Question 1 Labor Market Model [8 points] A model of the labor market. Some economists argue that the Beveridge curve in the U.S. has shifted out after the Global Financial Crisis (GFC) because the labor market has become less efcient. Your task is to understand how the U.S. labor market responded to the recession caused by the CFO using the model we developed in Lecture 8. Suppose each period in the model corresponds to a month. The parameter values are given in Table 1 below. s 0.03 A 0.50 or 0.50 c 1 J 4 Table 1: Model of labor market parameter Values (1) Using the parameter values in Table 1, calculate the steadystate values of the labor market tightness, the unemployment rate and the vacancy rate. (2 points) (2) Suppose the economy was initially in its steady state. At t = 1, a recession caused the value of lled jobs J to decrease to J = 2 for 15 months. Starting from the steady state, use the other parameter values as in Table 1 and a spreadsheet to calculate and plot the time paths of the market tightness, the unemployment rate and the vacancy rate for 15 months (15 = 0, 1, ..., 15) after the economy was hit by the recession. Describe how the market tightness, the unemployment rate and the vacancy rate respond to the decrease in J. Has the economy converged to a new steady state by the end of 15 months? Explain your ndings. (3 points) (3) Suppose the economy was initially in its steady state. At t = 1, a recession caused the matching efficiency parameter A to decrease to A = 0.3 for 15 months. Starting from the steady state, use the other parameter values as in Table 1 and a spreadsheet to calculate and plot the time paths of the market tightness, the unemployment rate and the vacancy rate for 15 months (t = 0, 1, ..., 15) after the economy was hit by the recession. Describe how the market tightness, the unemployment rate and the vacancy rate respond to the decrease in A. Has the economy converged to a new steady state by the end of 15 months? Explain your findings. (3 points)