2nd GECO

Question 1:
That’s false. The Philips Curve theory states an inverse relationship between
unemployment and inflation. Thus, the higher the unemployment is, the lower the
inflation will be and vice versa. 

Question 2:

d) There will be unemployment.

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 2nd GECO

Question 3:
a) K=4   

Ls=5W

2
1 2 120 w−25 w
Y= 3 KL− L →   Y =
2 2

b) W = 2

L = 5 · (2/1) = 10
1
s

L = 5 · (2/2) = 5
2
s

Y = 12 · 10 - (½) · 10 = 70
1
2

Y1 = 12 · 10 - (½) · 102 = 70
Y = 12 · 5 - (½) · 5 = 47.5
2
2

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 2nd GECO

c) Y = 24L - ½L^2

Where the equilibrium:

w = W/P = 1
Ln = 10
Y = 24 x 10 - ½ x 10^2 = 190