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quiz3answers - 14.02 Fall 2001 QUIZ 3 Answers PART 1: True,...

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14.02 — Fall 2001 — QUIZ 3 Answers PART 1: True, False or Uncertain. (30 points) a. TRUE. The natural level of output is de f ned as the level of output con- sistent with equilibrium in the labor market when the actual price level is equal to the expected price level. The Aggregate Supply relation is the level of output consistent with equilibrium in the labor market given each level of prices. Therefore, Y n is simply a point on the AS curve (the one that corresponds to P e ). b. FALSE. Changes in f scal policy will shift Aggregate Demand. As result, prices will change in the short run and the AS will shift over time until it intersects AD at the natural level of output again. In the medium run equilibrium, output is back to the same initial level ( Y n ), but the interest rate is now di f erent. Therefore, investment will necessarily have changed. (A f scal expansion increases the interest rate in the medium run and re- duces investment; a f scal contraction raises investment). c. FALSE. An increase in unemployment bene f ts ( z ,int e rm so fth eAS - AD model we have seen) will reduce the natural level of output. In the medium run, output will go down to its new natural level —so the increase in z will indeed have permanent e f
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quiz3answers - 14.02 Fall 2001 QUIZ 3 Answers PART 1: True,...

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