Author Question: A country's leadership believes that the neoclassical growth theory is correct. The country already ... (Read 51 times)

drink · **on:** Jun 29, 2018

A country's leadership believes that the neoclassical growth theory is correct. The country already has the necessary preconditions for growth, so suggest policy changes the government might enact to help speed economic growth.

What will be an ideal response?

Question 2

A company facing the problem of moral hazard decided to lay off some workers during a recession, instead of lowering wages. What is the possible reason behind such a decision?

What will be an ideal response?

jaaaaaaa · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The policy changes should encourage technological innovation and capital formation because these are the key engines of growth within the neoclassical growth theory. Hence, the government should encourage research and development, possibly by directly funding research and development. In addition, the government should support policies that increase saving, because an increase in saving will lead to increased investment and hence new capital, some of which will have the new technologies embodied in it.

Answer to Question 2

Employers pay higher wages to their employees to ensure high productivity and good morale. If the company lowered the wages of its workers, workers may have started shirking because there exists moral hazard in the labor market. This would have resulted in lower productivity and lower income for the company.