Question

a. In a small open economy, the domestic real interest rate can be higher than the world real interest rate. Answer true, false, or uncertain. Please briefly explain your answer.

b.Consider a country that is initially in steady state. According to the Solow–Swan model, if the technology parameter A increases but the saving rate falls, then the per capita capital stock increases and the country moves to a new, higher steady state level of per capita income.
Answer true, false, or uncertain. Please briefly explain your answer.

c.Consider a standard AD-AS model.
An increase in the inflation target is associated with a short-run decrease in unemployment but not a long-run decrease in unemployment.
Answer true, false, or uncertain. Please briefly explain your answer.

D. If the unemployment rate is decreasing, employment is increasing.
Answer true, false, or uncertain. Please briefly explain your answer.

E. An economy has two workers, Ben and Curtis. Every day they work, Ben can produce 24 shoes or 24 pants, and Curtis can produce 24 shoes or 12 pants. Suppose that the market price of pants is 5 shoes per pant. What goods do Ben and Curtis produce?
pants by Curtis; shoes by Ben
pants by Ben; pants by Curtis
pants by Ben; shoes by Curtis
shoes by Ben; shoes by Curtis

Answer 1

A) True

Explanation- In a small open economy disbalance between the income and exports as well as government policies regarding the tax and economic welfare can impact the interest rate and hence it can be higher than the world real interest rate.

B) False

Explanation - When the saving rate falls per capita capital stock decreases not increases hence the statement is false.

C) True

Explanation - Inflation, and unemployment are inversely proportional to each other as inflation increases the unemployment decreases however this effect is only short-term.

D) Uncertain

Explation- The decrease in the unemployment rate not always means employment is increasing if people are opting for higher education then they are not considered as unemployed however as they have opted from higher education they won't be count under unemployment and hence the unemployment rate will decrease but employment will not increase.

E) Pants by Ben; shoes by Curtis

Explanation- In order to keep economy stable Ben should produce Pants as he is making them oh higher number and curtis should produce shoes as it will keep the whole economy in equilibrium.