1. For the production function Y = K951 5, MPL = 0.5K"'L>. Since a profit-maximizing firm hires labor until MPL - W/P, the labor demand function in this case is L" = 0.25K/(W/P] A. Suppose the economy has 1,000 units of capital and a labor force of 1,000 workers. What is the equilibrium value of the real wage, W/P? And in this equilibrium, what are employment, output and the total amount earned by workers? (You should find that the real wage is %% unit of output.) B. Now suppose the government passes a law requiring firms to pay workers a real wage of 1 unit of output. What are employment, output and total labor earnings now? (Refer to Figure 6-3 on p. 183. When there is a rigid real wage above the equilibrium real wage, employment is demand-determined.} 2. Suppose that the economy is in long-run equilibrium when a catastrophic storm destroys a large quantity of crops and reduces food production. A. Use the AD-LRAS-SRAS model to graphically illustrate the short-run and long-run responses to the shock. B. Now explain how the economy moves from the old equilibrium to the new one. 3. A. Suppose that the AD curve is given by Y = 4(M/P), the LRAS curve is parallel to the y-axis, centered at Y = 4,000 and the SRAS curve is parallel to the x-axis, at P = 1.0. Also assume that the money supply is M = 1,000. What are the long-run values of P and Y? B. Suppose now that the AD curve sifts to Y = 2(M/P). What are the short-run values of P and Y? Given that the AD curve stays at this new location, what are the values of P and Y after the economy is again in a long-run equilibrium? C. Finally, draw an AD-LRAS-SRAS diagram that depicts both the situation before, and the situation after, the demand shock. (L.e., put both AD curves on the same AD-LRAS-SRAS diagram. The AD curves are nonlinear, but for this diagram, you can draw them as straight lines.) 4. Suppose that the economy is characterized by these equations: Y = C+1+G C = 250 + 0.8(Y - T) I = 1,000 G = 1,000 T = 1,000C. What happens to real GDP and the price level in the short-run? D. If they had perfect information about the economy, by how much would they have changed net taxes? E. What is the corresponding AD curve? 6. Assume the economy has an inflationary output gap. A. What action should the Fed take to try to move the economy back to long run equilibrium? Is this contractionary or expansionary monetary policy? B. Briefly explain how this action by the Fed would affect the economy as a whole (AD/AS). Use graphs to illustrate your explanation. 7. Suppose the money supply is $250 million dollars and the demand for money is given by QMD=400-40i, where QMP is in millions of dollars. A. What is the equilibrium interest rate in this economy? B. If the Fed announced a target for the overnight rate of 5%, should they buy or sell bonds to achieve this goal?sonbuilder/item/1823274/group/14b164c-63c2-458c-9862-29b9e836939f/Lessons/Problem%20Sets/ProblemSet term effects on the US economy if unions across America are disbanded driving wages down. A. Draw the AS/AD model for the economy that starts out in LR equilibrium. Be sure to label all axes and use subscripts of 0 to indicate the initial curves (e.g. ASo, ADo, and LRASo) B. Show the short-run effects on the AS/AD graph (if any curves shift, be sure to label them with a 1 subscript, e-g. AS1) C. To adjust back to LR equilibrium, the aggregate demand curve / aggregate supply curve (circle one) will shift to the left / right (circle one). In one sentence, explain the cause of this shift. D. Use the AD/AS graph to show this adjustment to LR equilibrium. If any curves shift, be sure to label them with a 2 subscript. E. If instead of waiting for the economy to adjust itself, the government wanted to push the economy back towards LR equilibrium, it could raise / lower (circle one) taxes OR increase / decrease (circle one] government spending. 10. Canada produces steel domestically and also imports it from abroad. Assume that the world market for steel is competitive and that Canada is a small producer, unable to affect the world price. Since Canada imports steel, we know that in the absence of trade, the Canadian equilibrium price would exceed the world price. a. Draw a diagram showing the Canadian market for steel, with imports at the world price. b. Explain why the imposition of a tariff on imported steel will increase the price of steel in Canada. c. Who benefits and who is harmed by such a tariff? Show these effects in your diagram. 11. Under pressure from the Canadian and US governments in the early 1980s, JapanesePAGE 1 -- Consumer Utility Assume both Good X1 and Good X2 cost 52, and Person] has a budget of $24 for the two goods. Assume, given the shape of hisfher indifference curves, Person J most prefers to consume equal units of Goods A and B. 1a. (i) Draw an indifference curve for Person J for goods X1 and X2. In your diagram place Good X2 on the yaxis and Good X1 on the xaxis, and label the indifference curve l1. (ii) Insert a budget line curve into the diagram that reflects the optimal preference of Person] with his/her cui'rent budget. On each axis, indicate the amount of X1 and X2 that Person] is consuming. 1b. (i) Return to la and draw two additional indifference curvesone below the original indifference curve and one above the original indifference curve. Assume the price of Good X1 falls to $1. Make changes to your diagram in (a) above as a result of this price change. 1c. At the new price for good X1, how many units of X1 does consumer] consume? 1d. At the new price for good X1, how many units of X2 does consumer] consume? 1e. Depict the individual demand curve of Person] for Good X1 for quantities demanded at prices 51 and 52. Show numerical values for price and quantity. Why does the Short Run Aggregate Supply curve slope upwards while in the Long-Run Aggregate Supply is perfectly inelastic. 2. Assume we start in LR equilibrium. Suppose we see the consumer confidence index rise. Use our Aggregate Supply/Aggregate Demand model to discuss the following. A. Would this event affect AD, SRAS, or LRAS? How and Why? Show this on an AD/AS graph B. Would this create an output gap? If so, what kind? Label this on your graph. C. How could the market self-correct to get back into LR equilibrium? Show this on your graph. 3. Consider a new deposit to the US banking system of $1000. Suppose that all banks have a desired reserve ratio of 20%. The following table shows how deposits, reserves, and loans enable the creation of money. Assume there is no currency drain and that banks do not hold on to excess reserves. a. Complete the table below. Round Change in Change in Change in Loans Deposits Reserves First $1000 $200 $800 Second Third Fourth Fifth b. After 5 rounds, what is the total change in deposits as a result of the single NEW deposit? C. What is the eventual total change in deposits? d. What is the eventual change in the money supply? What is the eventual change in reserves? In loans