Question

Indicate whether each of the following statements is true or false. If it is false, you must explain why it is false (you can use equations as part of an explanation when needed). Not explaining is the same thing as not answering. If it is true, no explanation is needed:

a.   The Romer model is useful because it allows us to explain why poorer countries grow faster than richer countries.
b.   The main difference between the Solow model and the Romer model is that the latter has a bigger steady state than the former.
c.   In the world of ideas, the fact that there is a fixed cost implies that there must be imperfect competition.
d.   If a 20-year-old stay-at-home dad decides to look for a job, the unemployment rate goes up immediately.
e.   If there is a baby boom in the year 2017, it means that the unemployment rate will increase automatically that year.
a. When the growth rate of both, the nominal GDP and the real GDP, are the same, it means
that the inflation rate is also the same as this growth rate.
b. When the only source of wage “rigidity” is the existence of a minimum wage policy, it
means that an increase in labor demand doesn´t have any effect over the wages in the
economy.
c. The short run fluctuation and the cyclical unemployment have a positive correlation.
d. In the world of ideas, there should by at least some level of market power in order to have
increasing returns to scale.
e. The Romer model performs better than the Solow growth model to explain the process
of economic growth of any economy.
f. In the long run, the actions from the central bank (increasing or decreasing the money
supply), don´t have any real effect on the economy.
g. If the investors around the world perceive a higher risk of a new crisis in Europe, the net
exports of the US will increase.
h. If the German bonds yield 5% per year, and the French bonds yield 4.5%, then the
investors will necessarily prefer to buy the German bonds.
i. If the FED decreases the interest rate, then the US net exports will increase.
j. If Saudi Arabia decides to sharply cut their oil supply, the Phillips curve will shift to the
right.

Answer 1

a.   The Romer model is useful because it allows us to explain why poorer countries grow faster than richer countries. - TRUE

b.   The main difference between the Solow model and the Romer model is that the latter has a bigger steady state than the former.- TRUE

c.   In the world of ideas, the fact that there is a fixed cost implies that there must be imperfect competition.- FALSE, as it is not necessary that there should be imperfect competition, the same is also possible in perfect competition as it is a market structure controlled entirely by market forces.

d.   If a 20-year-old stay-at-home dad decides to look for a job, the unemployment rate goes up immediately.- TRUE as unemployment means people who are jobless, actively seeking work, and available to take a job.

e.   If there is a baby boom in the year 2017, it means that the unemployment rate will increase automatically that year.-FALSE, the unemployment rate will not increase automatically that year as there is boom in the population growth but as the babies are still not eligible for employment purpose.