Econ 2123 Problem Set 3

ECON2123 Problem Set 3

MA, Wing Pui Bowen 20344359

Part I

1. The statement should be false.  The workers in Republic of Communia are highly unionized which means their unemployment benefits and markup are higher than those workers in Individuela.  Both factors will increase the level of unemployment, and thus the level of natural level of employment is decreased.  Since the natural level of output is associated with the natural level of employment, so the production level of the Communia is lower than that of the Individuela.

1. The statement should be false, because the AD curve captures the relationship between the price and the output level.  The change in price would not shift the AD curve but only shift along the AD curve.

1. The statement is true.  At the point of natural output equilibrium, the price expectation equals to the actual price.  Now the actual output is lower than the natural output which means the actual price must be lower than the expected.

1. The statement is uncertain, because both fiscal policy and monetary policy shift the AD curve in similar extent and behavior.  These policies would have greater impact on output when AS curve is flatter.

1. The statement is false.  When the price of goods increases, it decreases the overall real money supply in the market and thus to increase the interest rate.  It will eventually reduce the level of investment and the society output level.  

Part II

Q1

1. The bargaining power for workers increases.  When the unemployment rate is low, this means the employers are getting harder and harder to find the substitutes for the positions.  The average wage will increase to a high level.

1. The wage would increase to infinite as the unemployment rate gets closer to zero.  This is not true in the reality, the worker’s wage also has other constraints and unemployment is not the only parameter.

Part III

Q1.

1. IS equation: [pic 1]

[pic 2]

      LM equation:[pic 3]

[pic 4]

1. AD equation: [pic 5]

1. [pic 6]

1. P must equal to .[pic 7]

1. In short run, the output level would be higher than the normal level.   However, the actual price level would increase and become higher than the expected level.  Then the market will adjust by itself, the expected price will increase and AS curve will shift until expected price equals to the actual price and the output level will remains the normal output level.

Q2.

1. AS:  AS curve is upward-sloping, because when output increases, the unemployment decreases. Meanwhile, when the unemployment decreases, P will increase.  Therefore, the AS curve is upward-sloping.[pic 8]
2. When the unemployment rate is equal to the natural rate of unemployment, the actual price meets the level of expected price according to the Price-setting and wage-setting relation. Also,  when output equals to the labor force, so Y is also said to be equal to its natural level.  When these three criteria established, the economy is in medium-run equilibrium.[pic 9]
3.  
4.  In medium-run/long-run economy, the change in nominal money supply would not have any effects on output and interest rate, because the price and expected price levels would change gradually with the nominal money supply in medium-run.
5.  
6.