Macroeconomics, 7e (Blanchard)

Chapter 13: Technological Progress: The Short, the Medium, and the Long Run

13.1 Productivity, Output, and Unemployment in the Short Run

1) Technological unemployment is a macroeconomic phenomenon that occurs when

A) unemployment changes due to the effects of technology in high-technology industries.
B) unemployment changes due to the effects of monetary and fiscal policy in the New Economy.
C) hysterisis.
D) Eurosclerosis.
E) unemployment changes as a result of technological change.
Answer: E
Diff: 1

2) Which of the following statements about the United States during the twentieth century is
correct?
A) Output growth has been approximately equal to employment growth.
B) Output growth has been slower than employment growth.
C) Output growth has been faster than employment growth.
D) Output has increased largely due to monetary and fiscal policy.
E) Output has decreased largely due to monetary and fiscal policy.
Answer: C
Diff: 1

3) Suppose an economy experiences an increase in technological progress. This increase in

technological progress will
A) allow more output to be produced with the same number of workers.
B) allow the same amount of output to be produced with fewer workers.
C) lead to changes in the types of goods produced.
D) all of the above
E) none of the above
Answer: D
Diff: 2

4) Some believe that technological progress leads to higher unemployment in the medium run.
This claim that technological progress results in an increase in unemployment in the medium is
supported by
A) economic theory, but contradicted by the evidence.
B) theory and evidence.
C) the evidence, but contradicted by theory.
D) neither theory nor evidence.
E) none of the above
Answer: D
Diff: 1

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5) The evidence suggests that recent technological change
A) permanently increased the natural rate of unemployment.
B) is different from past technological change, in that it has no impact on productivity.
C) has increased productivity in the service sector only.
D) has increased productivity in the manufacturing sector only.
E) has increased the wage gap between skilled and unskilled workers.
Answer: E
Diff: 2

6) When the production function is represented by Y = NA, labor productivity is represented by

which of the following expressions?
A) 1/A
B) NA
C) A/Y
D) Y/A
E) none of the above
Answer: E
Diff: 2

7) When the unemployment rate is on the horizontal axis and the real wage is on the vertical
axis, an increase in productivity will cause which of the following to occur?
A) The wage-setting and price-setting curves will both shift downward.
B) The wage-setting and price-setting curves will both shift upward.
C) The price-setting curve to shift downward, and no shift in the wage-setting curve.
D) The wage-setting curve to shift upward, and the price-setting curve to shift downward.
E) The wage-setting curve to shift downward, and the price-setting curve to shift upward.
Answer: B
Diff: 2

8) The number of workers employed will not change as a result of an increase in productivity
when which of the following occurs?
A) The AS curve shifts downward.
B) Output growth exceeds productivity growth.
C) Productivity growth is equal to output growth.
D) The AD curve shifts to the right.
E) none of the above
Answer: C
Diff: 2

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9) An increase in productivity will cause which of the following according to the price-setting
behavior of firms?
A) a reduction in prices set by firms
B) an increase in the real wage paid by firms
C) a reduction in the markup set by firms
D) all of the above
E) none of the above
Answer: D
Diff: 2

10) Based on price setting behavior, which of the following will cause an increase in the price
level?
A) a reduction in productivity
B) an increase in the nominal wage
C) an increase in the markup
D) all of the above
E) none of the above
Answer: D
Diff: 2

11) Based on our understanding of the wage setting equation, which of the following will not
cause a reduction in the nominal wage?
A) an increase in unemployment
B) a reduction in the expected price level
C) a reduction in expected productivity
D) all of the above
E) none of the above
Answer: E
Diff: 2

12) Suppose workers' and firms' expectations of the price level and productivity are accurate. In
this case, an increase in productivity will cause which of the following?
A) an increase in both the real wage and the natural rate of unemployment
B) a decrease in both the real wage and the natural rate of unemployment
C) an increase in the real wage and no change in the natural rate of unemployment
D) a decrease in the real wage and an increase in the natural rate of unemployment
E) none of the above
Answer: C
Diff: 2

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13) The empirical evidence suggests that periods of high productivity growth will cause which of
the following in the short run?
A) higher markups
B) lower unemployment
C) constant real wages
D) greater equality in wages
E) none of the above
Answer: B
Diff: 2

