1.     Suppose the United States economy is represented by the following equations:

Z = C + I + G            C = 100 + .Y_D                     T = 200                     I = 30

Y_D = Y - T                 G = 100

a)     Which variables are endogenous and which are exogenous?

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b)     Calculate equilibrium levels of output, consumption and disposable income

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c)     What is the multiplier for this economy

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d)     What is the effect of increasing G by $100 on Y and the deficit

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2)     Suppose that the wage and price setting relations are given by

W = P^e(1-u)

P = (1+?) W

a.      If P = P^e and the mark-up is 20% find the real wage

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b.     Calculate the natural rate of unemployment

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c.      Calculate the real wage and the natural rate of unemployment if the mark-up decreases to 10%

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d.     Now if P ? P^e and P^e =105, but markup is still 20%, what unemployment rate is compatible with the price level = 100?

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e.      Derive the aggregate supply if the production function is Y = N

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Q3) Suppose the Okun'e law is given by

Where variables are as defined in class.

1.      What is the output growth needed to result in reducing unemployment by 1% in a year.

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2.      What is the output growth needed to reduce unemployment by 2% over the next 4 years.

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3.      what is your interpretation of the 3% in Okun's law above?

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