ECON 302 Midterm 2 Review
How is the probability that a worker will find a firm expressed in the two-sided labor search model?
em(1,j)
What is maximized at the Golden Rule savings rate?
The steady-state level of per capita consumption is maximized.
What is the economic theory that explains why vacancy rates have increased?
There has been a change in the type of workers firms are searching for so firms are searching longer and there are more vacancies at any level of employment.
According to the endogenous growth model, what will happen in terms of per capita GDP to a rich country and a poor country with identical levels of investment in human capital?
These countries will neither converge nor diverge. According to the model, convergence does not occur even if countries are identical in all respects except that there are differences in the initial level of human capital.
What is the probability of finding a job for a searcher if M is the aggregate number of matches, e is the matching efficiency, m(Q,A) is the matching function, Q is the number searching for jobs and A the number of vacancies?
em(Q,A)/Q
Where does the US economy currently stand on the Beveridge Curve?
high and to the left
What is the likely result of improvements in labor-saving devices used in the home based on the two-sided search model?
higher labor force participation and higher output
What is the traditional Solow Residual missing, according to Romer?
human capital
True or False: Human capital is a public good.
False.
True or False: If b>z in the two-sided matching model, the government will institute a minimum wage.
False.
True or False: The production input factors are the same in Solow and endogenous growth models.
False.
True or False: Total factor productivity does not play a role in the endogenous growth model.
False.
True or False: In the steady state of the Solow growth model, capital stock in the future period is the quantity of aggregate savings in the current period, K'=sY.
False
True or False: In the steady state of the Solow growth model, the per-worker production function is equal to the steady-state savings of capital, zf(k*)=sk*.
False
What is "welfare-improving"? Why may there be a welfare-improving non-zero level of Unemployment Insurance? Why can UI get us to a better equilibrium? (2 reasons)
(1) "Welfare-improving" means putting the overall economy on a higher indifference curve or increasing total output. (2) A non-zero level of UI would reduce the cost of continued search, but itself is costly and reduces output temporarily if people search longer, so it is only a welfare-improving result if the positives are larger than the costs. (3) UI encourages entry into the labor force and increases the number of matches and therefore GDP. (4) UI encourages workers to keep searching for a more productive match, which increases productivity and therefore GDP.
Why is international trade good for the economy? (5 reasons)
(1) Exports create jobs and boost economic growth. (2) The opportunity for domestic companies to produce and exchange in foreign markets can lead to competitive advantage overtime in global trade. (3) International trade leads companies to become more efficient. (4) Allowing imports and foreign competition reduces prices for consumers. (5) Consumers experience a wider variety of goods and services.
What are some economic arguments explaining why openness to international trade and to international finance is so positively correlated with economic growth? (5 arguments)
(1) Increased competition inducing innovation so there is more TFP growth (2) larger markets increases gains from innovation so there is more TFP growth (3) increased specialization leads to learning nay doing so there is more growth (4) international financial flows increase returns to savings and therefore income for lending countries and increase capital accumulation and therefore GDP growth in borrowing countries (5) international transmission of ideas through multinational corporations leading to convergence and rapid growth in countries adopting new technologies
Why do we observe unemployment in equilibrium? (2 reasons)
(1) It takes time for workers and firms to find each other because of asymmetric information about firms, workers, vacancies, job skills. (2) It is worth it for workers and firms to take their time and forego some income while they search for a quality match.
What are the four conditions that must hold in the Solow Growth model for two countries to have the exact same steady-state levels of per-capita GDP?
(1) Levels of technology must be the same. (2) Savings rates must be the same. (3) Population growth must be the same. (4) Both countries must have the same depreciation rates.
Why was the ratification of NAFTA expected to lead to more US economic growth? (4 reasons)
(1) Openness increases access to new information, which leads to increases in z. (2) Openness increases competition, which induces innovation. (3) Openness increases market size, which increases the returns from innovation, and thereby encourages innovation. (4) Openness leads to specialization, which leads to innovation through learning and other scale economies.
True or False: There are savings decisions in both the Solow growth and endogenous growth model.
False, there are no savings decisions in the endogenous growth model.
What happens to a, w, k, and A in the two-sided labor search model after a decrease in the share of surplus going to the firm?
A firm's share of surplus is a proportion (1-a); if (1-a) is decreasing, a must be increasing. A decrease in the share of surplus going to the firm decreases labor market tightness, causing posting vacancies to become less attractive for firms, decreasing A. Since wage is a function of a, if a is increasing, so is w. And lastly, k is increasing because the cost of posting a vacancy is increasing relative to the firm's share of surplus.
