Answer. the following questions as attached below.

3. AD-AS Model Questions: 15 pts a. Explain how an increase in each of the following variables affects the aggregate price level (P): (1) the expected price level; (2) employment; (3) the markup; and (4) unemployment benefits. 4 pts OAs the expected price level goes up, the AD will go up, So the aggregateprice will increase eAs the employment rate increase, the output will increase, so the AS will the XHDIremain same aggrete price will decrease) @ As the ma rise, the case rise, so output will fall AS shit left. Aggreare @ As unemployment textFi increase, the unemployment will rise, so A b. Analysis of the macroeconomic effects of changes in the money supply indicates that money is "neutral" in the medium run. Suppose there is a reduction in government spending. Will this fiscal policy action also be neutral in the medium run? Explain. 2 pts Yes, when government spending goes down. In the Short run Yincrease, howevery goverment spending decrease in the medium run case decrease in investment and c. Based on your understanding of the aggregate supply and aggregate demand model and So the IS-LM model, graphically illustrate and explain what effect a tax cut will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibria. 3 pts d. Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model, graphically illustrate and explain what effect an decrease in the money supply will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibria. 3 pts e. Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model, graphically illustrate and explain what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibria. 3 ptsQuestion 1 (40 pts) Consider the following model of a vertical market. In a market for a good, there exists a monop- olist manufacturer with a marginal cost of 5 who charges a wholesale price of Pm to a monopolist retailer. The retailer's only marginal cost if the manufacturer price; however, the retailer must pay a fixed cost F in order to sell the manufacturer's goods. (For example, he must remodel parts of his store.) The retailer charges a price to consumers of pr. Demand is linear with p, = 15 - Q. a. Write down the retailer's profit function. b. What is the price the retailer charges as a function of P.? c. Write down the manufacturer's profit function as a function of p.. What is the optimal pm set by the wholesaler? d. Given p., what is the retailer's profit? At what level of F will the retailer no longer be willing to purchase from the manufacturer? e. Consider the vertically integrated monopolist. At what level of F will the vertically inte- grated monopolist no longer be willing to stock the good in his retail division? At what values of F will the manufacturer carry the good if and only if it is vertically integrated with the retailer? Question 2 (35 pts) Suppose that two types of people exist, high (H) and low (L) productivity. Education is worthless other than to potential employers. Those workers that receive an education are identified as H- type and get a wage of wy = $9,000 while those that do not are identified as L-type and receive WL = $7,500. H-types can obtain an education at a cost of CH = $1,000, and L-types receive an education at a cost of GL = $3,000. Denote A as the probability that an individual is high productivity, A = P(H). a. Show a separating equilibrium exists. b. Does a pooling equilibrium exist at A = !?4 (25 points) While investigating patents, you learn that China started a program to incentivize patents in 1997. From that year on, the government would give the authors of successful patents a large cash reward. You decide to investigate the causal effect of this policy on the number of patents awarded. 1. Why might l from the regression N U M PATENTSCMM't = g + 51191997 + 0hm,t be an inconsistent estimator for the causal effect? 2. Say you also have patent data from Japan. Under what assumption will this data enable you to estimate the causal effect of the Chinese program on patents awarded? How could you test this assumption (hint: draw a graph)? 3. Given that the assumption you stated above holds, what regression would you run to estimate the causal effect of the Chinese program on patents awarded (i.e. what is the difference-in difference specication)? 4. Say the causal e'ect of the program is some value [33. Give an expression for g in terms of population moments. Also, give a consistent estimator for 53 in terms of sample moments. 5. Show how to test the null that the causal effect is 0 versus the alternative that the causal effect is different from 0 at the 5% level (hint: testing for di'erenceindi'erence works the same as with any other regression). Question 2 (25 marks) In a one-period model economy, there are many consumers, many firms and a government. All consumers are identical. The representative consumer is en- dowed with h units of hours, and derives utility from both consumption c and leisure 1. The utility function is w(c,!) = Inc + all, where a > 0. Let w denotes real wage. He receives labor income w(h = 1), of which T proportion is paid as tax (proportional income tax). All firms are also identical to each other and the market is perfect competitive. The representative firm hires labor and produces consump- tion good with production technology given by Y = AN, where Y is output, A is productivity and N is labor demand. All the firms are owned by the consumers. The government can not issue bonds and runs a balanced budget. That is, the tax collected by the government is equal to its spending G. a) Define the competitive equilibrium for this economy. b) Solve for the competitive equilibrium - the equilibrium wage, consumption and leisure. c) Set up a social planner's problem and derive the efficient allocations. d) Is the competitive equilibrium socially optimal? Why or why not. Question 3 (25 marks) In a two-period model economy, there are a total N number of consumers, of which N are of type A and N are of type B consumers. Consumers derive utility from current period consumption c and future period consumption c'. For all consumers, current and future consumptions are perfect substitutes. Type A consumers have MRS. = a, and type B consumers have MRScp = b, where a 0, Ny' - G' > 0 and a > 2 Ny-G a) Solve for the competitive equilibrium - the equilibrium real interest rate, and the current and future consumption allocations for each individual consumer. b) Does the Ricardian Equivalence Theorem hold in the equilibrium? Explain why or why not