{ EC12Midterm2sP2.. Q M Midterm Exam 2 Macroeconomics EC12 Tufts University April 11, 2024 Prof. Fusillo Instructions: The following questions constitute your second EC12 midterm exam. You have until 10:00 PM Friday April 12" to complete them. You may use whatever materials you deem appropriate, but you must work alone. When done, scan and upload your answers to Canvas as if it is a homework assignment. Please write clearly. Be concise in your answers. Points will be deducted for irrelevant information. 1) Consider an economy with a long history of output stability. The growth of real output is constant while inflation is moderate and stable. Suddenly and unexpectedly, the rate of inflation jumps up for no reason that anyone can pinpoint. Thinking about this development, answer the following as true, false or uncertain and briefly justify your answer. a) The supply of money in this economy is growing much more rapidly than it did in prior years. (8 points) b) The short-term demand for labor will increase. (8 points) ) The nominal interest rate in this economy will be lower than in previous years. (8 points) d) The real interest rate in this economy will be higher than in previous years. (8 points) e) Those who borrowed money in the past benefit from the new inflation. (8 points) 2) Suppose thatin the first month of every year, the monetary authority of your country announces some target inflation-unemployment pair for the next 12 months. a) How will inflation be affected by these announcements if expectations are adaptive? What about unemployment and output? (8 points) b) How will inflation be affected if expectations are rational or forwards looking and are formed before the central bank makes its announcement? (8 points) u 3) The \"bath tub\" model of the rate of unemployment is given as% = # where T is the percentage of workers that are unemployed, s is the rate of job separation and f is the rate of job finding. Using this model, how would the following scenarios affect the steady-state, or natural rate of unemployment? In your answers, be sure to explain how the rate of job finding or the rate of job separation or both are affected (if at all). If the answer is ambiguous, say so. a) A group of benevolent billionaires commit monies to cutting child care costs by half. (8 points) b) A demographic shift leads to a higher percentage of the population over the age of 35. (8 points) c) The central bank decides to increase the growth rate of the money stock. (8 points) d) The concept of \"employment-at-will\" which denies labor any legal attachment to a firm once hired is abandoned in favor of making firms partially responsible for the welfare of their laid off/fired workers. (8 points) 4) Suppose wage setting in your economy consists of two types. A proportion of the labor force y sets wages that are indexed to the actual price level. The wages of the remaining proportion (1 y) of the labor force are not indexed but set according to expected inflation. Expected inflation is a weighted average of the increase in wages such that nf = ym, + (1 y)nf. The expectations augmented Phillis Curve is given by m, mrf = &(uu"). If f is approximated by 1r,_,, what is the effect of wage indexation on the change in inflation from one period to the next? What does your result say about the steepness of the Phillips Curve in the presence of wage indexation? Could this explain why the Phillips Curve broke down in the early 1970s? (12 points) Calendar To Do Notifications