How is aggregate consumption calculated in the steady state of the Solow Growth model?
Aggregate consumption is not constant and is calculated as C=(1-s)zf(k*)N.
Why are productivity shocks good at explaining counter-cyclical fluctuations in unemployment, according to the two-sided model?
As z decreases, we move down and to the right along the Beveridge curve. (a decrease in z increases unemployment, thus decreasing vacancy rates)
True or False: In the steady state of the Solow growth model, the marginal product of capital equals the population growth rate plus the depreciation rate, MPk=n+d.
False, this is only true at the golden rule steady state when capital is accumulated at a rate that maximizes consumption per worker.
True or False: Based on the real world data, there is no regional evidence supporting the Solow growth model.
False.
What do the data say has happened to per-capita GDP and life expectancies over the past 200 years?
Both have increased all over the world.
Using the Solow growth model, how would you write aggregate consumption when a constant fraction of income, t, is paid to finance government spending?
C = (1-s-t)Y
True or False: Human capital is a common good.
False.
Why can't the Malthusian model describe post-industrial revolution growth?
Capital is in fixed supply in the Malthusian model.
What returns to scale does the matching function in the labor search model exhibit?
Constant returns to scale
How does aggregate consumption grow in the steady state of the Solow Growth model?
Consumption grows at a constant rate n in the steady state.
Why are you convinced that international trade and international finance are correlated with economic growth? (5 observations)
Countries that are open to international trade tend to (1) grow faster, (2) innovate, (3) improve productivity and (4) provide higher income and (5) more affordable goods/services to consumers; all of which are correlated with economic growth.
Is there a general trend to the data describing the correlation between per-capita GDP and life expectancies over time across countries?
Countries with higher per-capita GDP growth have had bigger gains in life expectancy.
True or False: True or False: Based on the two-sided search model, a decrease in total factor productivity can lead to an increase in the worker's probability of finding a match.
False. A decrease in total factor productivity would lead to a decrease in the worker's ability of finding a match.
True or False: If there is a decrease in the UI benefit, market tightness falls in the two-sided search model.
False. A reduction in total surplus, coming from the decrease in the UI benefit, k/[(1-a)(z-b)] decreases, and this causes labor market tightness to rise from the shift down and right on the labor demand curve.
True or False: If b>z in the two-sided matching model, workers have more bargaining power than firms.
False. Bargaining power is exogenous.
True or False: Based on the real world data, we see convergence worldwide consistent with the predictions from the Solow growth model.
False. In the data, there is evidence for convergency among the richest countries of the world, but convergence does not appear to be occurring among all countries or among the poorest countries.
True or False: If the government decides to use a lump sum tax (T) to fund research and development, increasing z enough such that the current level of consumption remains unchanged, the endogenous growth model indicates that the consumption path will fall, but pivot upwards.
False. In the endogenous growth model, the rate of growth of consumption is determined by the efficiency of human capital accumulation and the allocation of labor time.
True or False: A decrease in the savings rate will lead to an increase in steady-state capital per-capita.
False. It will lead to a decrease in steady-state capital per-capita.
True of False: Based on the Solow growth model, poor countries should grow more slowly than rich countries.
False. The Solow growth model predicts that a poor country will have a larger growth rate in aggregate output than a rich country.
True or False: Very low levels of the stock of capital can be an explanation for the lack of convergence between rich and poor countries.
False. The Solow growth model predicts that there will be convergence among countries if they have initial differences in capital per worker.
True or False: If the government decides to use a lump sum tax (T) to fund research and development, increasing z enough such that the current level of consumption remains unchanged, the endogenous growth model indicates that the economy is not at the golden rule level of capital stock.
False. The golden rule of capital stock is not represented in the endogenous growth model.
True or False: If the government decides to use a lump sum tax (T) to fund research and development, increasing z enough such that the current level of consumption remains unchanged, the endogenous growth model indicates that households will spend less effort on developing human capital now that they are more productive.
False. The only thing that would cause the growth rate of human capital to decrease is if the efficiency of human capital accumulation technology, b, decreases (inefficient education system), or if the fraction of time devoted to working in each period increases due to a change in b. Total factor productivity, z, is irrelevant in this model.
True or False: If there is an increase of the worker's bargaining power within the two-sided search model, the tightness of the market remains the same.
False. The tightness of the market decreases due to the increase in the cost of posting a vacancy relative to the firms smaller share of total surplus, and the leftward movement on the labor demand curve.
True or False: If there is a decrease in the UI benefit, unemployment rate rises in the two-sided search model.
False. The unemployment rate must fall because of the rise in labor market tightness, which acts to increase the probability of finding a job for a consumer.
