. Answer the following questions.

EXERCISE 1 1n the table below are statistics showing the labor force and total employment in month 1 and month 2 of the same year. Make the computations necessary to complete the table. (Number of persons is in thousands.) Calculate: l-The Labor Participation Rate 2-The Unemploynnent Rate I 3-The Employment Rate 4-If 300 unemployed workers became discouraged and stopped searching for a job, what happens to the unemployment rate? Explain your answer. Month 1 Month 2 Labor force 13629? 132065 Employed 129558 129556 Unemployed Unemployment rate (%) Employment rate (913) Working age population 263278 263526 LF Participation rate (?) + SRPG 2021 A LRPC INFLATION RATE (Percent) UNEMPLOYMENT RATE (Percent) Based on your answers to the previous questions, use the black line (plus symbol) to draw the short-run Phillips curve for this economy in 2021 (SRPC2021. The short-run Phillips curve is line: o At Natural Real GDP At the natural rate of unemployment o Representing the tradeoff between unemployment and inflation Now consider the long-run effects of this policy. Suppose, in particular, that following Implementation of the policy, the aggregate demand curve remains at ADB. Designate the long-run equilibrium that would follow such a policy as outcome C. Going back to the first graph, place the grey point (star symbol) at outcome C. Because output at point C is Natural Real GDP, the unemployment rate associated with outcome C is the natural rate of unemployment. Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph. This line is line: At Natural Real GDP At the natural rate of unemployment Representing the tradeoff between unemployment and inflation2. The Salem-Swan Model a) Consider an economy that is initially in a steady state equilibrium. Assume that in this equilibrium it has a saving rate of 50 per cent and a depreciation rate of 2 per cent. Further assume that the population is constant and that the level of output produced can be represented by the following production function: Y = AKO'L1_\" Where A = 1 and o: = 0.5. Use the Below-Swan model to determine the level of capital per worker and output per worker in this economy. (1 mark) b) Now suppose the government introduces a set of policies to increase domestic savings. As a result, the saving rate increases to 60 per cent. What is the new steady state level of capital per worker and output per worker. (I mark) c) Use a Below-Swan diagram to show the qualitative effects of this increase in total fac- tor productivity upon steady state output per worker and capital per worker. Briey describe the intuition behind this result. (2 marks) d) Economists typically argue that welfare within society is determined by the level of consumption rather than the level of output. How does consumption per worker change in the above example when the saving rate increases from 50 to 60 per cent? Are higher levels of GDP per capita necessarily a sign of higher consumption in the SolowSwan model? (I mark) Consider the Solow growth model. Recall that upper-case variables denote aggregate variables and lower-case variables denote per worker (or per capita) variables. Capital is assumed to evolve according to the following equation: K= I+ (1-d)K. (1) where K' denoffes aggregate capital in the future period and A is capital in the current period. There is a closed-economy model without a government, so in a competitive equilibrium the income-expenditure identity is Y = C + 1. (a) Use the income-expenditure identity and equation (1) to find an expression for the evolution of per- worker capital. In other words, show that equation (1) can be re-written as follows: K_ saf(k) (1 - d)k (2) 1+n 1+n (b) Denote the steady-state level of capital per worker as ". Show that in the steady state, equation (2) implies the following equilibrium equation: sef ( k' ) = (n+ d)k. (3) For the rest of this question, suppose there are two countries with an aggregate production function Y = =KNOT. Further suppose the following values for the model's parameters: s = 0.25, d = 0.1 and n = 0.02 in both countries. (c) Suppose =4 = 1 in Country A. Use equation (3) and the given values for the model's parameters and production function to calculate the steady-state level of income per capita, y', and the steady-state level of capital per worker, ka, in Country A. (d) Suppose ag = 2 in Country B, but otherwise the countries are equivalent. Because 28 > 24, Country B will have a higher standard of living (i.e., per capital income) in the initial period. In the long run, will Country A ever converge with Country B in terms of per capita income? Explain your answer. (e) How is the Solow model inconsistent with the growth fact that there is no correlation between the level of output per capita in 1960 and the average growth rate in output per capita since that time?2. The Phillips curve in the short run and long run In the year 2020, aggregate demand and aggregate supply in the fictional country of Gurder are represented by the curves AD2020and AS on the following graph. Suppose Natural Real GDP in this economy is $6 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. (?) 105 LRAS SRAS 105 Outcome C PRICE LEVEL AD 2020 103 AD AD 10 12 REAL GDP (Trillions of dollars) Economists have forecast that if the government does nothing and the economy continues to grow at the current rate, aggregate demand in 2021 will be given by the ADA curve, resulting in the outcome illustrated by point A. If the government pursues an expansionary policy, aggregate demand in 2021 will be given by the ADB curve, resulting in the outcome illustrated by point B. The following table gives projections for the unemployment rates that would occur at point A and point B. Consider what the rate of inflation would be between 2020 and 2021, depending on whether the economy moves from the initial price level of 102 to the price level at outcome A or the price level at outcome B. Complete the table by entering the inflation rate at each potential outcome point. Note: Calculate the inflation rate to two decimal points of precision. Unemployment Rate Inflation Rate A 6% % 3% % Use the following graph to help you answer the questions that follow. (Note: You will not be graded for any adjustments made to this graph.)