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ASSIGNMENT No. 2
(Units: 5–9) Total Marks: 100
Q.1 a) Discuss in detail the generic efficiency- wage model by giving its rational
assumptions, model solution and implications. (10)
b) Using wage- efficiency model, find equilibrium unemployment rate UO, given
wu = (1 + μ)wn, the wage in union sector, and in non union sector it’s wn = (1 –
bμ) wa/1 – β. Where wa is average wage and wa = ƒ.wu + (1 – ƒ)wn. Also
calculate by what proportion is the cost of effective labour is higher in union
sector than non- union sector if μ = ƒ = 0.12, β = 0.04 and b = 1? (10)
Q.2 Kydland and presscott (1977) show that the inability of policy makers to commit
themselves to low inflation policy can give rise to excessive inflation despite the
absence of long run trade-off between output and inflation. Explain? (20)
Q.3 Consider the model of investment in section 8.2 – 8.5 (Romer 2001). Describe the
effects of each of the following changes on k = o and q = o loci, on k and q at the time
of the change, and on their behavior overtime. In each case assume that k and q are
initially at their long run equilibrium values:
a) A war destroys half of the capital stock.
b) The government takes returns from owning firms at a rate t.
c) The government taxes investment, specially, firms pay the government ‘r’ for
each unit of capital they acquire, and receive a subsidy of ‘r’ for each unit of
disinvestments. (20)
Q.4 Describe how each of the following changes affects the basic diagram for the Solow
model. (20)
a) The rate of depreciation falls.
b) The rate of technological progress rises.
c) The production function is Cobb-Douglas, ƒ(k) = kδ and capital share δ rises.
d) Output per unit of effective labour is higher than before.
Q.5 a) Discuss the dynamics of the research and development (R & D) and growth
model without capital in the following cases: (10)
i) Ө < 1 ii) Ө = 1
b) Assume that Ө + β < 1 and n > 0, and the economy is on balanced growth path.
Show how each of the following changes affects ġA = 0 and ġk = 0 lines and the
position of the economy in (gA, gk) space at the moment of the change. (10)
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