True or False: If b>z in the two-sided matching model, firms will earn positive profits.
False. They will earn no profits.
True or False: If there is a decrease in the depreciation rate in the Solow model, per capita capital stock decreased with respect to the original steady state.
False. When the depreciation rate decreases, the per worker production function (labor supply curve) has a flatter slope due to the decrease in depreciation. The curve shifts outward, resulting in a new intersection between the per worker production function and the income per worker function. This ultimately leads to an increase in the per capita capital stock.
True or False: If there is a decrease in the UI benefit, vacancy rate falls in a two-sided search model.
False; k/[(1-a)(z-b)] decreases. The smaller the cost of posting a vacancy, k, relative to the firm's share of total surplus (1-a)(z-b), the greater will be the inducement for firms to post vacancies and enter the labor market.
Why are we able to predict that a poor country will catch up to, or converge with, a rich country by using the Solow model?
For a poor country, (n+d)k<szf(k). Given that aggregate output is lower in the poor country, and assuming both countries have the same labor force growth rate, the growth rate in aggregate output will be larger in the poor country than that for the rich country, and this will cause the level of aggregate output in the poor country to catch up to the level in the rich country.
Where does the equation used to make longer-term GDP forecasts using growth accounting relationships come from?
From the aggregate production function.
What does the decrease in US population growth rate over the past 50 years imply for the golden rule level of US savings based on the Solow model?
MPK=n+d at the golden rule level per-capita capital stock. The decrease in N requires MPK to fall in order to reach golden rule level per-capita capital stock. MPK falls as K increases. K increases as savings increase.
What would the social planner do to steady-state per-capita k and steady-state per-capita c to reach the new golden rule level of capital in the Solow model if mpk>n+d?
Increase both steady-state per-capita k and per-capita c towards the golden rule level.
What would the social planner choose to do to per capita capital stock and steady-state per capita consumption. if there is an increase in the workers' bargaining power in the Solow Growth model?
Increase per capita capital stock and increase steady-state per capita consumption. The increase in z shifts the entire income per worker function upwards, to a higher capital and consumption value.
What does international data say about other countries compared to the OECD countries?
International data shows less convergence in per capital GDP in non OECD countries.
In the steady-state of the Solow growth model, how is aggregate capital behaving?
It is growing at the same rate as the population.
What happens to labor market tightness and number of matches if there is an increase in matching efficiency in the two-sided search model?
Labor market tightness must go up; consumer find it easier to find the right job vacancy. Higher matching efficiency increases the probability of a match, this increases the amount of matches.
What does the Malthus model predict would be the effect of technological progress on both per-capita GDP growth and life expectancies?
Malthus predicted technological progress would increase life expectancies, but not increase per capita GDP because the numerator (CDP) would increase at the same pace as the denominator (people).
Why was the ratification of NAFTA expected to lead to greater convergence between Mexican and US standards of living?
Openness leads to equal flow of ideas, which leads to increased productivity and more flows of money for capital developments and therefore equal standards of living.
What happens to output and consumption, relative to the initial path, if there is a decrease in the fraction of time spent accumulating human capital in the endogenous growth model?
Output and consumption both increase in the short run because a decrease in the fraction of time spent accumulating human capital is an increase in the fraction of time devoted to working, u. However, an increase in u, time spent working, decreases the growth rate of consumption because less time is devoted to human capital accumulation, b, and leads to less consumption later on.
How does the per capita capital grow in the steady state of the Solow Growth model?
Per capita capital grows at the slope of the per-worker production function, which is the marginal product of capital, which is the population growth rate plus the depreciation rate.
How does the per capita consumption grow in the steady state of the Solow Growth model?
Per capita consumption does not grow by a specific rate, but rather it is calculates as the difference between steady state income per worker and the steady state savings per worker; both of which are calculated exogenously.
Why is the Congressional Budget Office ten year US GDP growth forecast so low relative to the historical US average?
Population growth is much smaller.
What would happen to steady-state per capita output and the golden rule capital per-capita if there was a decrease in the savings rate in the Solow growth model?
Steady-state per capita output would go down because the decrease s shifts the curve down and decreases k*. The golden rule capital per-capita stays the same because the golden rule quantity of capital per worker is unaffected by savings rate changes.
In the Solow growth model, what happens to the steady-state per-capita output and golden rule level of capital per-capita when there is an increase in the depreciation rate?
Steady-state per-capita output decreases because the curve (n+d)k* steepens and pivots inward. The golden rule level of capital per-capita decreases because the slope of (n+d) increases, shifting to a lower k* on the income per worker function. The slope of the per-worker production function is equal to the function (n+d)k* in a golden rule steady state.