14) For this question, assume that firms' of productivity are accurate while workers' expectations
of productivity adjust slowly over time. In this case, an increase in productivity will cause which
of the following?
A) an increase in both the real wage and the natural rate of unemployment
B) a decrease in both the real wage and the natural rate of unemployment
C) an increase in the real wage and a reduction in the natural rate of unemployment
D) a decrease in the real wage and an increase in the natural rate of unemployment
E) none of the above
Answer: C
Diff: 2

15) For this question, assume productivity has been increasing by 5% per year. Also assume that
workers' expectations of productivity growth adjust slowly over time. For this economy, a
reduction in productivity growth from 5% to 2% will most likely cause which of the following to
occur?
A) an increase in the natural rate of unemployment
B) a reduction in the real wage
C) an increase in the markup over labor costs
D) all of the above
E) none of the above
Answer: A
Diff: 2

16) A major explanation for the decline in employment projected in textiles is

A) increases in income.
B) social problems in the U.S.
C) shifts in production toward low-wage countries.
D) inaccurate expectations about productivity growth.
E) inaccurate expectations about the price level.
Answer: C
Diff: 1

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17) Assume an economy experiences, for a given period, a 4% increase in output and a 2%
increase in productivity. Given this information, we know that which of the following occurred
for this economy during this period?
A) The unemployment rate increased during this period.
B) The unemployment rate decreased during this period.
C) The unemployment rate did not change during this period.
D) The effects on the unemployment rate are ambiguous.
E) none of the above
Answer: B
Diff: 2

18) Assume an economy experiences, for a given period, a 4% increase in output and a 4%
increase in productivity. Given this information, we know that which of the following occurred
for this economy during this period?
A) The unemployment rate increased during this period.
B) The unemployment rate decreased during this period.
C) The unemployment rate did not change during this period.
D) The effects on the unemployment rate are ambiguous.
E) none of the above
Answer: C
Diff: 2

19) Assume an economy experiences, for a given period, a 1% increase in output and a 5%
increase in productivity. Given this information, we know that which of the following occurred
for this economy during this period?
A) The unemployment rate increased during this period.
B) The unemployment rate decreased during this period.
C) The unemployment rate did not change during this period.
D) The effects on the unemployment rate are ambiguous.
E) none of the above
Answer: A
Diff: 2

20) Because of labor hoarding, an increase in output may signal

A) an increase in employment.
B) a reduction in employment.
C) no change in employment.
D) a reduction in productivity.
Answer: C
Diff: 1

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21) Because of labor hoarding, a reduction in output may signal
A) an increase in employment.
B) a reduction in employment.
C) no change in employment.
D) a reduction in productivity.
Answer: C
Diff: 1

22) Suppose the aggregate production function is represented by Y = AN. Which of the
following expressions represents the number of additional workers required to increase
production by one unit?
A) 1/A
B) Y/N
C) 1/N
D) 1/Y
E) none of the above
Answer: A
Diff: 1

23) For this question, assume that the aggregate production function is represented by Y = A.
Which of the following represents the marginal cost of producing an additional unit of output?
A) W
B) W/A
C) A/W
D) (1 + A)W
E) 1/W
Answer: B
Diff: 2

24) For this question, assume that the aggregate production function is represented by Y = AN.
Which of the following represents the price setting relation for this economy?
A) (1 + m)A
B) (1 + m)A/W
C) (1 + m)W
D) W/A
E) none of the above
Answer: E
Diff: 2

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25) Which of the following represents the wage setting relation when changes in labor
productivity are allowed to occur?
A) W = PeF(u,z)
B) W = P(1 + m)
C) W = PeF(u,z)/A
D) W = AP/(1 + m)
E) none of the above
Answer: E
Diff: 2

26) For this question, assume that expectations of P and A are correct. Based on price setting
behavior, the real wage will be equal to which of the following?
A) A/(1 + m)
B) AP/(1 + m)
C) APF(u,z)
D) P(1 + m)
E) none of the above
Answer: A
Diff: 2

27) Which of the following is not believed to cause recent increases in wage inequality?
A) international trade
B) contractionary monetary policy
C) skill-biased technological progress
D) all of the above
E) none of the above
Answer: B
Diff: 1

28) For this question, assume that expectations of P and A are correct. Now suppose that there is
a 4% increase in A. Given this information, which of the following will occur?
A) The PS relation will shift up by 4%.
B) The WS relation will shift up by less than 4%.
C) The WS relation will shift down by 4%.
D) The PS relation will shift down by 4%.
Answer: A
Diff: 2

