The labor market - The role of technical change

The labor market

The role of technical change

1. Assume WS and PS are as described below, except that A may differ from Ae.

Wage setting: W/Pe = Ae (1 – au + z)

And the price-setting equation (PS) is: P = (1+m) W/A

All variables are as defined in Chapter 13 in Blanchard. For this question, you should assume A=Ae.

a.) Draw the graph of WS and PS and also solve (mathematically) for the mediumrun equilibrium. What assumptions are you using?

b.) Suppose that A rises by more than Ae. Analyze the impact on the medium-run equilibrium. Explain the change in natural unemployment using intuition.

c.) Now suppose the rise in A exactly equals the rise in Ae. Analyze the new medium-run equilibrium, both graphically and mathematically. Explain how and why it differs from your answer in part b.

The Solow model

2. What are the effects (both short-run and medium-run) of the following changes in the Solow model of economic growth:

a) a fall in the saving rate, s

b) a rise in growth of the labor force, gN

c) a fall in the growth rate of technical change, gA

For each case use the model and graph from Chapter 12. Summarize the consequences for the growth of (i) output and capital, (ii) output per worker and capital per worker, and (iii) output per effective worker, capital per effective worker.

The meanings of “natural”

3. In this course, we have encountered several variables named “natural” including the natural rate of unemployment, (un), the natural rate of interest, (rn), and the natural rate of long run growth (gA + gN ).

a.) Provide a precise definition of each variable. Use any graph or math to illustrate what they mean and which model to which they refer.

 b.) Is there any relationship between any of these variables? Do any of the variables imply on of the others?

c.) Are any of these variables really “natural”? Provide a critical assessment.

Uncovered interest parity

Use the example below to decide if global investors prefer Yen or Dollar denominated assets for the next year. The time horizon is 1 year (for interest rates and future exchange rates.) Show all calculations and explain in words.

Interest rates on dollar-denominated assets = 5%

Interest rates on yen-denominated assets = 2%

Spot exchange rate = E = 110yen/$1

Expected future spot exchange rate = Ee = 95yen/$1