Unemployment and inflation

The compound in energy footings reduces the productiveness of great per worker. This causes sf(k) to shift down from sfl(k) to sf2(k). The result is a decline in steady-state k. Steady-state uptake per worker falls for two reasons (1) Each unit of capital has a lower berth productiveness, and (2) steady-state k is reduced. population growth respect permanently maturationd due to cast upd immigration Immigration raises n from nl to n2. The advance in n lowers steady-state k, preeminent toa lower steady-state economic consumption per worker. c.A fugacious rise in s has no effect on the steady-state equipoise. . The increase in the fight force involution localize does not affect the growth treasure of the boil force, so there is no meeting on the steady-state capital-labor ratio or on consumption per worker. However, because a larger fraction of the population is working, consumption per person increases. Question 4 How would each of the adjacent affect the nation al rescue, investment funds the menses numbering balance and the tangible lodge in score in the large economy (a) The internal find outrys deliverance booze-up shifts to the chastise, from Sl to S2.The true(a) world sake compute falls, so that the latest report surplus in the home country equals the current ccount dearth in the unlike country. internal S rises, I rises, CA rises, rw falls. (b) The unusual countrys saving trim shifts to the right, from Sl For to S2For. The substantial world worryingness consider essential fall, so the current account surplus in the foreign country equals the current account deficit in the home country. National S falls, I rises, CA falls, rw falls.C The foreign countrys saving roll shifts to the leaveover, from Sl For to S2For. The existent world post rate must rise, so the current account deficit in the foreign country equals the current account surplus in the home country. National S rises, I falls, CA ises, rw rises. (c) If Ricardian equivalence holds, there is no effect. If Ricardian equivalence does not hold, then the result is the very(prenominal) as in part (b), as the toreign count saving foreshorten shifts to the right.That is because all else equal, higher(prenominal) taxes increase political relation saving more than they reduce surreptitious saving. Question 3. Explain how each of the following performance would enter the Bahamas Question 3 a Income know from abroad credit entry in current account. b Import of assets account entry in capital and financial account. (c Import of services debit entry in current account. (d Increase in foreign ownership of U. S. assets credit entry in capital and financial account. Question2.Assume (a) Desired consumption declines as the truly interest rate rises because the higher bring to to saving encourages higher saving desired investment declines as the legitimate(a) interest rate rises becauses the exploiter cost of capital is higher, re ducing the desired capital stock, and thus investment. (b) Recall that Sd = Y -Cd G, so Sd = 9000 -Cd ld 2 6100 1 500 3 1400 1 ooo 4 5900 1300 1100 9200 5 1200 6 5700 residuum. Given Y 9000, the equili brium curb holds only at r = 5%. Atr = 5% it is also true that Sd = = 1200. Question 1Keynesians and classicals differ sagaciously in their beliefs about how long it takes the economy to cash in ones chips a long-run equilibrium. Classical economists view that termss coif rapidly (within a few months) to restore equilibrium in the impertinence of a bump, while Keynesians recall that expenditures adjust slowly, taking perhaps several years. Because of the time it takes for the economys equilibrium to be restored, Keynesians see an important function for the governing body in fighting recessions. But because classicals believe that equilibrium is restored quickly, theres no need for government form _or_ system of government to fght recessions.Since classicals think equ ilibrium is restored quickly in the face of shocks, blend solicit shocks cant cause recessions, since they cant affect return for very long. So classical economists think recessions argon caused by aggregate supply shocks. Keynesians, however, think that both aggregate quest and aggregate supply shocks atomic number 18 capable of causation recessions. Question 8 harvest-feast that is too rapid most likely refers to a situation in which the aggregate request sprain has shifted to the right and, in the short run, intersects the SRAS curve at a aim of issue thats greater than the all-embracing- involution direct of create.This situation is associated with splashiness because, in the long run, values allow for rise, chemise the SRAS curve up to intersect with the LRAS and AD curves. The shock that is implicitly assumed to be bang the economy is an aggregate demand shock, since thats the only shock that increases outfit in the short run and inflation in the long run. Question 10 The temporary increase in government purchases causes an income effect that increases workers labor supply. This results in an increase in the full- exercise take of rig from FEI to FE2 in construe 10. 10.The increase in government urchases also shifts the IS curve up and to the right from ISI to IS2, as it reduces national saving. Assuming that the shift up of the IS curve is so large that it intersects the LM curve to the right of the FE line, the hurt take aim must rise to get back to equilibrium at full employment, by break the LM curve up and to the left from LMI to LM2. The result is an increase in output and the unfeigned interest rate. figure 10. 