Exercise7F10 - Economics 5202 Fall 2010 Exercise 7 Solution...

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Economics 5202 Fall 2010 Exercise 7 Solution will be posted by Friday, November 26. 1. Suppose you have an economy characterized by the Keynesian coordination failure model. In this economy, suppose part of the capital stock is destroyed by an earthquake. Please note that in answering this question when you think there is an ambiguity in the answer, discuss all possible outcomes. However, when asked to demonstrate your answer in a diagram, show only one case, unless you are asked to show all possible outcomes. a. Start by drawing the production for this economy and an arbitrary equilibrium in the labor market. b. Explain how the reduction in the capital stock affects these two diagrams. c. What is the effort on real wage? Employment? d. Draw a diagram showing the output market with a low output equilibrium and a high output equilibrium. Explain how the reduction in the capital stock affect the output supply and output demand curves. Provide clear explanations and show in the diagram. e. Finally, show and explain carefully how the low output equilibrium and high output equilibrium are affected by the changes in output supply and/or output demand.
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This note was uploaded on 03/08/2011 for the course ECONOMIA 44 taught by Professor Jose during the Spring '11 term at Universidad Carlos III de Madrid.

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Exercise7F10 - Economics 5202 Fall 2010 Exercise 7 Solution...

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