ECON4019 Macroeconomic Analysis
In-Course Exam 2021
Answer guide
Section A
1. Agree. Analysis of the productivity slowdown period and of cross-country
income di¤erentials using the model with human capital indicate that
technology is the most important variable for explaining both phenomena.
2. Disagree. Convergence can occur at the national level without eveyone
in a country having their income converge to the same level. Similarly,
if incomes within a country are converging, they can be converging to
di¤erent levels in di¤erent countries so this does not imply convergence
across countries..
3. Disagree. Increases in productivity can feed into higher wages without
generating higher prices — lifting the real wage.
4. Disagree. E¢ ciency wages push wages above the level they would be
if the goods market were competitive, but they do not ensure that the
resulting real wage will equal the marginal product of labour when the
goods market is monopolisticaly competitive.
Section B
5.1. The steady state fro output-per-e¤ective worker can be represented most
simply as
ey = s
n+ g +

1
e u:
An increase in u will raise ey. In terms of the Solow-Swan diagram, the
increase in u will rotate both the output-per-e¤ective-worker curve and the
saving-per-e¤ective-worker curve counter-clockwise. The intersection of
actual investment and break-even investment will occur at a higher value
for ek. The dynamic story describing the transition is the same as that
for the standard Solow-Swan model, as described in the lecture notes.
5.2. Growth in income-per-worker will increase in the short-run, but remain
unchanged with the long-run. The answer should be supported by a
diagram showing growth over time indicating the change in u as occurring
at t0.
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5.3. The conditions required for absolute convergence to occur are essentially
that the economies have the same or equivalent parameterisations. The
expression for the speed of convergence in the vicinity of the steady state
is that same at for the Slow-Swan model with technology growth and is
una¤ected by u.
6.1. > 0 is important because periods when in‡ation is above target must be
countered by a negative output gap which requires the real interest rate
to rise above equilibrium when in‡ation is above target.
6.2. The optimal value for is:
=

a
> 0:
6.3. Students are expected to use diagrams to illustrate the aggregate demand
curve shifting left (for one period), leading to lower in‡ation, which next-
period lowers the Phillips curve. With this lower Phillips curve, the
optimal policy chooses a point along the short-run Phillips curve in which
the output gap is positive, which raises in‡ation, determining the appro-
priate interest rate from the IS curve. Over time the economy adjusts
back to equilibrium with in‡ation equal to targeted in‡ation with the path
the economy takes described by the Phillips curve shifting along the mon-
etary rule curve. In the new equilibrium the real (and nominal) interest
rate returns to its original level. A diagram should be used to illustrate
the adjustments that occur over time in response to the shock.
6.4. The equilibrium law-of-motion for in‡ation is given by:
t T = 1
1 + a

t1 T

:
For the parameter values given in the question, this law-of-motion be-
comes:
t T = 0:8

t1 T

:
After 7 periods in‡ation will be within 0:5 percent point of the target
because
0:87 2 = 0:209715202 > 0:5
From the analytic solution above, it is clear that higher values for in-
crease the speed at which in‡ation returns to target.
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