,Solve the following.

2. Which of the following does not affect long run aggregate supply?

a. A change in labor force participation.

b. An outward movement of aggregate demand.

c. A negative trend in labor productivity.

d. An increase in the marginal tax rates on wages.

e. A new provision of government benefits that affect household incentives.

3. Aggregate Demand is composed of spending by households, businesses, foreigners and:

a. investors.

b. savers.

c. bankers.

d. non-profits

. e. government.

4. Money illusion arises when:

a. workers work harder when they know that layoffs are increasing.

b. workers work harder when inflation has raised their nominal wage, even though their real wage is lower.

c. workers work harder when they think their wages have fallen.

d. workers are paid in a unit of account that is different from the medium of exchange.

e. All of the above.

5. Without money illusion, a 10% increase in the price level will lead to a:

a. 10% increase in the nominal wage.

b. less than 10% increase in the nominal wage.

c. more than 10% increase in the nominal wage.

d. 10% increase in the real wage.

e. a 10% decrease in the price level.

6. If the quantity of money is $100 million, real GDP is $200 million and the overall price index is 1.5, then income velocity of money equals:

a. 1.5

b. 2.0

c. 3.0

d. 4.5

e. 6.0

7. The aggregate demand schedule represents the relationship between the quantity of goods and services demanded and:

a. the overall price level.

b. the market interest rate.

c. the quantity of money balances.

d. the bond price.

e. the level of default risk.

8. According to the quantity theory of money, an increase in the quantity of money results in a:

a. leftward movement along the aggregate demand schedule.

b. rightward movement along the aggregate demand schedule.

c. leftward shift of the aggregate demand schedule.

d. rightward shift of the aggregate demand schedule.

e. shifts in the aggregate demand that cannot be predicted.

9. Which of the following can be shown on the AS/AD model?

a. Inflation and growth.

b. Deflation and growth.

c. Inflation and depression.

d. Deflation and depression.

e. All of the above.

10. A central bank can prevent deflation by conducting monetary policy that:

a. shifts the aggregate supply schedule rightward.

b. shifts the aggregate supply schedule leftward.

c. shifts the aggregate demand schedule rightward.

d. shifts the aggregate demand schedule leftward.

e. Both B and C are true.

Two competing firms must decide how much output to produce. They know the market demand is P(Q) = b ? aQ where Q stands for total output. Each firm has a cost of production equal to ci (that is, firm 1 has a cost c1 and firm 2 has a cost c2 per unit produced). Solve this problem twice: first assuming that costs are equal and then assuming the costs of firm 1 are smaller than those of firm 2.

? Assume there are two firms that produce quantities of a certain good. The market demand s P(Q) = 100 ? Q where Q represents total quantity sold in the market and P(Q) indicates what the market price will be if Q units get sold. Suppose that the two firms have the same technology, and this technology allows them to produce one unit of the good at cost 0.

- (a) Calculate the set of pure action Nash equilibria for this game. Note: you can make all the assumptions of the Cournot model we studied in class.

- (b) Argue that there is only one rationalizable action profile

- (c) Suppose there was an epistemic background attached to this game. Suppose the epistemic background satisfies the following properties: (1) beliefs 11 are consistent with knowledge, payoffs are common knowledge (2) each player knows his action and the action of his opponent and (3) firm 1 produces 5 units. Are the players rational?

? (Bertrand competition) Two competing firms must decide what price to charge for their output. They know that market inverse demand is Q(p) = a?bp. Consumers think the goods provided are identical, so they will only buy to the firm producing the good at the cheapest price. If the firms set the same price, ? ? (0, 1) proportion of consumers buy from firm 1 and the rest buy from firm 2. Assume that the cost of production for firm i is ci . Solve this problem twice; first assuming c1 = c2 and then assuming c1

? (Bertrand competition revisited) Suppose there are two firms that produce some good. The consumers think these are indistinguishable goods, so they'll buy form the firm with the lowest price. If both firms set the same price, the firms believe that consumers will buy form them with probability 0.5 and they will buy from the rival with probability 0.5. Market demand is Q(p) = 100 ? 2p if p ? 50 and Q(p) = 0 if p > 50 (this qualification is included so as to rule out negative quantities, but does not affect the problem in any way). This country only has pennies available for trade, so prices must be non negative and change in penny amounts (i.e. 2.54 is a valid price but 3.465 is not.) Each firm has a per-unit production cost of 4.98. We can then model this as a 2 person game (I = {1, 2}), action sets are A1 = A2 = {0, 1 /100 , 2 /100 , 3/ 100 , ...} and utilities are as specified below.

u1(p1, p2) = {

0 if p1 > p2 or p1 > 50

1/ 2 (100 ? 2p1)(p1 ? 4.98) if p1 = p2 and p1 ? 50

(100 ? 2p1)(p1 ? 4.98) if p1

u2(p1, p2) = {

0 if p2 > p1 or p2 > 50

1 /2 (100 ? 2p1)(p1 ? 4.98) if p2 = p1 and p2 ? 50

(100 ? 2p1)(p1 ? 4.98) if p2

- (a) Prove that p1 = p2 = 4.99 is a Nash Equilibrium

- (b) Prove that p1 = p2 = 4.98 is another pure action Nash equilibrium.

