Problem Set 3
Problem Set 3
Macroeconomics, ECON 2123
Sections L3 and L4 P. Sen
Posted 9.11.14.
Due 5 PM 17.11.14.
-----------------------------------------------------------------------------------------------------------------------------------
100 marks total
Part I: True/False/Uncertain Please justify your answer with a short argument for each question and draw a diagram if necessary. (25 marks, 5 marks each: 2 marks for correct judgment and 3 marks for correct argument)
1. Suppose that workers in the Republic of Communia are highly unionized, while workers in the Republic of Individuela are not. In all other respects, the two countries are exactly the same. Then Communia is likely to have a higher natural level of output than Individuela.
2. Suppose there is a decrease in the price level from P to P’. Given the stock of nominal money, M, this leads to an increase in the real money stock, M/P, which shifts the LM curve down. This implies that the AD curve shifts to the right.
3. When output is below the natural level of output, the actual price level is lower than the expected price level.
4. In terms of changing output, monetary policy is relatively more effective when the AS curve is relatively flat, while fiscal policy is more effective when the AS curve is relatively steep. 5. The aggregate demand relation slopes down because at a higher price level, consumers wish to purchase fewer goods.
Part II: The Labor Market (Chapter 6) (10 marks)
1. The existence of unemployment
(a) Suppose previously the unemployment rate was relatively high. But now things change: the unemployment rate becomes very low this year. What change happens in terms of the relative bargaining power of workers and firms when the unemployment rate becomes very low? What do your answers imply about what happens to the wage as the unemployment
rate gets very low, given expected price and actual price constant?
? (b) Given your answer to part (a), why is there unemployment in the economy? (What
would
Macroeconomics, ECON 2123
Sections L3 and L4 P. Sen
Posted 9.11.14.
Due 5 PM 17.11.14.
-----------------------------------------------------------------------------------------------------------------------------------
100 marks total
Part I: True/False/Uncertain Please justify your answer with a short argument for each question and draw a diagram if necessary. (25 marks, 5 marks each: 2 marks for correct judgment and 3 marks for correct argument)
1. Suppose that workers in the Republic of Communia are highly unionized, while workers in the Republic of Individuela are not. In all other respects, the two countries are exactly the same. Then Communia is likely to have a higher natural level of output than Individuela.
2. Suppose there is a decrease in the price level from P to P’. Given the stock of nominal money, M, this leads to an increase in the real money stock, M/P, which shifts the LM curve down. This implies that the AD curve shifts to the right.
3. When output is below the natural level of output, the actual price level is lower than the expected price level.
4. In terms of changing output, monetary policy is relatively more effective when the AS curve is relatively flat, while fiscal policy is more effective when the AS curve is relatively steep. 5. The aggregate demand relation slopes down because at a higher price level, consumers wish to purchase fewer goods.
Part II: The Labor Market (Chapter 6) (10 marks)
1. The existence of unemployment
(a) Suppose previously the unemployment rate was relatively high. But now things change: the unemployment rate becomes very low this year. What change happens in terms of the relative bargaining power of workers and firms when the unemployment rate becomes very low? What do your answers imply about what happens to the wage as the unemployment
rate gets very low, given expected price and actual price constant?
? (b) Given your answer to part (a), why is there unemployment in the economy? (What
would