Question

Assume that employment decreases by 3%. Holding all other factors constant, we know with certainty that in Solow model without technological progress, which of the following will occur?

A none of the other answers is correct

B output will decrease by 3%

C output per capita will decrease by 3%

D output will decrease by less than 3%

2.The existence of the J-curve suggests that a real depreciation will cause:

A a final increase in net exports.

B ambiguous effects on net exports.

C an initial reduction in the demand for domestic goods.

D an initial increase in economic activity.

E an initial increase in net exports.

the capital labor ratio will decrease

Answer 1

1) Assuming that employment decreases by 3%, and holding all other factors constant and without any technological progress, then according to the Solow model the output will decrease by less than 3%. So option D is the correct answer.

2) The existence of a J curve suggests that a real depriciation will cause a final increase in net exports. This is because due to real depriciationc, the domestic goods will become cheaper for the foreign countries and due to this they will be attracted towards the cheaper goods, which will increase the exports of the country. On the other hand, due to real depriciation, the foreign goods become expensive for the domestic people. Due to this, people will reduce the demand of the expensive foreign goods, which will, in turn result in decrease of imports. Hence, the net exports will increase. So option a is the correct answer.

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