Quiz 8: Macro 2007 Name _____________________ Section 8:30 10:00 6:00

For this quiz, make the following assum tions! "se the mo#el of the econom$ #e%elo e# in class! &ssume consumers are non'liqui#it$ constraine#, non' (icar#ian )*+ consumers! &ssume N, is fi-e# at zero! &ssume e- ecte# inflation is constant! &ssume no monetar$ or fiscal olic$ takes lace, unless otherwise in#icate#! &ssume all changes are une- ecte# an# ermanent .unless tol# otherwise/! &ssume, e- ecte# inflation has no effect on mone$ #eman#! 0astl$, assume the econom$ is initiall$ in long run equili1rium .i!e, 2 0 3 24/! Note: When discussing the short run, compare the initial condition to the short run equilibrium. When discussing the long run, compare the initial conditions to the ne equilibrium. Note: !ssume no income e""ect on labor suppl# Question $ 5hich of the following are #efinitel$ true if there is a ermanent .an# une- ecte#/ increase in 6F)7 %n this problem, e ill assume the in the short run, the shi"t in aggregate demand cur&e and the shi"t in the short run aggregate suppl# cur&e result in prices remaining "i'ed (onl# in the short run) (*0 + *$) .8 oints each 9 80 oints total/! 6he ke$ to this question is to realize that in the short run, 5:) is fi-e# 1ecause 5 is fi-e# 1$ #efinition an# ) is fi-e# 1$ assum tion! 5e know in the long run, that 5:) will ha%e to rise! ;i%en that we are on the new la1or #eman# cur%e in 1oth the short run an# the long run, we know that in the short run N.short run/ < N4.new/! 5e know this 1ecause 5:) .short run/ = .5:)/4.new/! So, we know in the short run, 2.short run/ < 24.new/! 6his was the main intuition of this question! So, in the long run, we know the self correcting mechanism will kick in such that 5 will increases .shifting in S(&S an# utting u war# ressure on rices/! So, in the long run, we know ) will increase .gi%en the e-am le that * set u /! a! >onsum tion will #efinitel$ increase in the long run long run

6rue 9 )?0( increases ermanentl$ as 5:) increases in the long run! So, > increases! 1! 6he long run aggregate su l$ cur%e will #efinitel$ shift to the right .in the long run/!

6rue 9 1oth & an# N4 increase so 24 increases .0(&S shifts right/! c! 6he 0@ cur%e will not shift at all in the short run!

6rue 9 0@ cur%e onl$ shifts with changing @ an# changing )! @ is not changing an# ) is fi-e# in the short run gi%en the assum tions ma#e in the ro1lem! #! )rices will #efinitel$ increase in the long run!

6rue 9 see a1o%e! 6his is 1ecause 2 .short run/ < 24 .new/! So, the self correcting mechanism will kick in as workers are working too much! e! (eal wages will #efinitel$ increase in the long run!

6rue 9 this was so eas$! & question like this was on quiz 3 an# the mi#term! f! Nominal wages will #efinitel$ increase in the long run!

6rue 9 this was #ue to the self correcting mechanism 1ecause N .short run/ < N4 .new/ g! Structural #eficits will #efinitel$ fall in the long run!

6rue 9 as 24 increases, ta- re%enues will increase an# structural #eficits will fall! h! Aut ut er worker will not change in the short run!

6rue 9 gi%en the >o11'Bouglas ro#uction function, 5:) 3 !C .2:N/! No change in 5:) in the short run means no change in 2:N! i! 6he *S cur%e will #efinitel$ shift right in the short run!

6rue 9 as > increases, *S cur%e will shift right .also, @)D will increase causing * to increase all else equal/! E! *nterest rates will #efinitel$ increase in the long run!

6rue 9 *S shifts right an# 0@ shift left in long run .as ) increases/! !