of domestic firms from foreign competition
d. correction of market failures in capital markets

Answer 28

c. protection of domestic firms from foreign competition

Question 29

Using the Solow model, could differences in population growth, all other things being equal, explain persistent differences in standards of living across countries?

a. Yes, the high-population-growth country’s standards of living will grow more slowly
b. Yes, the high-population growth country’s standards of living will grow faster
c. Yes, the high-population growth country will have lower standards of living.
d. Yes, the high-population growth country will have higher standards of living

Answer 29

c. Yes, the high-population growth country will have lower standards of living.

Question 30

In the endogenous growth model, workers divide their time between market work and

a. trying to invent new production processes
b. accumulating physical capital
c. accumulating human capital
d. work at home

Answer 30

c. accumulating human capital

Question 31

What characteristics do both human and physical capital share?

a. they can easily be transferred to new ownership
b. the use of both exhibits rivalry
c. current costs are incurred for future benefits
d. both are controlled by the government

Answer 31

c. current costs are incurred for future benefits

Question 32

Paul Romer argues that a key feature of knowledge is

a. divisibility
b. durability
c. private ownership
d. non-rivalry

Answer 32

d. non-rivalry

Question 33

In the endogenous growth model with human capital, spending more time on education

a. increases the growth rate and decreases output in the short term
b. increases the growth rate and increases output in the short term
c. decreases the growth rate and decreases output in the short term
d. decreases the growth rate and increases output in the short term

Answer 33

a. increases the growth rate and decreases output in the short term

Question 34

Consider the graph from the chapter 8 endogenous growth model that shows (log) Consumption as a function of time.

And increase in the efficiency of the human capital-augmented labor input (z) would

a. permanently shift the Consumption path and increase its slope
b. temporarily shift the Consumption path but not change its slope
c. temporarily shift the Consumption path and temporarily increase its slope
d. permanently shift the Consumption path but not change its slope

Answer 34

d. permanently shift the Consumption path but not change its slope

The slope of the Consumption path is determined by b(1-u); the level of the Consumption path is determined by previous investments in H and by the efficiency with which human capital-augmented labor produces output.

Question 35

Consider the growth models of Chapters 7 and 8 when answering the following:

Assume the US Federal Reserve enacts policies that put upward pressure on world-wide interest rates such that r increases for Emerging Markets. The present value of human capital accumulation in emerging markets would _____ and their Consumption growth path would likely ___________.

a. fall; get steeper
b. rise; get steeper
c. fall; get flatter
d. rise; get flatter

Answer 35

c. fall; get flatter

The present value of C’ is C’/(1+r) which falls as r increases, therefore the emerging market is less likely to allocate resources to the future.

This might seem a little counter-intuitive, as you might think that human capital is an investment and as r has gone up they should invest more, but remember that human capital accumulation returns are determined by H’=b(1-u)H and not by the return on putting money in a bank.

The decision to invest in human capital involves a short-run cost (less C) and a long-run pay-off (more C’).

Question 36

Use the endogenous human capital accumulation model from chapter 8 to consider the following real-world situation:

Imagine that internet access improves for people living in remote and under-developed regions of the world; Less-Developed Economy Consumption would likely ___________ in the current period and be on __________ growth path as a result.

a. fall; steeper
b. be unchanged; steeper
c. fall; the same
d. be unchanged; the same

Answer 36

b. be unchanged; steeper

This is an increase in human capital accumulation efficiency. Human capital efficiency affects future, not current output. By model assumption things that affect current efficiency are called “z” and things that affect knowledge accumulation are called “b”

You might think that z and b might be correlated in the real world–that things that affect b might also affect z. That is likely true and that is an easy thing to add to the model–I’ve just cooked the multiple choice answers so there isn’t more than one right answer!

Question 37

According to the assumptions of the chapter 8 endogenous growth model, would an educated worker prefer to live in a country with other highly-educated people or in a country where most other people are not highly educated?

a. prefer to live in the country with high education levels
b. prefer to live in the country with low education levels

Answer 37

a. prefer to live in the country with high education levels

Consumption depends on aggregate human capital, and so the educated person would prefer to live in the more efficient high-output country. The model implication is that everyone would always prefer to live in the country that has accumulated high levels of human capital.

Question 38

Assume that an greater number of young people choose to go to school and training programs rather than enter the labor force, so that labor force participation rates decline. In order to maintain a balanced budget government will likely have to __________ current tax rates and _______________ future tax rates.

a. decrease; decrease
b. increase; decrease
c. decrease; increase
d. increase; increase

Answer 38

b. increase; decrease

G = tY. G is unchanged, so what must happen to t in order to offset changes in GDP implied by the question?