1. Suppose the economy is in long-run equilibrium. Now suppose that laws are passed banning labor unions resulting lower labor costs and the lower labor costs are passed along to consumers in the form of lower prices.

(a) Use the aggregate demand/aggregate supply model presented in Chapter 9 to illustrate graphically the impact in the short run and the long run of this supply shock. Be sure to label: (a) the axes; (b) the curves; (c) the initial equilibrium values; (d) the direction the curves shift; (e) the short-run equilibrium values; and (f) the long-run equilibrium values.

(b) Prepare three “time graphs” as presented in class to show the short-run and long-

run impacts on: (Y), (P) and unemployment.

2. For each of the following, draw a diagram to show how the curve or curves should shift in the IS-LM model of a closed economy with fixed prices, and explain in a sentence or two the reason(s) for the shift(s).

(a) An increase in government purchases (G) financed by borrowing(T does not

change)

(b) An increase in government purchases (G) financed by printing money

(c) An increase in government purchases financed by increasing taxes by the same

amount.

3) Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Other relevant information is:

a) C = 100 + 0.75 * (Y – T)

b) I = 750 – 20 * r

c) T = 1000; G = 1000;

d) Y = C + I + G

e) (M/P)d= 0.4 * Y – 48 * i

f) Ms= 1,200

g) (M/P)d= Ms/P

h) Suppose investors and bond traders expect inflation, π e= 0, so that i = r.

Answer the following:

(i) Calculate the IS curve. Solve for Y in terms of r.

(ii) Calculate the LM curve. Again, solve for Y in terms of r.

(iii) What are the short-run equilibrium values for Y, r, C, I, private saving, public saving,

and national savings.

(iv) Show that C + I +G = Y and that S = I

(v) Present a properly labeled IS-LM graph showing the equilibrium level of Y and r.

(v) What is the government spending multiplier when G increased by 200? That is, what

is deltaY/delta G?

(vi) Assume that G is back at its original level of 1000, but the money supply increases

by 200. By how much will Y increase in the short-run equilibrium?

4. Use the data from question (1) but let's make T a function of income (an income tax

rather than a lump sum tax). Let T = -100 + 1/3Y.

(i) Calculate the IS curve. Solve for Y in terms of r.

(ii) Calculate the LM curve. Again, solve for Y in terms of r

(iii) Solve for the short-run equilibrium values for Y, r

(iv) What is the government spending multiplier when G increased by 200? That is what

is deltaY/delta G? What happened and why?

(a) Use the aggregate demand/aggregate supply model presented in Chapter 9 to illustrate graphically the impact in the short run and the long run of this supply shock. Be sure to label: (a) the axes; (b) the curves; (c) the initial equilibrium values; (d) the direction the curves shift; (e) the short-run equilibrium values; and (f) the long-run equilibrium values.

(b) Prepare three “time graphs” as presented in class to show the short-run and long-

run impacts on: (Y), (P) and unemployment.

2. For each of the following, draw a diagram to show how the curve or curves should shift in the IS-LM model of a closed economy with fixed prices, and explain in a sentence or two the reason(s) for the shift(s).

(a) An increase in government purchases (G) financed by borrowing(T does not

change)

(b) An increase in government purchases (G) financed by printing money

(c) An increase in government purchases financed by increasing taxes by the same

amount.

3) Consider an economy in the short-run with the price level P fixed at 1 (P = 1). Other relevant information is:

a) C = 100 + 0.75 * (Y – T)

b) I = 750 – 20 * r

c) T = 1000; G = 1000;

d) Y = C + I + G

e) (M/P)d= 0.4 * Y – 48 * i

f) Ms= 1,200

g) (M/P)d= Ms/P

h) Suppose investors and bond traders expect inflation, π e= 0, so that i = r.

Answer the following:

(i) Calculate the IS curve. Solve for Y in terms of r.

(ii) Calculate the LM curve. Again, solve for Y in terms of r.

(iii) What are the short-run equilibrium values for Y, r, C, I, private saving, public saving,

and national savings.

(iv) Show that C + I +G = Y and that S = I

(v) Present a properly labeled IS-LM graph showing the equilibrium level of Y and r.

(v) What is the government spending multiplier when G increased by 200? That is, what

is deltaY/delta G?

(vi) Assume that G is back at its original level of 1000, but the money supply increases

by 200. By how much will Y increase in the short-run equilibrium?

4. Use the data from question (1) but let's make T a function of income (an income tax

rather than a lump sum tax). Let T = -100 + 1/3Y.

(i) Calculate the IS curve. Solve for Y in terms of r.

(ii) Calculate the LM curve. Again, solve for Y in terms of r

(iii) Solve for the short-run equilibrium values for Y, r

(iv) What is the government spending multiplier when G increased by 200? That is what

is deltaY/delta G? What happened and why?

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