True or false

Answer to 12 out of 13 questions. [60 points, 5 points each question] Explain briefly why the following statements are true or false. Answers without explanation will be counted as wrong. 1) According to the Solow growth model (for simplicity, think of the Solow growth model with population growth but without exogenous technological progress) Hurricane Mitch had no impact on the long run growth rate of GDP of Honduras and Nicaragua, in spite of the fact that it destroyed much physical capital and killed many people. 2) According to the Solow growth model (for simplicity, think of the Solow growth model with population growth but without exogenous technological progress) Hurricane Mitch would have had a positive impact on the growth rate of per capita GDP of Honduras and Nicaragua, if it had destroyed physical capital only but killed no human beings. 3) Assuming that the Solow growth model holds true, in an economy where population is not growing but where there is exogenous technological progress total and per capita output all grow at the same rate, that is, the rate of growth of -labor augmenting- productivity (E). 4) The Asian crisis is consistent with the Solow growth model only if the growth of the Asian economy in the past twenty years was mainly due to capital accumulation and not to technological progress. 5) In a Solow growth model without population growth and without exogenous technological progress, the Golden Rule of capital accumulation says that the savings rate should be such that the marginal product of capital at the steady state is equal to the rate of depreciation. 6) For the US we observe the following empirical fact: the real interest rate is acyclical, that is, is not procyclical nor countercyclical. This evidence is inconsistent with the Permanent Income model studied in class if we think of the US a closed economy. 8) Some Asian country is running large Current Account deficits. The IMF team arrives and suggests to the government that it should raise taxes immediately. Assuming that Ricardian Equivalence holds, does the IMF suggestion lead to an improvement in the Current Account situation of the country? 9) For the US we observe the following empirical fact: aggregate consumption is procyclical but smoother than output in terms of business cycle fluctuations. This piece of evidence is roughly consistent with the Permanent Income model studied in class. 10) Since leisure and consumption are substitutes, the same percentage (%) increase in the real wage will trigger a greater increase of labor supply for poor people than for wealthy people. 11) During a banking crisis - for example during the Great Depression - even if the monetary base does not change the money supply may shrink (decline). 12) The reason why you and I hold Pesos in our wallets is because we can always go to the Central Bank and exchange them for ounces of gold, which are part of the reserves of the Central Bank. 13) The Phillips curve is a negative empirical relationship between unemployment and inflation: when inflation is high, unemployment is low, and viceversa. Because of the Phillips curve, we cannot have both low inflation and low unemployment. If a Central Bank chooses to have low unemployment, it has to pay the price of having high inflation. Viceversa, if a Central banker chooses to to have low inflation, it has to pay the price of having high unemployment.