Assignment 3 on Chapters 6, 7, & 8

These three chapters examine the medium run of the economy during which the economy returns to the level of output associated with the natural rate of unemployment.

Chapter 6 examines labor market equilibrium at which level the real wage and employment “clears” at the natural rate of unemployment and output.

Chapter 7 combines the labor market that determines aggregate supply with the goods market (IS) and money market (LM) which determine aggregate demand in order to determine the general equilibrium price level and rate of output that will occur in the medium run.

Chapter 8 looks more closely at the relation between inflation and unemployment, known as the Phillips curve in the short run versus the medium run. We will be able to understand why money growth triggers only inflation in the median run and has no effect on real output.

Chapter 6

Written questions

1. Label true, false, or uncertain each of the 8 statements in Quick Check question 1 page 135 (a – h). If you are uncertain about any of the statements or wish to qualify you conclusion, briefly explain the reason(s) for your uncertainty or qualifications.

2. Answer question 3 on page 135 regarding determinants of the natural rate of unemployment.

3. Answer question 7 on pages 135-6.

Be able to discuss in class questions 4, 5, & 6

Chapter 7

Written assignment

1. Label true, false, or uncertain each of the 7 statements in Quick Check question 1 page 161 (a – g). If you are uncertain about any of the statements, briefly explain the reason(s) for your uncertainty or qualifications.

2. Show graphically using the IS-LM model and AD-AS model in the short run and explain the effects on the rate of output, the interest rate, the price level, the real wage, and the rate of employment of (a) an increase in consumer confidence, (b) an increase in government spending, (c) an increase in the money supply, (d) a government tax on oil and (e) a hurricane that results in a supply shock on the economy.

3. Show graphically and discuss how would these same influences in question 2 above affect the rate of output, the interest rate, the price level, the real wage, and the rate of employment in the medium run after the labor market clears?

Chapter 8 Written assignment

1. Label true, false, or uncertain each of the 6 statements in Quick Check question 1 page 181 (a – f). If you are uncertain about any of the statements, briefly explain the reason(s) for your uncertainty or qualifications.

Discussion

1. Be able to discuss the determinants of the Japanese natural rate of unemployment compared with the U.S. on page 175. Do you expect the natural rate of unemployment rate to stay the same in Japan in the future? Why or why not?

2. Discuss what do you think is the “natural rate of unemployment” for the U.S. economy? Has it fallen since early 1990s? See page 177.

3. What would deflation do to the Phillips Curve relationship (even in the short-run)?