Macroeconomics

Homework Assignment #2

Econ 3203

(Due date: November 5 at 11:00 am)

DIRECTIONS:

1. For all problems show your work if you want credit.

2. Please indicate with arrows an increase or decrease in your final answers.

3. Solve the problems in a separate sheet.

PROBLEM 1 (20 points)

Suppose that the firm’s markup over costs is 6%, and the wage-setting equation is, where is the unemployment rate and is equal to 0.03.
a. What is the real wage as determined by the price-setting equation?
b. What is the natural rate of unemployment?
PROBLEM 2 (30 points)
Using the WS and PS relations, graphically illustrate the effects of the following events on the natural rate of unemployment and on the real wage.
a. An reduction in unemployment insurance
b. Less stringent antitrust legislation
c. Increase in minimum wage
PROBLEM 3 (20 points)
Suppose the economy is initially operating at Yn. Now suppose the Fed conducts a monetary contraction where Ms decreases. (20 points)
a. Using AS and AD, and IS-LM graphs, illustrate the initial equilibrium, and medium run equilibrium.
b. What are the initial effects of the decrease in Ms Y, r, I, and C?
c. What happens to u and Y relative to their natural levels during: the short run, and the medium run?
d. What are the medium effects of the decrease in Ms on P, Y, r, I, and C?
PROBLEM 4 (15 points)
Assume πte = πt-1 and the Phillips curve for the United States is given by the following:
πt – πt-1 = -1.5(ut –un). Suppose ut = 0.06, un = 0.05 and πt-1 = 0.04.
a. Calculate πt. Is πt greater than, less than or equal to πt-1?
b. Calculate πt for each of the following values of ut = 0.07, and 0.08.
c. As ut increase, is inflation in period t increasing or decreasing?
PROBLEM 5 (15 points)
Suppose there are two economies: A an B where utA=6% and utB= 5%
a. Given this information, what can you say, if anything, about the change in inflation in these two economies? Specifically, what happened to πt (relative to πt-1) in these two economies?
b. Suppose πtA < πt-1A. Given this information, where is utA relative to the natural rate of unemployment? c. Suppose πtB > πt-1B. Given this information, where is utB relative to the natural rate of unemployment?
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