What happens to the consumption path after a positive TFP shock in the endogenous growth model?
The consumption path shifts up.
Using the endogenous growth model, what will happen to the consumption path of a country with low literacy rates after a law is instituted that requires people to go to school and pass a literacy test before being able to work?
The consumption path will shift down and pivot upwards.
If firms are making a positive profit in the two-sided matching model, what happens to the cost, k?
The cost of posting a vacancy, k, relative to the firm's share of the total surplus is decreasing as profit increases.
In the two-sided search matching model, if the benefit from consuming leisure increases, what happens to the curve in the bottom graph and what happens to the curve in the top graph?
The curve in the bottom graph does not shift; the curve in the top graph shifts inward.
What does the Solow growth model suggest will happen moving forward to a local economy in a steady state that experiences a hurricane that destroys much of the (per capita) capital stock?
The economy will grow faster than areas not affected by the hurricane; consumption will be temporarily lower than before the hurricane.
What is the effect of an increase in the amount of time spent working, but a decrease in the amount of time spent learning in the endogenous growth model?
The growth path for consumption pivots downwards and consumption is higher initially.
What is the effect of a decrease in the amount of time spent working, but an increase in the amount of time spent learning in the endogenous growth model?
The growth path for consumption pivots upwards and consumption is lower initially.
What are the key assumptions that Malthus used to predict the effect of technological progress on both per-capita GDP growth and life expectancies? (3 assumptions)
The key assumptions to the results are that there is no capital stock accumulation, so technological progress just meant more people, not more capital, so the numerator and denominator increased at the same pace.
If the government decides that for each vacancy a firm wishes to try and fill the firm needs to pay a fee and register the vacancy with the bureau of labor statistics, what will the result of the policy be according to the two-sided search model?
The labor force will decrease because the net payoff from posting a vacancy decreases, causing firms to post less vacancies and leave the labor market.
What data suggests there is a skills mismatch?
The number of unfilled job vacancies/openings is at its highest level in decades.
If firms are making a positive profit in the two-sided matching model, what happens to efficiency?
The result on the efficiency is irrelevant because no data or models suggest that a positive profit causes a mismatch of skills between firms and consumers.
If firms are making a positive profit in the two-sided matching model, what happens to the wages?
The result on the wage is irrelevant because it depends on the level of the worker's share of total surplus/bargaining power of the worker, labor productivity, and the unemployment benefit; all of which are not identifiable by a positive profit.
If firms are making a positive profit in the two-sided matching model, what happens to tightness, j?
Tightness, j, will increase until profits are zero because the ratio of the cost of posting a vacancy to the firm's surplus (profit) from a successful match determines labor market tightness. If the cost, k, is low relative to the profit, the greater will be the inducement for firms to post vacancies and enter the labor market, which will make j larger.
What happens to total match surplus if there is an increase in worker's bargaining power in the two-sided search model?
Total match surplus stays constant. Total match surplus = (z-b).
True or False: In the steady state of the Solow growth model, the per-worker production function multiplied by the savings rate equals the the population growth rate plus the depreciation rate multiplied by the capital per worker in the steady state, szf(k*)=(n+d)k*.
True, this equation always solves for the steady state capital stock per worker, k*. This equation also predicts that aggregate output will grow at the rate of labor force growth in the long run.
True or False: Based on the two-sided search model, a decrease in the worker's bargaining power can lead to an increase in the worker's probability of finding a match.
True.
True or False: Based on the two-sided search model, a decrease in unemployment insurance can lead to an increase in the worker's probability of finding a match.
True.
True or False: Based on the two-sided search model, an increase in matching efficiency can lead to an increase in the worker's probability of finding a match.
True.
True or False: Climate change can be an explanation for the lack of convergence between rich and poor countries.
True.
True or False: Corruption or poor economic infrastructure can be an explanation for the lack of convergence between rich and poor countries.
True.
True or False: Human capital is non-rival.
True.
True or False: If b>z in the two-sided matching model, employment will be zero.
True.
True or False: If the government decides to use a lump sum tax (T) to fund research and development, increasing z enough such that the current level of consumption remains unchanged, the endogenous growth model indicates that this is a Pareto improvement for the government to institute this tax policy.
True.
True or False: Poorly-functioning capital markets can be an explanation for the lack of convergence between rich and poor countries.
True.
True or False: The endogenous growth model predicts that economic growth depends on the quality of education.
True.
True or False: A decrease in population growth rate, within the Solow model, would increase the standard of living in a given country.
True. A decrease in the population growth rate causes the per worker production function to curve to shift outwards, causing an increase in the steady state quantity of capital per worker.
