1-Fiscal policy, like monetary policy, cannot change the natural level of output in the medium-run. Why then is monetary policy considered neutral but fiscal policy is not?

2-Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W = Px(1 - u), where u is the unemployment rate.

a)What is the real wage, as determined by the price-setting equation?

b)What is the natural rate of unemployment?

c)Suppose that the markup of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind your answer.

3-Suppose that the Phillips curve is given by_t=_t^e+0.2-2u_t)

a.) What is the natural rate of unemployment?

Assume_t^e=_(t-1) and suppose thatis initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 5% and hold it there forever.

b)Determine the rate of inflation in years t, t + 1 and t + 2.

Now suppose that in year t + 2,increases from 0 to 1. Suppose that the government is still determined to keep u at 5% forever.

c)What will the inflation rate be in years t + 3 and t + 4?

4-Suppose that there is a constant technological progress (g)and no population growth in a sample economy. Production function is given as

Y_t=F(K_t,A_t N)=(K_t ) (A_t N)

a)Write the output per effective worker as a function of capital per effective worker.

b)Derive the steady state level of capital per effective worker in terms of the saving rate (s), the depreciation rate (), and technology growth (g).

c)Derive the steady state level of output per effective worker in terms of the saving rate (s), the depreciation rate (), and technology growth (g).