section10 - Econ 100B Section 101 102 Summer 2009 UC...

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Econ 100B Section 101 & 102 Summer 2009 – UC Berkeley Phakawa On Jeasakul August 5, 2009 Practice Problems 1. Basics. This problem is to review the basic concept of the short-run aggregate supply curve. a. Explain why the short-run aggregate supply curve should be described as the following equation: ܻ ൌ ܻ ൅ ߙሺܲ െ ܲ ሻ ൅ ߭ . b. What should the short-run aggregate supply curve in part (a) look like on an output – price diagram? What should happen when the price expectation changes? c. How can the short-run aggregate supply curve in part (a) be related to the Phillips curve? 2. Disinflation. Disinflation means a reduction in the inflation rate. In this problem, let’s interpret disinflation as a reduction in the price level. a. What should the central bank do in order to bring down the price level? Can the price level decline immediately? b. Does the result in part (a) depend on the form of the price expectation? What should be the disinflation process if expectation is adaptive? What should be the disinflation process if expectation is rational? c. How does the sacrifice ration differ between the two forms of the price expectation? 3. (Mankiw 13.7) Some economists believe that taxes have an important effect on labor supply. They argue that higher taxes cause people to want to work less and that lower taxes cause them to want to work more. Consider how this effect alters the macroeconomic analysis of tax changes. a. If this view is correct, how does a tax cut affect the natural rate of output?
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