1. Modern aggregate-supply theory asserts that firms will respond differently to a change in price resulting from an increase in aggregate demand depending on whether the change was anticipated or unanticipated.

Use one of the three models discussed in class?the wage-contract model, the menu cost model, or the misperceptions model?to explain why the response to anticipated vs. unanticipated demand shocks would be different and how this difference leads to the conclusion that the SRAS curve slopes upward while the LRAS curve is vertical

Suppose the model of interest is Vi = BIZ] + BlK1i+ [32X2i + Hlehere Elu |Kl= and Eu 2 IX}: and H1 and X2 are uncorrelated in your sample. Will the biyariate regression of Y on Ki haye the same coefcient estimate and standard error for 1 ' B as the multivariate regression of Y on X1 and K2? [6 points] 2. The U.S. Congress is expected to pass legislation this month lowering taxes and increasing spending for the year 2011. Fiscal stimulus is often thought to have a "multiplier\" effect on aggregate demand, with $10 billion of additional stimulus leading to more than $10 billion of additional spending a} Explain why such a multiplier effect may occur. b} Explain how each of these might affect the amount of output expansion resulting in the short run from each dollar of stimulus: Whether the stimulus is spending or tax reduction, and whose taxes are reduced (uexplain how sensitiye real interest rates are to additional goyernment borrowing (iigexplain how wages respond to increased employment. c} Explain and discuss the difference between autonomous and induced consumption