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Unformatted text preview: ECON 305: INTERMEDIATE MACROECONOMICS SPRING 2011 MARK MOORE PROBLEM SET 4 A. CHAPTER 22 Quick Check 1. a. False. b. True. c. False. Even though the unemployment rate declined, it remained high until World War II. Traditional Phillips curve analysis suggests that deflation should have continued. Something more is needed to explain the end of deflation. The text explores several possible explanations. d. True. e. False. 2. a. The central bank could increase M and shift the LM curve to the right. b. Since the unemployment rate is above the natural rate, P > P e . As a result, P e falls, the AS curve shifts down, and P falls. In the IS-LM diagram, the fall in P implies an increase in M / P , so the LM curve shifts right. c. Expected inflation is likely to fall. The fall in expected inflation tends to increase the real interest rate and to shift the IS curve to the left. This movement of the IS curve tends to reduce output, i.e., to move output further away from the natural level. d. No. If the Fed does nothing, the fall in expected inflation may prevent the economy from returning to the natural level of output. 3. b. P falls and M / P rises, so the LM curve shifts right. The adjustment mechanism does not work when the nominal interest rate equals zero. As the LM curve shifts right, output does not change. c. Monetary policy is ineffective. An increase in M shifts the LM curve to the right, which does not lead to an increase in output when the nominal interest rate equals zero. d. Yes. An increase in G or a reduction in T would shift the IS curve to the right. As a result, output would increase. e. This is not wise advice. If the economy is in a liquidity trap, the central bank cannot restore output to its natural level. Dig Deeper 4. a. Short-term unemployment has a greater effect on wages. The long-term unemployed may not be searching actively for employment and may not be very employable. b. u =[.05/1.05(1-0.5 β )] c. If β =0, 0.4, 0.8, the natural rate =4.8%, 6.0%, 7.9%. Intuitively, if the weight on the long-term unemployed were zero instead of 0.5, the wage- setting and price-setting equations would determine the natural short-term rate of unemployment. The long-term unemployed would simply increase the aggregate unemployment rate. Thus, as the proportion of long-term unemployed increased, the natural rate of unemployment would increase....
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This note was uploaded on 05/26/2011 for the course ECON 305 taught by Professor Dekle during the Spring '07 term at USC.
- Spring '07