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,
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 Winter '06
 Fleisher
 Economics, Macroeconomics, Fed, nominal money supply

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