Economics 305 Dr. Neri Problem Set No. 5 due in class on Friday Oct. 23 Late papers will not be accepted 1. Suppose that laws are passed banning labor unions and that resulting lower labor costs are...

Economics

305

Dr.

Neri

Problem

Set No. 5 due in class on Friday Oct. 23 Late papers will not be accepted

1.

Suppose that laws are passed banning labor unions and that resulting lower

labor costs are passed along to consumers in the form of lower prices. Use the

aggregate demand/aggregate supply model presented n Chapter 9 to illustrate

graphically the impact in the short run and the long run of this favorable

supply shock. Be sure to label:

a. the

axes; b. the curves; c. the initial equilibrium values; d. the direction the

curves shift; e. the short-run equilibrium values; and f. the long-run

equilibrium values.

2.

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while

the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate

demand curve is Y = 2(M/P) and M = 1,500.

a.

If the

economy is initially in long-run equilibrium, what are the values of the price

level (P) and Y?

b. What

is the velocity of money in this case?

c. Suppose because banks start paying interest on checking accounts, the

aggregate

demand function shifts to Y = (1.5)(M/P). What are the short-run

values

of P and Y?

d. What is the velocity of money in this case?

e. With the new aggregate demand function, once the economy adjusts to long-

run

equilibrium, what are P and Y? f. What is the velocity now?

3.

Simple Keynesian-Cross Model.

The economy of Bernankistan is characterized by the following equations,

(1) C =

100 + .75Yd = 100 + .75(Y – T) (2) I = 300

(3) G = 75,

(4) T = 100

a.

Solve for the equilibrium level of income.

b. Calculate the government spending and tax multipliers.

c. If G increases by 25(from 75 to 100), find the new equilibrium level of

income. d. Suppose now taxes depend upon income such that T = -40 +.4Y:

i. Solve for the equilibrium level of income.

ii. Calculate the government spending and tax multipliers.

4. I

have posted an Excel file named “Okun’s Law containing data for 3 countries.

1.

Use

the Excel graph function to prepare a graph for each country using the Okun’s

Law formulation. Highlight the data (do not highlight the data titles), Click

on Insert, click Scatter.

2.

There

is a feature “Add Trend Line”. Put your curser on a data point on the graph,

right click. Click “Linear” to fit a straight line to the data. Click “display

equation” and “display R-square”

3.

What

is the change in the growth rate in RGDP for a one-percentage point change in

the unemployment rate for each country?

4.

What

is the growth rate in RGDP when there is no change in the unemployment rate for

each country?