Suppose people have rational expectations and the AD and AS curves take the following forms: AD: Y₁ =y 400+ 0.5. 1 200 Pt Full employment level of output is equal to 550 and 1. In period t=0 the actual price level Po = 1 and it was NOT equal to the AS: P₁ = EP₁ + ²/(Yt-ỸÝ) 50
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- Congratulationst You have been appointed an economic policy adviser to the United States, You are told that the economy is significantly abowe futtemplyoment GDP. Based on this inlormation, how can the economy would adjust to reach LR.SR Equilbrium (Classical View)? The economy wilt experience low unemployment rate, pushing wages up, and increasing the pelces of a key input (labor). shatting the sAS to the left (up). The economy will experience high unemployment rate, pushing wages down, and reducing the prices of a key input (labor). shiting the SAS to the right (down). The econoriny wil experience low unemployment rate, decreasing inceme, which will eventually shift the AD to the left. The eooncmy will experience low unemployment rate, pushing wages up, and increasing the prices of a key input (labor), shiting the sAs to the night (down).Suppose, initially the Australian economy is atfull employment(in other words the economy is atthe potentialGDP). Using AD-AS model, explain how would each of the following events aectthe economy both in theimmediate and in the long term.a) A slowdown in China’s economic growth due to the sub-prime crisis in the US.b) Union wage settlements push the wage rate up.c) An increase in consumer confidence.Economics How are aggregate output and the real interest rate determined in compettive egulbum? OA The aggregate oulput can be found by multiplying current employment by current real wage at the intesection of the current labour supply and demand curves, given the raal inderest rate. and ssubtracting the level of investment in the economy OB. Cument aggregata output and the real interest rate are determined by the intersection of the output supoly and demand ouves OC. Cunent aggregate output can be found by finding current employment from the intersection of the current labour supply and domand ourves given the real interest rate and aocounting tor total tactor productivity OD. The real interest rate is determined by the slope of the output supply curve at a given level of aggregate output
- 09. The left-hand Which of the following statements is tru about the diagrams above depicting the macroeconommy in both Keynesian and Classical frameworks and a change from AEo to AE* and ADo to AD*? a) The left-hand diagrams show the effect of an increase in Aggregare Expenditures (and Aggregate Demand), where the short-run Aggregate Supply is horizontal, meaning a constant products price level. b) The right hand diagrams show the effect of an increase in Aggregate Expenditrues (and Aggregate DEmand), where short-run Aggregate Supply is vertical (constant Aggregate Quantity Supplied). c) The left-hand diagrams illustrate the Keynesian range of the shor-run Aggregate Supply curve, where Keynesian expansionary policy does not cause any inflation and thus is very effective. d) The right-hand diagrams illustrate the Classical or Monetarist range of the short-run Aggregate Supply curve, where Keynesian expansionary policy is totally dissipated in…2. Show a AD-AS graph inflation in the short run and the shift in the SAS necessary to eliminate it.Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…
- Use the following figure to answer the next question. Price Level P MHURBODDES 0 E 40 18 X DOBO GODD a 4 9 OA) low unemployment OB) expansion OC) hyperinflation OD) stagflation 9 AS₁ Q₁ Q₂ Q3 Real Domestic Output AS₂ AD₁ AD₂ In the figure, AD2 and AS2 represent the original aggregate supply and demand curves. If Q3 is full-employment output, then AD2 and AS₁ best represent a period ofConsider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring. Price Level P3 2 Po 0 FIGURE 29-1 Y" E3 E2 E1 Eo Real GDP AS3 AS2 AS1 ASO AD3 AD2 AD1 ADO Select one: O a an annual shift upward of the AS curve by 3%. b. an annual increase in the inflation rate of 3%. Oc. an annual shift upward of the AD curve by 3%. d. an annual increase in the equilibrium price level of 3%. Oe. Not applicable. The diagram shows the price level, not the inflation Refer to Figure 29-1. A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one asConsider a Keynesian business cycle theory that combines the IS-LM model with the assumption that investors become infected with optimism. Does the theory explain observed cyclical behavior of each of the following variables? Еmployrment O A. is procydlical in the data, but is countercydlical in the model. Hence the model does not match this business cycle fact. O B. is countercyclical in the data, but is procyclical in the model. Hence the model does not match this business cycle fact. OC. is countercyclical in the data, and is countercyclical in the model. Hence the model matches this business cycle fact. OD. is procyclical in the data, and is procyclical in the model. Hence the model matches this business cycle fact. Average labor productivity O A. is procyclical in the data, but is countercyclical in the model. Hence the model does not match this business cycle fact. OB. is countercyclical in the data, but is procyclical in the model. Hence the model does not match this business…
- Questron 3 Suppose the nominal interest rate is currently 24 per cent and expected inflation is 16 per cent. IF the expected inflastion rate doubles to 3.2 per cent, wtich of the foloving would be an implication of the Fisher effect? O The real interest ate talls by 1.6 per cent O The nominal interant rate doubies to 48 per cent O The nominal interast rate rises n 5.6 per cent O The nominal incerest rate des co 4.0 por centAssume that the present price level is P1. Prico Lovel Price Level a A LAS Real GDP с LAS Real GDP AS AD AS AD Price Level Price Level a B LAS Real GDP D Real GDP AS AD AS ADQuestion 5 The economy's MPN is given by MPN=100-N0.5 where N is the level of employment. How much is the aggregate labor demand when the real wage is w 20? 120 64,000 O 6400 80 Question 6 The ECON 103 professors have two hundred midterm exams to grade. They offer to hire you to help them grading, paying you twice the amount you would normally receive (because fow students are willing to work during the term), You take the job. This would be an example of the substitution effect being stronger than the income effect. the income effect being stronger than the substitution effect. the substitution effect being equal to the income effect. a pure income effect.