d Briefly outlone two main difference between the CPI and the GDP deflator 2

# D briefly outlone two main difference between the cpi

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(d) Briefly outlone two main difference between the CPI and the GDP deflator. 2. Unemployment (a) Carefully explain the differences between “structural unemployment”, “frictional unemployment” and “cyclical unemployment”. (b) What theoretical explanations are there for the existence of structural unemployment? (c) Explain two possible reasons for the presence of frictional unemployment. (d) Identify a policy which may be adoped by the government to reduce the level of structural, frictional and cyclical unemployment. (Please turn over for Question 3)
3. The IS-LM Model Assume that the consumption function is given by C = 200 + 0.5( Y T ) where C is consumption, Y is GDP and T is taxes. The investment function is I = 1000 – 200 r , where r is the interest rate measured in percent. Government spending, G, equals 300, and T equals 200. Assume that equilibrium in the money market may be described as M / P = 0.5 Y – 100 r , where M is the money supply and P is the price level and M / P equals 800. (a) Derive an equation for the IS curve where r is expressed as a function of Y . Explain why the slope of the IS curve is negative. (b) Derive an equation for the LM curve where r is expressed as a function of Y . Explain why the slope of the LM curve is positive. (c) Briefly explain the reason why the income response to a fiscal expansion is generally less in the IS LM model than it is in the Keynesian-cross model.

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• Spring '14
• Dr.GonzaloForgues-Puccio

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