True or False: If there is an increase of the worker's bargaining power within the two-sided search model, firm profits fall per each match.
True. A higher bargaining power for the consumer results in a smaller share of the total surplus for the firm. The share of the total surplus for the firm equals the firm's profit. Each new match causes profits to fall due to the increase in a, w, and j.
True or False: A decrease in the depreciation rate will lead to an increase in steady-state capital per-capita.
True. Capital will last longer and be more useful to more people.
True or False: A decrease in MPK will lead to an increase in steady-state capital per-capita.
True. Capital won't be used as quickly and we will require a higher quantity of capital to achieve same results.
True or False: If there is an increase of the worker's bargaining power within the two-sided search model, there is a movement along the labor demand curve.
True. Decreasing the firm's share of total surplus increases the relative cost of posting a vacancy which then decreases the labor market tightness by a leftward movement on the labor demand curve.
True or False: Based on the Solow growth model, poor countries should have higher MPK than rich countries.
True. Given that the MPK is the marginal product of capital, the marginal product of increases capital in a poor country is much larger than in rich countries.
True or False: An increase in savings rate, within the Solow model, would increase the standard of living in a given country.
True. If we take real income per worker to be a measure of the standard of living in a country, an increase in the savings rate shifts the curve szf(k*) up, resulting in an increase in the quantity of capital per worker, thus an increase in the standard of living.
True or False: An increase in productivity, within the Solow model, would increase the standard of living in a given country.
True. Increases in total factor productivity cause increases in the quantity of capital per worker, thus an increase in the standard of living.
True or False: If there is a decrease in the depreciation rate in the Solow model, growth rate of per capita GDP is the same at both steady states.
True. Per capita GDP and its growth rate are not affected by depreciation rate.
True or False: If there is an increase of the worker's bargaining power within the two-sided search model, there is an upward shift in the labor supply curve.
True. The expected payoff equation shifts upward with an increase in a.
True or False: A decrease in the population growth rate will lead to an increase in steady-state capital per-capita.
True. There will be less people to share the steady-state capital with.
True or False: If there is a decrease in the depreciation rate in the Solow model, standards of living increased with respect to the original steady state.
True. When the depreciation rate decreases, this results in an increase in the quantity of capital per worker; capital is depreciating slower with the save investment and accumulating faster. Because capital per worker rises, output per worker also rises, from the per-worker production function. A higher output per worker is a good measure of welfare.
True or False: If there is a decrease in the UI benefit, the wage decreases in the two-sided search model.
True. Workers receive a wage calculated as the sum of the worker's share of total output (bargaining power) and the firm's bargaining power times the UI. w=az+(1-a)b; if b goes down, so does w.
What happens to worker's surplus and the probability of a firm finding a match if the government imposes a proportional labor income tax on the wage in the two-sided search model?
Worker's surplus goes down because the employment insurance benefit goes up from the proportional labor income tax. The reduction in total surplus causes labor market tightness to fall, causing the probability of a firm finding a match to be higher.
What is the aggregate resource constraint in the Solow growth model?
Y=C-(1-d)K+K'
What is the production function of the endogenous growth model with no physical capital with the representative firm producing output using only efficiency units of labor?
Y=zuH^d; Y is the current output, z is the marginal product of efficiency units of labor, and uH^d is the demand for efficiency units of labor.
If a country gives another country, in the steady state of the Solow model, a large shipment of capital goods (increase in the per-capita stock k), what should the country do with the gift according to the Solow model?
accept the gift because it would increase consumption
What is the behavior of per capita GDP (y) in the steady state of the Solow model?
constant
If there is an increase in the productivity of a match between a worker and a firm in the two-sided search model, what happens to labor force, unemployment rate, vacancy rate, and output?
k/[(1-a)(z-b)] decreases from the increase in z, so labor market tightness increases. Firms now find it more attractive to post vacancies. Higher z shifts up the labor supply curve, and so the labor force increases; consumers find it more attractive to enter the labor force since wages are higher and the chances of finding a job are greater. Since labor market tightness has risen, the unemployment rate falls and the vacancy rate rises. Since Q and j both increase, there is an increase in aggregate output.
In the steady state, aggregate output, aggregate consumption, and aggregate investment grow at the same rate as what other variable?
labor force growth
What relationship is ALWAYS TRUE in the steady state of the Solow growth model regarding per capita capital?
szf(k*)=(n+d)k*
What does the slope of the consumption path in the endogenous growth model represent?
the growth rate of output
What is the total surplus of the match if there is not unemployment benefit?
z; total surplus is z-b