<p>Review Questions for Midterm #2 Intermediate Macroeconomics ECO 241 / Waters</p><p>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.</p><p>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.</p><p>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.</p><p>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.</p><p>4) Name a government policy change that could shift aggregate supply. Explain briefly.</p><p>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?</p><p>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.</p><p>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.</p><p>8) Using the wage and price setting equations, explain why aggregate supply slopes up in the short run.</p><p>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.</p><p>10) Show a liquidity trap on an IS-LM graph. Explain (and show) why monetary policy alone cannot increase output.</p><p>9) Use the following macro model to answer the questions below.</p><p> gy,t = gm,t - t e t tut ut – ut-1 = 0.5(3% - gy,t)</p><p>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.</p>