29) For this question, assume that expectations of P and A are correct. Now suppose that there is
a 1% increase in A. Given this information, which of the following will occur?
A) a 1% increase in the real wage and a reduction in the natural rate of unemployment
B) a 1% increase in the real wage and no change in the natural rate of unemployment
C) no change in the real wage and an increase in the natural rate of unemployment
D) no change in the real wage and a reduction in the natural rate of unemployment
Answer: B
Diff: 2

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30) For this question, assume expectations of P and A are correct. Now suppose that there is a
3% reduction in A. Given this information, which of the following will occur?
A) The PS relation will shift up by 2%.
B) The WS relation will shift down by less than 2%.
C) The WS relation will shift down by 2%.
D) There will be no change in the real wage.
Answer: C
Diff: 2

31) For this question, assume that expectations of productivity are slow to adjust. Further assume
that A had been increasing by 6% a year. Now suppose that A only increases by 2% in period t.
This slowdown in productivity growth will cause
A) the PS relation to shift up more than the WS relation.
B) the WS relation to shift up more than the PS relation.
C) the natural rate of unemployment to fall.
D) the real wage to fall.
Answer: B
Diff: 2

32) For this question, assume that expectations of productivity are slow to adjust. Further assume
that A had been increasing by 2% a year. Now suppose that A increases by 5% in period t. This
increase in productivity growth will cause
A) the real wage to rise and no change in the natural rate of unemployment.
B) the WS relation to shift up more than the PS relation.
C) the natural rate of unemployment to fall.
D) the real wage to fall.
Answer: C
Diff: 2

33) For this question, assume that expectations of productivity are slow to adjust. An increase in
productivity growth from 1% to 3% will cause
A) an increase in the real wage of 1% and an increase in un.
B) an increase in the real wage of 1% and a reduction in un.
C) an increase in the real wage of 3% and an increase in un.
D) an increase in the real wage of 3% and a reduction in un.
Answer: D
Diff: 2

34) Among the reasons that the poor countries have been unable to close the "technology gap"
with the rich countries is
A) poorly established property rights.
B) poorly developed financial markets.
C) low education levels.
D) all of the above
E) none of the above
Answer: D
Diff: 1
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35) When was the last year that GDP per capita in North Korea was approximately equal to GDP
per capita in South Korea?
A) 1950
B) 1970
C) 1990
D) 2000
E) none of the above
Answer: B
Diff: 1

36) Based on price setting behavior, which of the following will cause a reduction in the price
level?
A) an increase in productivity
B) a reduction in the nominal wage
C) a reduction in the markup
D) all of the above
E) none of the above
Answer: D
Diff: 2

37) There are some concerns that technological progress can lead to an increase in
unemployment. Explain the two related but separate dimensions of technological progress.
Answer: First, TP allows for a greater quantity of goods produced with the same inputs. Second,
TP results in the production of new goods and the disappearance of old ones.
Diff: 2

38) Joseph Schumpeter argued that growth was a process of creative destruction. Explain what is
meant by the phrase, "creative destruction."
Answer: When TP occurs and new goods are developed, old goods will disappear. In those
industries that produced these "old" goods, employment will decrease. It is this process of
technological progress causing the destruction of old jobs that is referred to as "creative
destruction."
Diff: 2

39) For this question, assume that expectations of productivity growth adjust slowly. Now,
suppose that there is a 3% reduction in productivity. Explain how this 3% reduction in
productivity can cause changes in the unemployment rate.
Answer: The PS curve will shift up as productivity growth occurs; however, it will not shift up
as much. If expectations of productivity are slow to adjust, the WS curve continues to shift up by
a larger amount (based on past increases in A). The real wage will rise by the actual change in
productivity. The unemployment rate will, however, increase because of the larger shift in the
WS curve.
Diff: 2

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40) For this question, assume that expectations of productivity growth adjust slowly. Now,
suppose that there is a 5% increase in productivity. Explain how this 5% increase in productivity
can cause changes in the unemployment rate.
Answer: The PS curve will shift up as productivity growth occurs; however, it will now shift up
by a greater amount. If expectations of productivity are slow to adjust, the WS curve continues to
shift up by a smaller amount (based on past increases in A). The real wage will rise by the actual
change in productivity. The unemployment rate will, however, decrease because of the smaller
shift in the WS curve.
Diff: 2

