Question

1. Are the following statements True, False or Uncertain? Justify you answer for each of the statements. You need to explain in detail

a) An increase in saving rate increase long run growth in the Solow model.

b) Expectation Augment Phillips Curve can explain both high inflation and unemployment together

c) In an open Economy, Expansionary fiscal policy abroad has no impact on the trade balance of home country

d) Policy by rule may be preferred than policy by discretion

Answer 1

(a) In the Solow growth model as the saving rate increases as a result investment increases its lead to an increase in capital and higher growth in the long run

so statement a is true

(b)Expectation  Agument Phillips curve work on the adaptive expectation it can explain high inflation leads to low unemployment and low inflation leads to high unemployment  so there is the trade-off between unemployment and inflation rate

so high inflation and high unemployment is not possible together

so the above statement is false

(c) In Expansionary fiscal policy government expenditure increase that leads to demand for loanable fund increases and in result price of loanable fund increases (interest rate ) so as interest rate, raise foreign  investment in the home country increases so it leads to the trade deficit for an open economy

So the above statement is false   

(d) According to monetarist in the long-run economy can be managed by simple money supply rules  

So policy rules preferred over policy direction according to monetarist

so above statement is true