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Roderick_April_BU204-05_Unit_9_Homework

Roderick_April_BU204-05_Unit_9_Homework - in reducing...

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Problems 4 and 10 #4 The different effects on the magnitude and duration of unemployment in these two economies are decided by how fast wages can react to the change in aggregate output. When aggregate output falls, the demand for labor also falls. In Northlandia where there are no labor contracts businesses will quickly rethink wages and offer lower wages. The magnitude of the unemployment problem will be less and the duration will be shorter for Northlandia. In Southlandia where wages are set at the beginning of each odd year and last for two years, employers will be not be able to reduce wages for a period of time no matter if they have falling sales or not. The magnitude and duration of unemployment will be larger in Southlandia until contracts can be renegotiated. #10 Japanese short-run Phillips curve will shift upwards and the long-run Japanese Phillips curve will still be vertical. Argentina will find that its short-run Phillips curve is practically vertical. Argentinean monetary and fiscal policy is ineffective
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Unformatted text preview: in reducing unemployment. Problems 5 and 6 #5 The main advantage to printing money to cover the deficit is to avoid the crowding-out effects. The disadvantage to printing money to cover the deficit is that it will result in inflation. Financing the budget deficit with an increase in actual taxes, printing money imposes an inflation tax. #6 a. If the actual inflation rate is 4%, Lynn is better off and Boris is worse off. Boris had expected to pay, and Lynn had expected to receive, a real interest rate of 3%. An actual inflation rate of 4%, an 8% nominal interest rate yields a real interest rate of 4%. So Boris will pay more, and Lynn will receive more than expected. b. If the actual inflation rate is 7%, Boris is better off and Lynn is worse off. An actual inflation rate of 7%, an 8% nominal interest rate yields a real interest rate of 1%. Boris pays less, and Lynn receives less than what was expected....
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