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Econ 154a Problem Set 9

# Econ 154a Problem Set 9 - I Problem#1 1 Aggregate Demand...

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I. Problem #1 1. Aggregate Demand Curve: AD (P | A f , G, G f , M, M f ). Full Employment (Exogenous-Labor) Curve: FE exogenous (r | A, K). With an exogenous labor supply, the only supply shock variable is current productivity, A. Future Productivity (A f ), current money supply (M), future money supply (M f ), current government expenditures (G) and future government expenditures (G f ) are all demand shocks. a) Full Employment (Endogenous Labor) Curve: FE endogenous (r | A f , A, K, G, G f ). With an endogenous labor supply, current productivity is the only pure supply shock. Current money supply and future money supply are the only pure demand shocks. Future productivity, current government expenditures and future government expenditures are both supply and demand shocks. b) Full Employment (Efficiency Wage) Curve: FE EW (r | A, K). In the efficiency wage model, current productivity is the only supply shock. Future productivity (A f ), current money supply (M), future money supply (M f ), current government expenditures (G) and future government expenditures (G f ) are all demand shocks. 2. All the demand shocks predict that employment will be procyclical, average labor productivity will be countercyclical, and current price level will be acyclical. For consumption, a shock to future productivity predicts that consumption is acyclical while a shock to current government expenditures predicts that consumption is countercyclical and the other demand-shock variables predict that it is procyclical.

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Econ 154a Problem Set 9 - I Problem#1 1 Aggregate Demand...

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