Exercise 1

Assume a closed economy whose labor market is characterized by the following equations: : / = ^e/ ((40/100) + - 10)

of : = 2

y of insurance : = 60/100

Active population: = 500

profit margin: = 1 and whose demand is characterized by the equations: sumption: = 40 + 0.1 ( - )

ment: = 1420

Government spending: = 40

taxes: = 40

expected inflation: ^ = 0

nominal monney stock: =1000

Actual cash request: ^/=120

1. What is the natural unemployment rate and natural GDP of this economy? 2. What is the equation of the aggregate supply curve (OA)? 3. What is the equation of the IS curve? 4. What is the equation of the LM curve? 5. What is the equation for the aggregate demand curve (AD)? 6. What is the medium-term balance? 7. Suppose the central bank increases the stock of money to =2000 no effect on expected inflation. What will be the short-term and medium-term effect of this policy change on the price level, GDP, and real interest rate? Illustrate your answer graphically. 8. Back to =1000. Suppose the government increases its spending to G=500. What will be the short-term and medium-term effect of this policy change on the price level, GDP, and real interest rate?