Determine whether following statements are true or false. Right answer is worth

Question

Determine whether following statements are true or false. Right answer is worth 0.5 points and wrong answer costs 0.5 points. The total points cannot be negative however. There is a single right answer to each item. 1. In general equilibrium macro models fiscal policy has no effect on the economy 2. Unemployment rate means the ratio of unemployed people to working age population 3. Production function ELK, N) = Koo 3 No 6 has constant returns to scale. 4. Production function FLK, N) = Koo 3 No , has constant returns to scale. 5. The government purchases of national income accounts include e.g. defense costs, costs of public education and unemployment benefits. 6. Current account is by definition equal to net exports 7. According to Fisher equation there is an approximate relation r = R i between nominal interest rate R, real interest rate r and inflation ate i 8. Ricardian equivalence does not hold if there is proportional taxation of labor income 9. Productivity growth does not affect growth of the economy in the Solow mode 10. Inflation mean growth rate of price level 11. In Keynesian macroeconomic models monetary policy does not affect the real economy at al 12. Keynesian macroeconomic models usually include some price rigidities in the short run.

Explanation / Answer

Ans 1. False

In general equilibrium macro models fiscal policy effect economy. Such as during recession expansionary fiscal policies adopted to lift out of recession .

Ans2. True

Unemployment rate=

number of unemployed persons ÷ labour force

Labour force includes employed and unemployed people i.e working age population.

Ans 3.False

In this production function let a= 0.3 and b= 0.6

a+b= 0.3+ 0.6 =0.9

0.9<1, so it is decreasing returns to scale not constant returns to scale.

Ans 4. True

Let a=0.3 and b = 0.7

a+b = 0.3+0.7= 1.0

Since a+b=1,this production function follows constant returns to scale.

Ans 5.False

Since government purchase are government consumption expenditure such as salaries for current military officers of a country.

Ans 6.True

Current account is sum of balance of trade i.e goods and services exports less imports which is equal to net exports.

Ans 7. True

Fisher equation provides accurate approximately relation between nominal interest rate,real interest rate and inflation rate.

r = R - i

Ans 8.False

Ricardian equivalence holds if there is proportional taxation of labour income as future income is uncertain.A tax cut today reduces certainty equivalent.Agents having perfect foresight save to pay for future taxes.

Ans 9.False

Productivity growth in Solow model means higher capital-labour ratio,higher output per worker and higher consumption per worker.productivity shifts production and saving function up.

Ans 10.True

Inflation is increase in price level of goods and services reducing purchasing power of consumer.

Ans 11. False

Keynesian economics models monetary policy affects the real economy .Such as IS-LM model assume economy is producing at less than full employment .so this tells that government has to increase its spending to encourage private investment .Lead to further increase in GDP.Therefore ,according to Keynes monetary policy effects the real economy.

Ans 12. False

In Keynes economics there is price flexibility and wage rigidity.prices are free to vary and wages are fixed in short run due to which unemployment exists in short run.

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