QUESTION 1:

"To understand what causes the business cycle, leading variables alone are of interest. Coincident and lagging variables merely display the consequences of changes in the economy."

Do you agree with the statement above? Explain.

QUESTION 2

Explain why price and wage stickiness in the short run are reasons that macroeconomic shocks can result in fluctuations in total employment and total production. You can explain with or without a diagram.

QUESTION 3 (1,000 pts)

Suppose that in 2011, potential GDP for BloomJack Island is $85,000, real GDP is $75,000, and potential GDP grows at a rate of 2% per year.

a) If real GDP is $78,000 in 2012, using Okun's law, calculate the cyclical rate of unemployment

b)If real GDP is $83,000 in 2013, using Okun's law, calculate the cyclical rate of unemployment.

c)Sketch a curve to represent Okun's law, depicting the two points calculated in parts a and b.