Explain efficiency wage theory and why it can lead to structural unemployment. A6. Efficiency wages are above-market wages paid by firms to increase productivity, reduce turnover, attract better workers, or improve effort. This causes a surplus of labor (unemployment) because wages don’t fall to clear the market. Chapter 7 – Economic Growth I (Solow Model) Q7. In the Solow model, suppose production function ( Y = K^0.3 L^0.7 ), saving rate 0.25, depreciation rate 0.1, no population growth. Find steady-state capital per worker. A7. In per-worker terms: ( y = k^0.3 ). Steady state: ( s y = \delta k ) [ 0.25 k^0.3 = 0.1 k ] [ 0.25 / 0.1 = k / k^0.3 \quad \Rightarrow \quad 2.5 = k^0.7 ] [ k = (2.5)^1/0.7 \approx (2.5)^1.4286 \approx 3.73 ]
Explain the Fisher effect. A2. The Fisher effect states that the nominal interest rate equals the real interest rate plus expected inflation. In the long run, a change in the money growth rate leads to an equal change in inflation and the nominal interest rate, leaving the real interest rate unchanged. Chapter 5 – The Open Economy Q3. In a small open economy with perfect capital mobility, what happens to the trade balance if the government increases spending? A3. Increased government spending reduces national saving. With world interest rate fixed, the trade balance (NX) decreases (or becomes more negative). Real exchange rate appreciates. macroeconomics 4-7 answer key
Show the effect of a protectionist trade policy (import tariff) on the real exchange rate and net exports. A4. Tariff shifts net export schedule outward, but does not change saving or investment. Real exchange rate appreciates, offsetting the initial rise in NX. Result: NX unchanged, real exchange rate higher. Chapter 6 – Unemployment Q5. If the job separation rate is 0.02 per month and the job finding rate is 0.48 per month, what is the natural rate of unemployment? A5. Natural rate ( u = \fracss+f = \frac0.020.02+0.48 = \frac0.020.50 = 0.04 ) or 4%. Explain efficiency wage theory and why it can
What is the golden rule level of capital? A8. The golden rule capital stock maximizes steady-state consumption per worker, where ( MPK = \delta + n ) (with population growth ( n )). At this point, the marginal product of capital equals the depreciation rate plus population growth rate. Summary of Key Formulas (Ch 4–7) | Chapter | Concept | Formula | |---------|---------|---------| | 4 | Quantity equation | ( MV = PY ) | | 4 | Fisher effect | ( i = r + \pi^e ) | | 5 | NX = S – I | ( NX = (Y – C – G) – I ) | | 6 | Natural unemployment | ( u = \fracss+f ) | | 7 | Solow steady state | ( s f(k) = (\delta + n)k ) | If you provide the specific 4–7 questions you need answers for, I can generate an exact answer key tailored to your assignment. This causes a surplus of labor (unemployment) because