Q1 and Q2

Assume that all the me ture slides are true (Le. the we make about which variables an exoge d outside any of the models we have learned) Multiple choice questions may have more than one answer (but there is always at least one answer) Consider the outcom me of an economy in the long-run with N = 1200 potential workers who may be employed or unemployed. Suppose that the aggregate production function in Y-RL -5 L where Y is real GDP and L is the number of employed people. So we are assuming that R = $ and that the marginal productivity of labour (MIPL) is constant and not decreasing in L (it does not change regardless of how many people are employed) The job separation rate is s =0.01 and the job finding rate is f - 0.23. Recall that the firm's demand for labour is determined by W/P = MPL where W is nominal wages and P is the price-level The equilibrium real interest rate in the financial market is 001 (1%). In the money market, suppose that money supply is M' = M . 25000, and that expected inflation is n' = 0.01 (15) Assume that the demand for real balances is given by the function where P is the price level and i is the nominal interest rate. To summarize. N = 1200, # = 0.01. - 0.23, M = 25000. = 0.01. n' = 0.01. The long run unemployment rate is and long run employment L is long-run aggregate supply Y is 2 Can the long run equilibrium level of output be determined without knowing aggregate demand? (a) No, we need to know what the consumption and investment functions are. (h) No. we need to know what the government's fiscal policies (G, 1) are. (c) You, and it is Y= 1150 (d) Yes, and it is Y' = 5750. 3. According to the Fisher equation, the equ inal interest rate i ts The equilibrium price level PP 23i where P is the price level and i is the nominal interest rate. To summarize, N = 1200, s = 0.01, f = 0.23, M = 25000, r = 0.01, 7 = 0.01. 1. The long-run unemployment rate is and long-run employment Lis_ Therefore long-run aggregate supply, Ys, is 2. Can the long-run equilibrium level of output be determined without knowing aggregate demand? (a) No, we need to know what the consumption and investment functions are. (b) No, we need to know what the government's fiscal policies (G, T) are. (c) Yes, and it is Y* = 1150. (d) Yes, and it is Y* = 5750