Homework answers / question archive / 1)What is the key difference between classical and Keynesian macroeconomists differing beliefs about?         Economists use the term shocks to mean unexpected government actions that affect the economy

1)What is the key difference between classical and Keynesian macroeconomists differing beliefs about?         Economists use the term shocks to mean unexpected government actions that affect the economy

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1)What is the key difference between classical and Keynesian macroeconomists differing beliefs about?

 

 

 

 

2. Economists use the term shocks to mean
   1. unexpected government actions that affect the economy.
   2. typically unpredictable forces that have major impacts on the economy.
   3. sudden rises in oil prices.
   4. the business cycle.

 

3. Consider an economy in long-run equilibrium with an inflation rate (π) of 0.08 per year and a natural unemployment rate of 0.05. The expectations-augmented Phillips curve is given by             π = πe - 2.5 (u - 0.05).

Consider a two-year disinflation. In the first year, π = 0.06 and πe = 0.08. In the second year, π = 0.04 and πe = 0.05.

1. In the first year, what is the value of the unemployment rate?
2. In the second year, what is the value of the unemployment rate?
3. What is the sacrifice ratio for this disinflation?

 

 

4) In a certain economy the expectations-augmented Phillips curve is

π – π^e  =  – 2 (u – u^N)   and   u^N  =  0.06.   

 

1. Graph the Phillips curve of this economy for an expected inflation rate of 0.10.  If the Central Bank chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate?
2. An aggregate demand shock (resulting from increased military spending) raises expected inflation to 0.12 (the natural rate of unemployment is unaffected).  Graph the new Phillips curve and compare it to the curve you drew in part (a).  What happens to the unemployment rate if the Central Bank holds actual inflation at 0.10?  What happens to the Phillips curve and the unemployment rate if the Central Bank announces that it will hold inflation at 0.10 after the aggregate demand shock, and this announcement is fully believed by the public?
3. Suppose that a supply shock (a drought) raises expected inflation to 0.12 and raises the natural unemployment rate to 0.08.  Repeat part (b).

 

 

 

5) Suppose there is a decline in consumer optimism that reduces desired consumption at each level of income and the real interest rate. ( points)

1. 1. 1. Determine the effects of this change on output, the real interest rate and the price level using the IS-LM model, and show your analysis on an IS-LM diagram. Distinguish between the short-run and the long-run assuming price stickiness in the short run.
      2. Suppose that the government wants to stabilize output, i.e. keep the level of output constant, in the short run. Explain what the government would have to do to achieve its goal using monetary policy and show it on an IS-LM diagram.
      3. How does your answer to part (b) changes if the government decides to use fiscal policy instead of monetary policy? Show your answer on an IS-LM diagram.

 

 

6) Consider the following economy:

         C^d  =  1275 + 0.5 (Y – T) – 200 r    

         I^d  =  900 – 200 r    

M^D / P  =  0.5 Y – 200 i Y  =  4600 π^e = 0

Suppose that T = G = 450 and that M = 9000.  Find an equation describing the IS curve.  Then, find an equation describing the LM curve.  Finally, find an equation for the aggregate demand curve.  What are the equilibrium values of output, consumption, investment, the real interest rate, and price level? 

 

 

 

7) Use the IS-LM model to determine the effects of each of the following on the short-run equilibrium and general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and price level. Moreover, show changes in AD-AS model.

1. 1. A reduction in the effective tax rate on capital increases desired investment.
   2. The expected rate of inflation rises

 

 

8) Suppose that an influx of working-age immigrants increases labor supply (ignore any other possible effects of increased population).  Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and price level.