Question

8. A country introduces more generous benefits paid to people who are unemployed.
Which of the following statements about the labour market is not correct?
(a) The equilibrium real wage will fall.
(b) Unemployed people will spend longer on average looking for jobs.
(c) The equilibrium unemployment rate will increase.
(d) The size of the labour force will increase.
9. Assume the central bank sets interest rates with the goal of achieving an inflation
target. Which of the following statements is a correct reason why the aggregate
demand curve is downward sloping?
(a) Higher inflation leads the central bank to increase the nominal interest rate by
more than the inflation rate increases, thus raising the real interest rate, which
leads to lower spending.
(b) Higher inflation reduces the real value of aggregate income, which leads to
lower spending.
(c) Higher inflation reduces the real value of the money supply, which leads to
lower spending.
(d) Higher inflation leads the central bank to increase the nominal interest rate by
less than the inflation rate increases, thus raising the real interest rate, which
leads to lower spending.
10. A country permanently increases its saving rate. According to the Solow growth
model, which of the following statements is correct?
(a) Both the level and growth rate of output per person are permanently higher.
(b) Both the level and growth rate of output per person are permanently lower.
(c) The level of output per person is permanently lower, but there is no
permanent effect on the economy’s growth rate.
(d) The level of output per person is permanently higher, but there is no
permanent effect on the economy’s growth rate.

Answer 1

8. A country introduces more generous benefits paid to people who are unemployed.
Which of the following statements about the labour market is not correct?
(a) The equilibrium real wage will fall.
(b) Unemployed people will spend longer on average looking for jobs.
(c) The equilibrium unemployment rate will increase.
(d) The size of the labour force will increase.

Answer:(d) The size of the labour force will increase.

Explanation: We know that the labour force is the number of people who are in a certain working age group e.g laborforce in India is the number of persons in the age group 15-59. When the country introduces more generous benefits paid to people who are unemployed, it will not increase the labour force.

9. Assume the central bank sets interest rates with the goal of achieving an inflation
target. Which of the following statements is a correct reason why the aggregate
demand curve is downward sloping?
(a) Higher inflation leads the central bank to increase the nominal interest rate by
more than the inflation rate increases, thus raising the real interest rate, which
leads to lower spending.
(b) Higher inflation reduces the real value of aggregate income, which leads to
lower spending.
(c) Higher inflation reduces the real value of the money supply, which leads to
lower spending.
(d) Higher inflation leads the central bank to increase the nominal interest rate by
less than the inflation rate increases, thus raising the real interest rate, which
leads to lower spending.

Answer: (b) Higher inflation reduces the real value of aggregate income, which leads to
lower spending.

Explanation:  We know that inflation is the increase in prices and fall in the purchasing value of money, as a result, it reduces the real value of the aggregate income which leads to lower spending.  

10. A country permanently increases its saving rate. According to the Solow growth
model, which of the following statements is correct?
(a) Both the level and growth rate of output per person is permanently higher.
(b) Both the level and growth rate of output per person is permanently lower.
(c) The level of output per person is permanently lower, but there is no
permanent effect on the economy’s growth rate.
(d) The level of output per person is permanently higher, but there is no
permanent effect on the economy’s growth rate.

Answer:d) The level of output per person is permanently higher, but there is no
permanent effect on the economy’s growth rate.

Explanation: As per the solow model the saving rate does not affect the long run growth rate. It only helps to increase output per person.