- (c) Prove that, for both firms, setting a price of 0 is a strictly dominated action. Then, use this to argue that no price p satisfying 0 ? p ? 4.97 is rationalizable.

- (d) Assume now that this economy incorporates credit cards and bank accounts, so that prices can take on any real vale (like 10.654762). Is it still true that no price p satisfying 0 ? p ? 4.97 is rationalizable?

Justify your answer.

1. Use the following yersion ofthe ISLM model to answer all parts of this question. Endogenous Exogenous Consumption: C = EDD + .B'Wd Variables 'y'ariables Dispoable Income: 'fd = \"f T Taxes T = 125 + .25\"! C, Yd, T, 'r' M, G, P, Yf lnyestment | = 2DD w 20*r AD, I, r, NX (foreign?) Net Exports NX = 100 - .2\"! w 5*r +.1'r'f Md Aggregate Demand AD = c + | + G + N): Goods Market Equilibrium y = AD Money Demand Md = (.5? 50*r}*P Money Market Equilibrium Md = M Assume Ys'fp a. {E} Solve for the IS curye and identify its slope. b. {4) Solve for the LM curve and identify its slope. c. {4) Find the reduced form statement for T. d. {5) Based on the results in part c, does monetary policy or fiscal policy haye a larger impact on GDP? Support your answer. e. {5) What would be the effect of a decline in foreign income {Yf} on output and interest rates in this economy? Support your answer. 2. Consider a Solow growth model {1 G type) with the following production function. Vt = Kt" [Techti'L' a. {5) Specify and explain the steady state condition for this model. b. (T) Assume that technology grows at a rate of g percent per year and labor grows at n percent per year. Determine the equilibrium time path for y (output per laborer at any given time period E.) c. {6) Determine how fast output per laborer grows along its steadystate path. l_ d. {3"} What would be the effect of an increase in the savings rate on the steady state path for output per laborer and capital per unit of labor? (You may use graphical or mathematical analysis for this cart] Exercise 9-14 On July 1, 2020, Pina Colada Aggregates Led. purchased 6% bonds having a maturity value of $115,000 for $119,123. The bonds provide the bondholders with a 5% yield. The bonds mature four years later, on July 1, 2024, with interest receivable June 30 and December 31 of each year. Pina Colada uses the effective interest method to allocate unamortized discount or premium. The bonds are accounted for using the FV-OCI model with recycling. Pina Colada has a calendar year end. The fair value of the bonds at December 31, 2020 and 2021, was $116,869 and $117,543, respectively. Assume fair value adjustments are recorded at year end only. Immediately after collecting interest on December 31, 2021, the bonds were sold for $117,543. Prepare the journal entry at the date of the bond purchase. (Credit account titles are automatically indented when the amount is entered, Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit July 1, 2020 FV-OCI Investments Cash LINK TO TEXT Prepare a bond amortization schedule to December 31, 2021. (Round answers to 0 decimal places, e.g. 5,275.) Schedule of Interest Revenue and Bond Premium Amortization Effective-Interest Method Date Cash Received Interest Revenue Premium Amortized Amortized Cost of Bonds July 1, 2020 Dec. 31, 2020 June 30, 2021 Dec. 31, 2021 Prepare the entries and year-end entries from December 31, 2020, through to the collection of interest on December 31, 2021. (Credit account titles are automatically inder the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to Places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit December 31, 2020 Cash FV-OCI Investments Interest Income (To record collection of Interest) FV-OCI Investments zed Gain or Loss - ( To record fair value adjustment) June 30, 2021 Cash FV-OCI Investments Interest Income (To record collection of interest) December 31, 2021 w Cash FV-OCI Investments Interest Income (To record collection of interest) Following the three-step approach, prepare the journal entries for the sale of the bond on December 31, 2021. Include the reclassification of unrealized gains and losses to net income. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit Unrealized Gain or Lass - FV-OCI Investments (To record fair value adjustment to date of disposal) Cash FV-OCI Investments (To record disposal of the bond) Loss on Disposal of Investi Unrealized Gain or Loss - ( "To reclassify accumulated unrealized gains and losses from OCI to net income)