solutions4 - University of California, Riverside Econ 103A...

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1 University of California, Riverside Econ 103A Macroeconomic Theory Winter 2008 Solutions to Quiz # 4 1. Which of the following statements is incorrect when there is an adverse productivity shock ? - The production function relating output and labor shifts down. - The aggregate labor demand curve shifts to the left. - The equilibrium level of employment decreases. - The FE line shifts to the right. Answer: When there is an adverse productivity shock, the FE line will shift to the left not to the right. See lecture notes for details. 2. Which of the following would not shift the FE line ? - A positive productivity shock (that is an increase in A in the production function). - An increase in the general price level. - An increase in expected future real wage. - An increase in the size of the working age population. Answer: An increase in the general price level would not shift the FE line . An increase in expected future real wage would shift the aggregate labor supply curve to the left, lower the equilibrium level of employment and hence output. This would shift the FE line to the left. An increase in the size of the working age population would shift the aggregate labor supply curve to the right, raise the equilibrium level of employment and hence output. This would shift the FE line to the right.
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2 3. The LM curve will shift up and to the left when - the general price level goes up. - the nominal money supply goes up. - the real income level goes down. - nonmonetary assets become more liquid. Answer: The LM curve will shift up and to the left when the general price level goes up. A decrease in real income and an increase in the liquidity of nonmonetary assets will lower the demand for real money. These shift the real money demand curve down and lower the real interest rate that clears the asset market. 4. The IS curve will shift up and to the right when
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solutions4 - University of California, Riverside Econ 103A...

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