SS131-Macroeconomics: Mid-Term II Exam

Total Points: 50; Time: 60 minutes

1. If the labor market is in steady-state, ie, unemployment is neither rising nor

falling, then the number of people finding jobs, fU, must equal the number of
people losing jobs sE.

a. Show that the steady-state rate of unemployment, U/L, depends on the

rate of job finding, f, and the rate of job separation, s. (5 points)
b. If 1% of the labor force loses its job every month, and 20% finds a job
every month, calculate the steady-state rate of unemployment. (3
points)

2. Complete the following table by writing the five conditions that must hold in
each of the columns showing the outcomes that an open economy can
experience: (8 points)

Trade Surplus Balanced Trade Trade Deficit

3. When a country runs a trade deficit, policy makers must confront the
question of whether it represents a national problem. Briefly explain when a
trade a deficit might represent a problem and when it might not. (7 points)

4. Use the model of the small open economy to predict what would happen to
the trade balance, the real exchange rate, and the nominal exchange rate in
response to each of the following events:

a. A fall in consumer confidence about the future induces consumers to

spend less and save more. (3 points)
b. The introduction of a stylish line of Toyotas makes some consumers
prefer foreign cars over domestic cars. (3 points)
c. The introduction of automatic teller machines reduces the demand for
money. (3 points)

5. In the Solow model, how does the saving rate affect the steady-state level of
income? How does it affect the steady-state rate of growth? Explain using
graph(s). (5 points)
6. In the Solow model, how does the rate of population growth affect the
steady-state level of income? How does it affect the steady-state rate of
growth? Explain using graph(s). (5 points)
7. In the Solow model with technological progress, the production function may
be written as Y=F(K, LxE), where E reflects the efficiency of labor and is used
to model technological progress in the Solow model.

a. After normalizing the production function by LxE, derive the formulas

for: (4 points)
i. capital per effective worker
ii. output per effective worker
iii. output per worker
iv. total output
b. What are the steady-state growth rates for each of the variables
derived in part (a) above. (4 points)