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# PS8 - 2 of full-employment output The...

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Econ 3140 Fall 2009 Problem Set 8 Due Wednesday November 11 (on lecture time) Reading assignment: Chapter 12 1. Question Two from Abel et.al., Chapter 12, numerical problems. 2. Consider the following misperceptions model of the economy: AD : Y = 600 + 10( M P ) SRAS : Y = Y + ( P ° P e ) Okun°s Law: ( Y ° Y ) Y = ° 2( u ° u ) Let Y = 750 , u = 0 : 05 , M = 600 , and P e = 40 . (a) What is the price level? (b) Suppose there is an unanticipated increase in the nominal money supply to 800 . What is the short-run equilibrium level of output, the unemployment rate, and the price level? Draw the equilibrium on a AD ° AS diagram. (c) When price expectations adjust fully, what is the price level? 3. Consider an economy in long-run equilibrium with an in±ation rate ( ° ) of 0 : 08 per year and a natural unemployment rate of 0 : 05 . Suppose Okun°s law holds and a one percentage point increase in the unemployment rate reduces real output by
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Unformatted text preview: 2% of full-employment output. The expectations-augmented Phillips curve is given by: & = & e & 2 : 5 ( u & : 05) Consider a two-year disin±ation. In the ²rst year, & = 0 : 06 and & e = 0 : 08 . In the second year, & = 0 : 04 and & e = 0 : 05 . (a) In the ²rst year, what is the value of the unemployment rate? (b) In the ²rst year, by what percentage does output fall short of full-employment output? (c) In the second year, what is the value of the unemployment rate? (d) In the second year, by what percentage does output fall short of full-employment output? (e) What is the sacri²ce ratio for this disin±ation? 4. Question Two from Abel et.al., Chapter 12, analytical problems 5. Question Six from Abel et.al., Chapter 12, analytical problems 1...
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