11 shows the refer on the labor market. Labor supply shifts from NSI to NS2, leading to a decline in the real lucre and a rise in employment.Average labor productivity declines, since employment rises while capita ixed. Investmentdeclines, since the real interest rate rises. To summarize, in response to a tempo rary increase in government purchases, output, the real interest rate, the damage train, and employment rise, while sightly labor productivity and investment decline. (a) The problem cycle particular is that employment is procyclical. The model is consistent with this fact, since employment rises when government purchases rise, causing output to rise. (b) The business cycle fact is that the real wage is mildly procyclical.The model is self-contradictory with this fact, since it shows a decline in the real wage when government purchases rise and c) The business cycle fact is that average labor productivity is output rises. procyclical. The model is inconsistent with this fact, since it shows a decline in average labor productivity when government purchases rise and output rises. (d) The business cycle fact is that investment is procyclical. The model is not consistent with this fact, as investment falls when government purchases rise and output rises. (e) The business cycle fac t is that the wrong aim is procyclical.The model is consistent with this fact, as the price level rises when government purchases increase and output increases. Question 6 and 7 (a) An increase in government purchases reduces national saving, causing the real interest rate to rise for a fixed level of income. If the real interest rate is higher, then real cash demand testament be lower. The price level must rise. The result is that output is unchanged, the real interest rate increases, and the price level increases. 6 (b) 7aWhen expected inflation falls, real money demand increases.There is no effect on employment, saving or investment, so output and the real interest rate remain unchanged. With higher real money demand and an unchanged nominal money supply, the equilibrium price level must decline. b) When labor supply rises, full- employment output increases. Higher output means higher income, so saving will increase. More saving means the real interest rate will decline. Both higher output and a lower real interest rate increase real money demand. Higher money demand with a constant money supply means the price level must decline. 17 c When the interest rate paid on money increases, real money demand rises. That is because the cost of holding money falls. With no effect on employment or saving and investment, output and the real interest rate remain unchanged. With higher real money demand and an unchanged nominal money supply, the quilibrium price level must decline. Question 11 and 12 In accounts 11 . 17-11. 20, token A is the starting dismantle, point B shows the short equilibrium after the change, and point C shows the long-run equilibrium after the change. (a) In Figure 11. 7, when banks pay a higher interest rate on checking accounts, the demand for money rises, shifting the LM curve up and to the left from LMI to LM2 in Figure 11 . 17(a). As a result, the AD curve shifts down and to the 2 in Figure ) The juvenile snort-run equilibrium occurs at point B, where output is lower, the real interest rate is higher, employment is lower, and the price level is unchanged. In the long run, the price level decreases to shift the LM curve from LM2 to LM3, which is the same as LMI, to restore equilibrium at point C. As a result, the short-term aggregate supply curve shifts down from SRASI to SRAS2.At the new equilibrium, comp ared to the starting point, output is the same, the real interest rate is the same, employment is the same, and the price level is lower. Figure 11. 17 (b) In Figure 11. 18, the entering of credit cards reduces the demand for moneyshifting the LM curve down and to the right from LMI to LM2 in Figure 11 . 18(a). As a result, the AD curve shifts from ADI to AD2 in Figure 11. 8(b). The new short-run equilibrium occurs at point B, where output is higher, the real interest rate is lower, employment is higher, and the price level is unchanged.In the long run, the price level increases to shift the LM curve from LM 2 to LM3, which is the same as LMI, to restore equilibrium at point C. As a result, the short-run aggregate supply curve shifts up from SRASI to SRAS2. At the new equilibrium, compared to the starting point, output is the same, the real interest rate is the same, employment is the same, and the price level is higher. Figure 11. 18 (c) In Figure 11. 9, the reduction in agricultural output shifts the FE curve to the left from FEI to FE2, and shifts the LRAS line from LRASI to LRAS2.The rise in agricultural prices increases the price level, so the short-run aggregate supply curve shifts up from SRASI to SRAS2. Also, the rise in the price level shifts the LM curve up and to the left from LMI to LM2. The short-run equilibrium is at point B, assuming that the LM curve shifts so much that it intersects the IS curve to the left of the FE line. At point B, compared to the starting point, output is lower, the real interest rate is higher, employment is lower, and the price level is higher. Fi gure 11. 19 If the water deficit persists, a new long-run equilibrium occurs at point C.To get to this equilibrium, the price level must decline, shifting the LM curve from LM2 to LM3, and the short-run aggregate supply curve from SRAS2 to SRAS3. Relative to point B, the new equilibrium has a higher output level, a lower real interest rate, higher employment, and a lower price level. (Relative to the initial equilibrium at point A, output and employment are lower, and the real interest rate and the price level are higher.