EC111Class16Answers

EC111Class16Answers - EC111 MACROECONOMICS Spring Term 2012...

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Spring Term 2012 EC111 Class 16 Solution Question 1 (a) A classical economist would conjecture that there was no inflation and appeal to the quantity theory of money: MV = PY. Given M and Y are growing at 5%, then provided V is constant, there can be no growth in P, that is no inflation, in the long run. (b) If there were sustained inflation, then the logical place to look for a breakdown of the above logic is in the assumption of a constant velocity of money, V. Alternatively if the classical assumption of full employment does not hold then Y could vary (but then we would no longer be in a classical world). Question 2. (a) The downward sloping relationship between nominal wage and price change and unemployment (the Phillips curve) comes from partial wage adjustment to excess demand or supply in the labour market (below). This can be contrasted with the classical case, when the wage adjustment function is vertical, and the extreme Keynesian case where it is horizontal. One reason to expect something in between is that wages are negotiated infrequently. (b)
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EC111Class16Answers - EC111 MACROECONOMICS Spring Term 2012...

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