HW 3-Econ 305
- Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain with the help of a graph what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
- Explain in detail what effect a Fed purchase of bonds will have on: (1) the LM curve; and (2) the IS curve.
- Increases in the budget deficit are believed to cause reductions in investment. Based on your understanding of the IS-LM model, will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain.
- What effect does the existence of discouraged workers have on the ability of the official unemployment rate to provide accurate information about the extent to which labor is employed?
- First, provide a brief explanation of what the unemployment rate measures. Second, explain how changes in each of the components of the unemployment rate can cause changes in the unemployment rate.
- Graphically illustrate (using the WS and PS relations) and explain the effects of a reduction in the minimum wage on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.
- Explain how a reduction in each of the following variables affects the aggregate price level (P): (1) the expected price level; (2) employment; (3) the markup; and (4) unemployment benefits.
- When output exceeds the natural level of output, explain what adjustments will occur in the labor market and discuss what effect they will have on output and the price level.
- Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model, graphically illustrate and explain what effect a tax cut will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibria.
- Analysis of the macroeconomic effects of changes in the money supply indicates that money is “neutral” in the medium run. Suppose there is a reduction in government spending. Will this fiscal policy action also be neutral in the medium run? Explain.
Practice Questions from the End of Chapters (will not be graded, but you can discuss the solutions with the TA or Professor during Office hours).
Chapter 5- Q3, Q4
Chapter 6-Q2, Q4
Chapter 7-Q5, Q6