Review Questions for Midterm #1

Review Questions for Midterm #2 Intermediate Macroeconomics ECO 241 / Waters

The second midterm is on Wednesday, November 2 and covers the material for Chapters 6-8 with some related material from earlier chapters. There will be both multiple choice and essay / problem questions. The latter will be inspired by the review questions below.

1) Using a graph for wage and price setting, show the effect of the decrease in unionization in the U.S. on the natural rate of unemployment in the medium run.

2) Show the effect of an increase in the money supply in the short and medium run using an AS-AD graph. Does your graph show money neutrality? Explain briefly.

3) Recently prices on commodities used in manufacturing such as copper and platinum have risen substantially. If this is a permanent increase, show the effect on an AS-AD graph.

4) Name a government policy change that could shift aggregate supply. Explain briefly.

5) Government increases spending on health care. The short run effect is to raise equilibrium GDP by 10%. Since there are more healthy workers, potential GDP also rises by 5%. Show these changes on an AS-AD graph. Why might somebody argue that this policy would eventually lower potential GDP?

6) If unemployment starts at the natural rate and the Federal Reserve increases the money supply, the short and medium run effect on a graph of the Phillip’s Curve.

7) If price and inflation expectations are above their true values, what does this mean for the levels of unemployment and inflation compared to their natural rates. Show this situation on AS-AD and Phillip’s curve graphs.

8) Using the wage and price setting equations, explain why aggregate supply slopes up in the short run.

9) Show a recessionary gap on an AS-AD graph and a Phillips Curve graph. If the Fed acts to close the gap, what would they do? Show the changes on the graph.

10) Show a liquidity trap on an IS-LM graph. Explain (and show) why monetary policy alone cannot increase output.

9) Use the following macro model to answer the questions below.

gy,t = gm,t - t e t tut ut – ut-1 = 0.5(3% - gy,t)

Find the medium run values of gy,t and ut. If gm,t = 6%, what is the medium run value of t ? If the Fed wants inflation to be 2% in the medium run, to what level should they set gm,t ? Starting from the initial medium run values, if the Fed makes this change in gm,t , find the one period (short run) change in unemployment, inflation and the growth rate of output. Also find the (one period) sacrifice ratio.