13.2 Productivity and the Natural Rate of Unemployment

1) For this question, assume that workers expectations of the price level and productivity are
accurate. Now suppose that the economy experiences an increase in productivity. Which of the
following will occur in the medium run?
A) no change in unemployment
B) an increase in unemployment
C) a reduction in unemployment
D) no change in the natural level of output if the unemployment rate does not change
E) none of the above
Answer: A
Diff: 2

2) Since 1971, the annual growth rate of real wages has been
A) remarkably high.
B) positive, but low.
C) zero.
D) negative.
E) impossible to measure accurately, and so has not been reported.
Answer: D
Diff: 1

3) In recent years, real wages of the least educated workers

A) have increased faster than the real wages of college-educated workers.
B) have increased, but by less than the real wages of college-educated workers.
C) have decreased, but by less than the real wages of college-educated workers.
D) have decreased, while the real wages of college-educated workers have increased.
E) have decreased at about the same rate as the real wages of college-educated workers.
Answer: D
Diff: 2

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4) In recent years, the increasing relative wage of skilled labor has been mostly due to
A) a decrease in the supply of skilled labor that exceeds the decrease in demand.
B) an increase in the demand for skilled labor that exceeds the increase in supply.
C) a decrease in the supply of, and increase in the demand for, skilled labor.
D) government laws promoting the hiring of skilled labor.
E) government subsidies provided to college students.
Answer: B
Diff: 1

5) Which of the following would increase the gap in wages between skilled and unskilled
workers?
A) less technological progress of the kind we've experienced in the past 15 years
B) new types of production technology that require workers to have more skills
C) an increase in the costs of going to college
D) all of the above
E) none of the above
Answer: D
Diff: 2

6) Which of the following is not true about technological progress?

A) allow for the production of a larger quantity of goods using the same number of workers
B) lead to the production of new goods
C) lead to the disappearance of old goods
D) cause a reduction in employment in the short run
E) none of the above
Answer: E
Diff: 1

7) Suppose the aggregate production function is represented by the following: Y = AN. Given
this information, labor productivity is given by
A) Y.
B) N/A.
C) A/N.
D) A.
E) none of the above
Answer: D
Diff: 1

8) Assume an economy experiences an increase in productivity that occurs as a result of a more

widespread implementation of a major technological breakthrough. Given this information, we
would expect which of the following to occur?
A) aggregate demand would not change
B) aggregate demand would shift to the right
C) aggregate demand would shift to the left
D) both the aggregate demand and aggregate supply curves would shift to the left
Answer: B
Diff: 2
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9) Assume an economy experiences an increase in productivity that occurs as a result of the more
efficient use of existing technologies. Given this information, we would expect which of the
following to occur?
A) aggregate demand would not change
B) aggregate demand would shift to the right
C) aggregate demand would shift to the left
D) both the aggregate demand and aggregate supply curves would shift to the left
Answer: C
Diff: 2

10) When the unemployment rate is on the horizontal axis and the real wage is on the vertical
axis, a reduction in productivity will cause which of the following to occur?
A) The wage-setting and price-setting curves will both shift downward.
B) The wage-setting and price-setting curves will both shift upward.
C) The price-setting curve to shift downward, and no shift in the wage-setting curve.
D) The wage-setting curve to shift upward, and the price-setting curve to shift downward.
E) The wage-setting curve to shift downward, and the price-setting curve to shift upward.
Answer: A
Diff: 2

11) Based on price setting behavior, which of the following will cause a reduction in the price
level?
A) an increase in productivity
B) a reduction in the nominal wage
C) a reduction in the markup
D) all of the above
E) none of the above
Answer: D
Diff: 2

12) Suppose workers' and firms' expectations of the price level and productivity are accurate. In
this case, a reduction in productivity will cause which of the following?
A) a decrease in both the real wage and the natural rate of unemployment
B) an increase in both the real wage and the natural rate of unemployment
C) a decrease in the real wage and no change in the natural rate of unemployment
D) an increase in the real wage and a decrease in the natural rate of unemployment
E) none of the above
Answer: C
Diff: 2

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13) Assume an economy experiences, for a given period, a 5% increase in output and a 1%
increase in productivity. Given this information, we know that which of the following occurred
for this economy during this period?
A) The unemployment rate increased during this period.
B) The unemployment rate decreased during this period.
C) The unemployment rate did not change during this period.
D) The effects on the unemployment rate are ambiguous.
E) none of the above
Answer: B
Diff: 2

