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f01_ps7 - 14.02 Fall 2001 Problem Set 7 Posted 5 November...

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14.02 — Fall 2001 — Problem Set 7 Posted 5 November, 2001 Due 16 November, 2001 Part I: True, False or Uncertain? 20 points Explain your answer completely yet brie fl y. 1. The natural rate of unemployment is una ff ected by policy changes. (4 points) 2. If employment is increasing, then the unemployment rate must be declin- ing. (4 points) 3. All of the following will make the economy move along the Aggregate Supply curve (in the short run): an increase in the money supply, an increase in government spending, an increase in taxes. (4 points) 4. All of the following will shift the Aggregate Supply curve upwards: an increase in the fi rm’s markup of price over costs, an increase in the ex- pected price level, an increase in the generosity of unemployment bene fi ts. (4 points) 5. If equilibrium output is above its natural level, fi rms will lay o ff excess workers. This depresses wage demands and therefore prices, thus bringing the economy back to its natural level. (4 points) Part II: Labor Market Equilibrium. 35 Points Suppose that, in a certain economy, wages are set according to the following equation (Wage-Setting Relation): W = P (1 u ) z where W is the nominal wage, P is the price level, u is the unemployment rate and z captures all other variables a ff ecting the outcome of the wage setting, such as institutional factors.
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