Problem Set 3F09

# Problem Set 3F09 - edition, p256 5 th edition), Question...

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Economics 305 Dr. Neri Problem Set No. 3 due in class on October 21 Late papers will not be accepted 1. Suppose that laws are passed banning labor unions and that resulting lower labor costs are passed along to consumers in the form of lower prices. Use the aggregate demand/aggregate supply model presented n Chapter 9 to illustrate graphically the impact in the short run and the long run of this favorable supply shock. Be sure to label: 1. the axes; 2. the curves; 3. the initial equilibrium values; 4. the direction the curves shift; 5. the short-run equilibrium values; and 6. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run. 2. Mankiw, Chapter 9, Problems and Applications (p285 7 th edition, p277 6 th
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Unformatted text preview: edition, p256 5 th edition), Question No. 3.(Question about Fed A and Fed B) 3. Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500. a. If the economy is initially in long-run equilibrium, what are the values of P and Y? b. What is the velocity of money in this case? c. Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y? d. What is the velocity of money in this case? e. With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y? f. What is the velocity now?...
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## This note was uploaded on 02/22/2011 for the course ECON 305 taught by Professor Terrell during the Fall '08 term at Maryland.

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