14) Suppose an economy experiences a reduction in productivity. Explain both the short-run and
medium-run effects of this reduction in productivity on output, employment, and the
unemployment rate.
Answer: In both the short run and medium run, TP will cause a reduction in output (assuming,
of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What
happens to employment in the medium? Given that Y will fall by the full change in TP in the
medium, we know that N and u will not be affected in the medium run. In the short run, N will
fall and u will rise if the percentage change in Y is less than the percentage change in TP.
Diff: 2

15) Some commentators will argue that increases in productivity may have no effect or even a
negative effect on employment in the short run. Explain what must occur for an increase in
productivity to have no effect or even a negative effect on employment in short run.
Answer: An increase in productivity will have no effect on employment if the percentage
change in output equals the percentage change in productivity. Employment will fall if the
percentage change in output is less than the percentage change in productivity. This can be seen
from Y = AN which implies that N = Y/A.
Diff: 2

16) Explain what effect a reduction in productivity has on wage setting behavior, price setting
behavior, the equilibrium real wage, the natural rate of unemployment, and the natural level of
output.
Answer: A reduction in A will cause a reduction in the real wage based on WS behavior;
therefore, the WS curve shifts down by the change in A. The reduction in A increases the
marginal cost of an additional unit of output so firms will raise the price. Hence, the real wage
based on PS behavior will fall by A and the PS curve shifts down by A. Given the size of the
shifts in the WS and PS curves, u does not change; however, the real wage does fall.
Diff: 2

17) Explain how technological change can cause changes in wage inequality.
Answer: If the technological progress favors skilled workers, the demand for skilled workers
will rise and the demand for relatively unskilled workers will fall. This would cause the wage
gap to increase.
Diff: 2

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18) Explain some of the causes of increased wage inequality.
Answer: Possible causes: skill-biased technological progress and international trade.
Diff: 2

19) First, explain each of the following: hysterisis and Eurosclerosis. Second, explain how each
of them can be used to explain the relatively high natural rate of unemployment in Europe.
Answer: Hysteresis suggests that the natural unemployment rate is not independent of the actual
unemployment rate. In Europe, high unemployment would result in an increase in unemployment
benefits that would cause an increase in the natural rate. Eurosclerosis suggests that the high
natural rate is a result of structural problems such as high minimum wage, reluctance of labor
unions to accept wage cuts.
Diff: 2

20) Suppose an economy experiences an increase in productivity. Explain both the short-run and
medium-run effects of this increase in productivity on output, employment, and the
unemployment rate.
Answer: In both the short run and medium run, TP will cause an increase in output (assuming,
of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What
happens to employment in the medium? Given that Y will rise by the full change in TP in the
medium, we know that N and u will not be affected in the medium run. In the short run, N will
rise and u will fall if the percentage change in Y is greater than the percentage change in TP.
Diff: 2

21) Assume expectations of both prices and productivity are accurate,use the PS/WS relations,
graphically illustrate and explain the effects of an increase in the productivity on the natural rate
of unemployment.
Answer: An increase in productivity shifts both the wage and the price-setting curves by the
same proportion and thus has no effect on the natural rate.
Diff: 2

22) Assume expectations of prices are correct but expectations of productivity adjust slowly. Use
the PS/WS relations, graphically illustrate and explain the effects of a decrease in productivity
growth on the natural rate of unemployment.
Answer: The PS relation shifts up by a factor A. The WS relation shifts up by a factor Ae. If
Ae>A, the PS curve shifts up by less than the WS relation shifts up, leading to an increase in the
natural rate of unemployment for some time.
Diff: 2

23) Suppose an economy is characterized by the equations below:

Price setting: P= (1 + m) (W/A)

Wage setting: W=AP(1 - u)

Solve for the natural rate of unemployment if the markup (m) is equal to 4%.
Answer: u = 4%
Diff: 2

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13.3 Technological Progress, Churning, and Inequality

1) "Churning" refers to
A) changes in the real wage over the business cycle.
B) changes in the markup over the business cycle.
C) structural change associated with technological progress.
D) the increase in productivity caused by an increase in output.
E) the increase in output caused by an increase in productivity.
Answer: C
Diff: 1

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