prac3 - Economics 502 Professor S. McCafferty Practice...

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Economics 502 Professor S. McCafferty Practice Problems III 1. For the purposes of this question, assume that a typical business cycle contraction includes all of the following phenomena: 1.) Reduced Real Output 2.) Reduced Consumption 3.) Reduced Investment 4.) Reduced Real Interest Rate 5.) Reduced Employment of Labor Services 6.) Reduced Real Wage Rate 7.) Reduced Average Labor Productivity Assume a standard classical macroeconomic model in which there is complete information. Can a temporary reduction in government spending explain all of these phenomena? Answer YES or NO . Carefully explain which (if any) of the above phenomena this kind of shock CANNOT explain. Use diagrams where appropriate. In answering this question assume that the nominal money supply is fixed. 2. For the purposes of this question, assume that a typical business cycle contraction includes all of the following phenomena: 1.) Reduced Real Output 2.) Reduced Consumption 3.) Reduced Investment 4.) Reduced Real Interest Rate 5.) Reduced Employment of Labor Services 6.) Reduced Real Wage Rate 7.) Reduced Average Labor Productivity Assume a Keynesian macroeconomic model in which there may be excess supply of output and temporarily fixed prices. Can a negative shock to the expected future marginal product of capital explain all of these phenomena? Answer YES or NO. Carefully explain which (if any) of the above phenomena this kind of shock CANNOT explain. Use diagrams where appropriate. In answering this question, assume that the nominal money supply and government fiscal policies are both fixed.
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3. Assume that the economy starts out in long run equilibrium with . 0 Y Y = Now suppose that business firms increase their optimism about the productivity of newly installed capital. That is, suppose that there is an increase in f MPK . To start out, assume that there are no changes in government policies or other expectations about
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This note was uploaded on 07/17/2008 for the course ECON 508 taught by Professor Fleisher during the Winter '06 term at Ohio State.

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prac3 - Economics 502 Professor S. McCafferty Practice...

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