Consider a permanent decrease in labor supply (a shift of the labor supply curve up and to the left).Statehow each of the variables will change (if at all) once the economy moves to its new long run equilibrium. [Hint: You may want to sketch out the effect of the shift on the economy using a Macro Worksheet as scratchwork.] (1 point each)

A. Long-run equilibrium output, Y*?

B. The long-run equilibrium output price, p?

C. The long-run equilibrium real wage, w/p?

D. The long-run equilibrium real interest rate, r?

E. The IS curve, in equilibrium?

F. The LMcurve, in equilibrium?

Question 2

For the statements below, state whether each one is more consistent with a Keynesian/Dovish view or Neoclassical/Hawkishview of business cycles and our macro model. (2 points each)

A. "Despite high inflation, it is important to for the central bank raise interest rates carefully so as to not cause a major recession."

B. "High inflation is likely due to too much fiscal stimulus, which drove up aggregate demand and crowded out private investment."

C. "High unemployment is likely due to firms laying off workers because it was difficult to lower their (nominal) wages. Thus, there is likely a role for monetary or fiscal policy to boost demand and help these people get back to work."

Question 3

Answer what should happen to each curve or variable below in response to a decrease in the nominal money supply, M. In doing so, assume that there are no other shocks to the economy, and ignore any potential feedback effects. [Hint: You may want to sketch out the effect of the shift on the economy using a Macro Worksheet as scratchwork.] (2 points each)

A. The LM curve?

B. The (short-run) level of output,Y?

C. The real interest rate,r?

Question 4

Answer what should happen to each curve or variable below in response to anincrease in net exports,NX. In doing so, assume that the short-run aggregate supply (SRAS) curve slopes up (i.e., a New Keynesian macro model), there are no other shocks to the economy, and ignore any potential feedback effects. [Hint: You may want to sketch out the effect of the shift on the economy using a Macro Worksheet as scratchwork.](2 points each)

A. (Short-run) output prices, p?

B. The (short-run) level of employment, N?

C. The real interest rate, r?