Macro Chapter 13

Suppose the aggregate production function is represented by Y = AN. Which of the following expressions represents the number of additional workers required to increase production by one unit?

1/A

An increase in productivity will cause which of the following according to the price-setting behavior of firms?

A) a reduction in prices set by firms B) an increase in the real wage paid by firms C) a reduction in the markup set by firms D) all of the above

Which of the following would increase the gap in wages between skilled and unskilled workers?

A) less technological progress of the kind we've experienced in the past 15 years B) new types of production technology that require workers to have more skills C) an increase in the costs of going to college D) all of the above

For this question, assume that expectations of P and A are correct. Based on price setting behavior, the real wage will be equal to which of the following?

A/(1 + m)

Explain what effect a reduction in productivity has on wage setting behavior, price setting behavior, the equilibrium real wage, the natural rate of unemployment, and the natural level of output.

Answer: A reduction in A will cause a reduction in the real wage based on WS behavior; therefore, the WS curve shifts down by the change in A. The reduction in A increases the marginal cost of an additional unit of output so firms will raise the price. Hence, the real wage based on PS behavior will fall by A and the PS curve shifts down by A. Given the size of the shifts in the WS and PS curves, u does not change; however, the real wage does fall.

Assume expectations of both prices and productivity are accurate,use the PS/WS relations, graphically illustrate and explain the effects of an increase in the productivity on the natural rate of unemployment.

Answer: An increase in productivity shifts both the wage and the price-setting curves by the same proportion and thus has no effect on the natural rate.

Some commentators will argue that increases in productivity may have no effect or even a negative effect on employment in the short run. Explain what must occur for an increase in productivity to have no effect or even a negative effect on employment in short run.

Answer: An increase in productivity will have no effect on employment if the percentage change in output equals the percentage change in productivity. Employment will fall if the percentage change in output is less than the percentage change in productivity. This can be seen from Y = AN which implies that N = Y/A.

There are some concerns that technological progress can lead to an increase in unemployment. Explain the two related but separate dimensions of technological progress.

Answer: First, TP allows for a greater quantity of goods produced with the same inputs. Second, TP results in the production of new goods and the disappearance of old ones.

Explain how technological change can cause changes in wage inequality.

Answer: If the technological progress favors skilled workers, the demand for skilled workers will rise and the demand for relatively unskilled workers will fall. This would cause the wage gap to increase.

Suppose an economy experiences a reduction in productivity. Explain both the short-run and medium-run effects of this reduction in productivity on output, employment, and the unemployment rate.

Answer: In both the short run and medium run, TP will cause a reduction in output (assuming, of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What happens to employment in the medium? Given that Y will fall by the full change in TP in the medium, we know that N and u will not be affected in the medium run. In the short run, N will fall and u will rise if the percentage change in Y is less than the percentage change in TP.

Suppose an economy experiences an increase in productivity. Explain both the short-run and medium-run effects of this increase in productivity on output, employment, and the unemployment rate.

Answer: In both the short run and medium run, TP will cause an increase in output (assuming, of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What happens to employment in the medium? Given that Y will rise by the full change in TP in the medium, we know that N and u will not be affected in the medium run. In the short run, N will rise and u will fall if the percentage change in Y is greater than the percentage change in TP.

Explain some of the causes of increased wage inequality.

Answer: Possible causes: skill-biased technological progress and international trade.

Assume expectations of prices are correct but expectations of productivity adjust slowly. Use the PS/WS relations, graphically illustrate and explain the effects of a decrease in productivity growth on the natural rate of unemployment.

Answer: The PS relation shifts up by a factor A. The WS relation shifts up by a factor Ae. If Ae>A, the PS curve shifts up by less than the WS relation shifts up, leading to an increase in the natural rate of unemployment for some time.

For this question, assume that expectations of productivity growth adjust slowly. Now, suppose that there is a 3% reduction in productivity. Explain how this 3% reduction in productivity can cause changes in the unemployment rate.

The PS curve will shift up as productivity growth occurs; however, it will not shift up as much. If expectations of productivity are slow to adjust, the WS curve continues to shift up by a larger amount (based on past increases in A). The real wage will rise by the actual change in productivity. The unemployment rate will, however, increase because of the larger shift in the WS curve.

For this question, assume that expectations of productivity growth adjust slowly. Now, suppose that there is a 5% increase in productivity. Explain how this 5% increase in productivity can cause changes in the unemployment rate.

The PS curve will shift up as productivity growth occurs; however, it will now shift up by a greater amount. If expectations of productivity are slow to adjust, the WS curve continues to shift up by a smaller amount (based on past increases in A). The real wage will rise by the actual change in productivity. The unemployment rate will, however, decrease because of the smaller shift in the WS curve.

Assume an economy experiences, for a given period, a 1% increase in output and a 5% increase in productivity. Given this information, we know that which of the following occurred for this economy during this period?

The unemployment rate increased during this period

When the unemployment rate is on the horizontal axis and the real wage is on the vertical axis, an increase in productivity will cause which of the following to occur?

The wage-setting and price-setting curves will both shift upward.

Joseph Schumpeter argued that growth was a process of creative destruction. Explain what is meant by the phrase, "creative destruction."

When TP occurs and new goods are developed, old goods will disappear. In those industries that produced these "old" goods, employment will decrease. It is this process of technological progress causing the destruction of old jobs that is referred to as "creative destruction."

Assume an economy experiences an increase in productivity that occurs as a result of a more widespread implementation of a major technological breakthrough. Given this information, we would expect which of the following to occur?

aggregate demand would shift to the right

For this question, assume productivity has been increasing by 5% per year. Also assume that workers' expectations of productivity growth adjust slowly over time. For this economy, a reduction in productivity growth from 5% to 2% will most likely cause which of the following to occur?

an increase in the natural rate of unemployment

Suppose workers' and firms' expectations of the price level and productivity are accurate. In this case, an increase in productivity will cause which of the following?

an increase in the real wage and no change in the natural rate of unemployment

The evidence suggests that recent technological change

has increased the wage gap between skilled and unskilled workers.

In recent years, real wages of the least educated workers

have decreased at about the same rate as the real wages of college-educated workers.

The empirical evidence suggests that periods of high productivity growth will cause which of the following in the short run?

lower unemployment