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"A card will put we and to price work, which is a barbaric form of competition that benefits no one." Discussion Questions: 1. What is absolute advantage in trade theory? 2. What is the comparative advantage on international trade? 3. How does absolute and comparative advantage lead to specialization? 4. What are the benefits of comparative advantage? Calculations: 1. The following represents the production possibilities in the following two countries. Canada Mexico 9:19 PM 5/17/2621 O 9 search29. if money income remains the same while the average price level doubles, then: A. Real income will fall 3. Interest rates will fall C. Nominal income will fall D. Purchasing power will increase 30. Hyperinflation would raise nominal interest rates to outrageous levels. (13,000%% inflation means higher than 13,000% interest rates) This would: A. Lead to an increase in Real GDP. B. Do nothing. When government prints money it has no effect on the economy. C. Lead to economic ruin by making it impossible to engage in borrowing and lending. D. Lead to economic prosperity by making it easy to engage in borrowing and lending. 31. Episodes of hyperinflation are caused by: A. Severe recessions. B. Extreme economic booms. C. Extremely high rates of money growth. D. Moderately high rates of real GDP growth. 32. "Inflation is always and everywhere, a monetary phenomenon." Milton Freidman means: A. Increases in the money supply cause increases in prices B. Increases in the money supply cause decreases in prices C. Decreases in the money supply cause increases in prices D. There is no relationship between the prices and the amount of money the government prints. 33. Inflation is like a tax in that: A. When money is printed, we all become richer B. When money is printed, we all become poorer C. There is no effect on the economy when new money enters into circulation D. When money is printed, the first recipients of the new money benefit greatly, since prices have not yet had a chance to rise. 34. Real wealth consists of: A. Gold and silver B. Money and coins C. Stocks and bonds D. The goods and services we consume and produceConsider a two-period economy that has at the beginning of period 1 external wealth of 100. GDP in both periods is 120. The interest rate in periods 1 and 2 is 10 percent. In period 1, the country runs a current account decit of 5 percent of GDP. At the end of period 2, the external wealth must be equal to zero. 1. Find the level of the trade balance in period 1, the level of the current account balance in period 1, and the country's external wealth at the beginning of period 2. 2. Is the country living beyond its means? To answer this question, nd the country's current account balance in period 2 and the associated trade balance in period 2. Is this value for the trade balance feasible? [Hintz Keep in mind that since expenditures cannot be negative, the trade balance cannot exceed GDP]. 3. Now assume that in period 1, the country runs instead a much larger current account decit of 10 percent of GDP. Find the country's external wealth at the end of period 1. Is the country living beyond its means? If so, why? 4. What is the maximum current account decit (as a share of GDP) that this country can have at time 1 and still live within its means? In this question, we extend the model with search friction discussed in class by adding non-pecuniary preferences over jobs. There are two periods and workers search for a job every period. Workers have linear utility and no saving. If unemployed, workers draw a job offer from a job offer distribution. Each job offer has two components - a wage to and a disutility 1). Assume that w and 'v are independently distributed. The distribution of wages is gm and the distribution of disutilities is g\". If the agent accepts the job offer, her utility at that period is given by: u(w,v)=w'u If the worker accepts a job at period 1, she remains employed for the next period on the same job. If the worker rejects the job offer from period 1, she receives unemployment insurance b at that period and searches for a new job in the next period. The worker has to accept the job offer received in the second period. Utility in the second period is discounted by rate ,8. 1. Suppose the worker receive job offer (110,11) on the rst period. Write down the value of accepting this job offer in period 1, V\"\"\"Pt(w, 'v). . Calculate the expected utility of being unemployed on the next period as function of E(w) and 13(1)). Hint: Use that the utility is linear, u('w, v) = 'w 'v, and that w and v are independently distributed. . Calculate the disutility of rejecting job offer (10,0) on the rst period, Vrew, c). . Calculate the utility of receiving job offer (11:, v) on the rst period, V(w, '0), using your answer to questions 1 to 3. . Cenditional on a disutility of working or, plot the utility of rejecting a job and the utility of accepting a job on a graph with wages on the xaxis and the utility value on the yaxis. Mark the reservation wage 213(1)) on this gure. . Calculate the reservation wage as a function of the disutility, 25(1)). Is the worker willing to accept a lower wage if she nds the job more meaningful? Conditional on a wage w, plot the utility of rejecting a job and the utility of accepting a job on a graph with disutility on the x-axis and the utility value on the y-axis. Mark the reservation disutility 6(a)) on this gure. Use the following graphs to answer question 35. RGDP Short-Run Trend Long-Run Trend A C D Time 35. The short run trend is known as: A. The cattle cycle B. The water cycle C. The business cycle D. The division of labor 36. A recession is defined as: A. A long and severe depression B. An increase in unemployment C. Two consecutive months of falling GOP D. An increase in the National Debt to GOP ratio E. Two consecutive quarters of falling Real GDP 37. A depression is defined as; A. Two consecutive quarters of falling Real GDP B. An increase in the National Debt to GDP ratio C. Two consecutive months of falling GOP D. An increase in unemployment E. A long and severe recession 38. In the Long-Run, the growth rate in the U.S. economy is about: A. 0%% B. 39% C. 8% D. 15% E. 25% 39. Real business cycle theory states that an economic downturn would most likely be caused by: A. A sudden, sharp fall in consumer spending B. A sudden, sharp increase in the price of oil C. Good weather and good crop yields D. The invention of the internet