Author Question: In Solow's exogenous growth model, the economy reaches a stable steady state because A) the ... (Read 522 times)

fagboi · **on:** Jun 30, 2018

In Solow's exogenous growth model, the economy reaches a stable steady state because

A) the marginal return of capital is decreasing.
B) capital is growing at a constant rate.
C) the substitution effect is stronger than the income effect.
D) conditional convergence holds.

Question 2

Explain the dilemma that supply shocks pose when the Fed chooses to use monetary policy to achieve its goals.

What will be an ideal response?

ebe · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

A negative supply shock causes the Phillips curve to shift up as the inflation rate increases for every value of the output gap. If the Fed keeps the real interest rate unchanged, the inflation rate will rise, undermining the Fed's goal of price stability. The Fed could attempt to maintain the inflation rate at its initial level by raising the real interest rate, but the higher interest rate would result in declines in consumption, investment, and net exports, decreasing real GDP below potential GDP, and so fails to meet its goal of high employment. Therefore, supply shocks require the Fed to choose between its goals of price stability and high employment.