a. Workers are paid at a rate equal to their reservation wage.

False, the Efficiency wage theory states that higher wages improve the productivity of workers.
b. Workers who do not belong to unions have very little bargaining power.
True, the Insider outsider model states that workers belonging to unions have higher bargaining powers
because they are costly to replace.
c. It may be in the best interest of employers to pay their workers’ wages higher than their reservation
wage.
True, the Efficiency wage theory states that higher wage will make workers more efficient and productive.
d. The natural rate of unemployment is unaffected by policy changes.
False, natural rate of unemployment is determined by price expectations. As such, policy changes will lead
to a change in expected prices and as a result will affect the natural rate of unemployment.
e. The aggregate supply relation implies that an increase in output leads to an increase in the price level.
True, aggregate supply is upward sloping. Thus, an increase in output leads to an increase in price level.
f. The aggregate demand relation implies that an increase in the price level leads to an increase in output.
False, aggregate demand is downward sloping. Thus, an increase in the price level leads to a decrease in
output.
g. In the absence of changes in fiscal and/or monetary policy, the economy will always remain at the
natural level of output.
True, the natural level of output is determined by the equilibrium between labor supply and demand.
Labor demand is dependent on the price expectations. In the absence of changes in fiscal and/or
monetary policies, the price expectations will remain at the same level. Thus, the natural level of output
will not change.
h. Expansionary monetary policy has no effect on the level of output, according to the monetarists.
True, in the short run, monetarists insist that level of output is determined by money supply; however, in
the long run, real factors, such as land labor and capital, determine the level of output.
i. In the long run, according to Keynesians, the shift in the aggregate supply curve is caused by changes in
wage expectations.
True, in the long run, wage rigidities will not affect the level of aggregate supply curve due to changes in
wage expectations.
j. The relationship between employment and output growth is perfectly correlated, i.e., an increase in one
percent in GDP growth increased the employment rate by one percent.
False, they are positively correlated but an increase in one percent of GDP growth does not imply an
increase in one percent of employment rate.
 Botswana is a landlocked country in Saharan Africa. Some of the major challenges faced by the

country are the lack of seaports and small amount of land for agriculture. Another challenge is the high

incidence of HIV. Despite these obstacles, after Botswana became independent from Britain in 1966, it

has exhibited above average growth rates.

One of the factors that contributes to the long run growth of the country is their geography

which gave them huge diamond deposits for them to explore. This became a major contributor to their

output. However, countries such as Sierra Leone and Democratic Republic of Congo shows us that

having natural resources alone was not enough to boost the economy. Another factor that contributed to

the growth of Botswana was the direct foreign investments. Because of this, the capital per worker

increased which increases the output per worker. Moreover, foreign mining companies were sharing their

profits from their explorations which also increases the capital stock of the country. Here, we can see that

from the equation of the change is capital stock per worker,

ΔK Yt Kt
=s −δ
N N N
Yt
the investment per person s is large due to the foreign investments. Thus, we can expect the steady
N

state to be high as well.

Aside from these, the role of the government also played a significant role in the growth of the

country. The government was effective in governing the country since they have a tradition of long-term

planning “guided by a vision for the future direction of the economy.” Moreover, whenever the dominant

Botswana Democratic Party felt threatened by other parties, it responds by delivering better government

services. The government was also able to improve human capital when they attained universal primary

education. It was also able to allow its citizens to make suggestions to its policies and criticize those in

power. Finally, the government always makes sensible decisions and avoids serious corruption that

benefited the economy.

Overall, we can see that the GDP growth of the country as exhibited by the equation

ΔY Δ A ΔK ΔN
= +θ + ( 1−θ )
Y A K N
is mainly due to the high investments which is properly managed by the policies of the government.

Although Botswana seems to have a healthy GDP growth, it is also important to note that long-

run growth is affected by both technology and capital. On the side of capital, Botswana seems to have

everything under control as the strategies employed by the government are very effective. What was not

mentioned by the article was how Botswana is able to utilize technology. This would be one of the main

problem areas for Botswana’s future GDP growth. As a country that is primarily reliant on its exports of

diamond as well as foreign investments. There are no avenues for technology to develop in Botswana that

would benefit the GDP. Any advances in technology with those foreign investments in Botswana would

mean that the country itself is not able to utilize it fully. Furthermore, Botswana’s diamond reserve is

limited and aside from this export the article does not mention any other sustainable export. Since the

country has no sustainable export in the long run foreign firms may prefer to invest in other countries

that specialize in manufacturing or in services as prices there will be cheaper. This would mean that in the

long run it is possible for Botswana to experience a decrease in foreign investments which will then lead

to a decrease in total capital stock of the nation.

Aside from this, it is also mentioned that although Botswana has relatively high primary literacy

compared to that of its neighbours; it still has a problem with higher levels of education. This is another

problem in itself as in the long run the current generation may not be competitive enough when placed in

the global scene. To add to this, Africa is the region where HIV is at its highest around the globe. nearly

20% of the population has HIV which shortens the average lifespan to just 55 years old. Separately,

having a work-force that has lower levels of education when compared to other countries would mean

that in the long run Botswana may have difficulty in creating its own technology to expedite the diamond

mining processes. A low average life expectancy with high number of cases of HIV would mean that

Botswana would have a sickly workforce that is not favorable for their GDP growth. In the long run, we

see that the main constraints that Botswana will face are its lack of sustainable exports, decrease in foreign

investments, and the quality of its workforce.

There are two ways that the Philippines can learn from Botswana. First, is to emulate Botswana’s

policies when it comes to foreign investments and if possible its tradition of not enforcing the idea of
elites in a society. An example of how the Philippines could improve on how foreign investments work

locally would be how it reacted to the sudden surge of online gaming casinos in the Philippines. An

approach that would have been more beneficial to the Philippine economy would be to regulate the

online gaming casinos and distribute the licenses more spread out so that there will be more competition.

Additionally, it would have been more beneficial to the local economy if the government placed heavier

taxes on the online casinos that were primarily non-filipino owned in order to gain a notable amount of

revenue from them as well as protecting the local market. Furthermore, the Philippines should also invest

more into assuring that in the long-run the country will have a competent and healthy workforce in order

to avoid the situation that Botswana’s labor force is in.