ECO3203 - Problem Set 2 You must answer the Problems en papers and upload po afyour wuk (Typedes) Ephembe mwendon a different sheet of paper. You can the photo an MS Word or a PDF and upload a SINGLE The femme-P. Problem 1) Read Chapter 7: Appendix ow Page 154 of the frontlook. The exacer questions below: a. Why does the wage-setting relation in Figure I have an upward slope? As N approaches L, what happens to the unemployment rate? b. The price-setting relation is horizontal. How would an increase in the mark-up affect the position of the price setting relation in Figure 1? How would an increase in the mark-up affect the natural rate of unemployment in Figure 1 Problem 2) Disewer the following statements. 2. The Phillips curve implies that when unemployment is high, inflation is low, and vice versa. Therefore, we may experience either high inflation or high unemployment, but we will never experience both together. b. As long as we do not mind having high inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by using, for example, expansionary fiscal policy. c. In periods of deflation, workers resist reductions in their nominal wages in spite of the fact prices are falling Problem 3) The mediwa-raw nawilibrime is characterized by four conditions Output is equal to potential anthur Y = Y, and the real policy rate must be clear by the cutral links The awe nayoyawent rate is equal to the natural nate u = . The mal policy interest rate is equal to the natural rate of interest T were Te is defined as the policy rate when Y = C(Y. -T) + (Y..X) +G The extended rate of inflation ne is equal to the actual rate of inflatiow Ft. This aplies the inal policy rate i = T. + 1. If the level of expected inflation is formed sort equals t, characterize the behavior of inflation in a medium-run equilibrium b. Write the Is relation as Y = C(Y-T) + F(Y.r + x) + G. Suppose T, 26. If x increases from 3 to 5% how must the central bank change t, to maintain the existing medium-run equilibrium. Explain in words c. Suppose G increases permanently. In what direction must the central bank changer to maintain the existing medium-run equilibrium? Explain in words. d. Suppose T decreases permanently. How must the central bank changer to maintain the existing medium-run equilibrium? Explain in words. c. Discuss: In the medium run, a fiscal expansion leads to an increase in the matural rate of interest. Search 10:20 PM Changes in Profit per Unit of Capital versus Changes in the ratio of Output to Capital in the United States since 1980 2.0 1.5 Change in output (scale at left) 2 1.0 0.5 Change in the ratio of output to capital (percentage points) -2 0.0 Change in the ratio of profit to capital (percentage points) - 4 -0.5 4 -1.0 -6 Change in profit (scale at right) -1.5 -8 -2.0 -10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 ECO3203 - Problem Set 2 You must answer the Problems en papers and upload po afyour wuk (Typedes) Ephembe mwendon a different sheet of paper. You can the photo an MS Word or a PDF and upload a SINGLE The femme-P. Problem 1) Read Chapter 7: Appendix ow Page 154 of the frontlook. The exacer questions below: a. Why does the wage-setting relation in Figure I have an upward slope? As N approaches L, what happens to the unemployment rate? b. The price-setting relation is horizontal. How would an increase in the mark-up affect the position of the price setting relation in Figure 1? How would an increase in the mark-up affect the natural rate of unemployment in Figure 1 Problem 2) Disewer the following statements. 2. The Phillips curve implies that when unemployment is high, inflation is low, and vice versa. Therefore, we may experience either high inflation or high unemployment, but we will never experience both together. b. As long as we do not mind having high inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by using, for example, expansionary fiscal policy. c. In periods of deflation, workers resist reductions in their nominal wages in spite of the fact prices are falling Problem 3) The mediwa-raw nawilibrime is characterized by four conditions Output is equal to potential anthur Y = Y, and the real policy rate must be clear by the cutral links The awe nayoyawent rate is equal to the natural nate u = . The mal policy interest rate is equal to the natural rate of interest T were Te is defined as the policy rate when Y = C(Y. -T) + (Y..X) +G The extended rate of inflation ne is equal to the actual rate of inflatiow Ft. This aplies the inal policy rate i = T. + 1. If the level of expected inflation is formed sort equals t, characterize the behavior of inflation in a medium-run equilibrium b. Write the Is relation as Y = C(Y-T) + F(Y.r + x) + G. Suppose T, 26. If x increases from 3 to 5% how must the central bank change t, to maintain the existing medium-run equilibrium. Explain in words c. Suppose G increases permanently. In what direction must the central bank changer to maintain the existing medium-run equilibrium? Explain in words. d. Suppose T decreases permanently. How must the central bank changer to maintain the existing medium-run equilibrium? Explain in words. c. Discuss: In the medium run, a fiscal expansion leads to an increase in the matural rate of interest. Search 10:20 PM Changes in Profit per Unit of Capital versus Changes in the ratio of Output to Capital in the United States since 1980 2.0 1.5 Change in output (scale at left) 2 1.0 0.5 Change in the ratio of output to capital (percentage points) -2 0.0 Change in the ratio of profit to capital (percentage points) - 4 -0.5 4 -1.0 -6 Change in profit (scale at right) -1.5 -8 -2.0 -10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015