Answe key to AS3

Answe key to AS3 - Econ 199 Macroeconomic Theory I...

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1 Econ 199 Macroeconomic Theory I Assignment 3 (Chapter 7, 8, 9) Due: in TA’s tutorial, May 7th, 2009, Thursday 1. Label each of the following statement true, false, or uncertain. Explain briefly. a. The aggregate demand relation slopes down, because at a higher price level, consumers want to purchase few goods. False. A higher price level will increase the quantity demanded for money and raise the real interest rate. As a result, both consumption and investment will be discouraged. b. Fiscal policy cannot affect investment in the medium run, because output always returns to its natural level. False. In the Keynesian model, output does not always return to its natural level. c. The aggregate supply relation is consistent with the Phillips curve observed before 1970, not but since. False. The aggregate supply relation is consistent with the expectations- augmented Phillips curve since 1970. d. During periods of depression, the Phillips curve relation still holds. False. During period of Great Depression, according to the Phillips curve, we should have deflation. But actually the inflation is positive. This is because people do not like to see a decrease of their nominal wage. In other words, Phillips curve may break down during period of depression and deflation. See Pg 200 of textbook. e. According to the Okun’s law, an increase of output growth will lead to a one for one decrease in unemployment rate. False. See equation 9.2 of textbook. f. In the medium run, the real money growth is equal to the normal growth rate. True. See Pg211 of textbook. g. According to Robert Lucas and Thomas Sargent, a faster disinflation is going to result in a smaller sacrifice ratio. True. See Pg 215-216 of textbook.
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2 2. Question 7 of Chapter 7 in the textbook. a. The LM has a flat segment at i =0 and then slopes up. b. The IS slopes down as before. There is no flat segment at i =0. Arguably, the IS curve is undefined for nominal interest rates below zero. c.
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Answe key to AS3 - Econ 199 Macroeconomic Theory I...

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