Assignment #3. ECON Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

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1 ECON Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Assignment #3 Notice: (1) There are 25 multiple-choice problems and 2 analytic (short-answer) problems. This assignment is due on March 26, 2010, class time. Please submit before the class starts. (2) Solutions of this assignment will be posted on the web after the due date. Name: Page 1

2 Problem 1~25: Multiple choice problems Please choose your answer and circle the corresponding capital letter (A, B, C, D) 1. The natural rate of unemployment is: A) the average rate of unemployment around which the economy fluctuates. B) about 10 percent of the labor force. C) a rate that never changes. D) the transition of individuals between employment and unemployment. 2. In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the who find a job each month, while the rate of job separation equals the percentage of the who lose their job each month. A) labor force; labor force B) labor force; unemployed C) employed; labor force D) unemployed; employed 3. All of the following are reasons for frictional unemployment except: A) workers have different preferences and abilities. B) unemployed workers accept the first job offer that they receive. C) the flow of information is imperfect. D) geographic mobility takes time. 4. Sectoral shifts: A) lead to wage rigidity. B) explain the payment of efficiency wages. C) depend on the level of the minimum wage. D) make frictional employment inevitable. 5. Unemployment insurance increases the amount of frictional unemployment by: A) making workers more frantic in their search for new jobs. B) inducing workers to accept the first job offer that they receive. C) making employers more reluctant to lay off workers. D) softening the economic hardship of unemployment. Page 2

3 6. The unemployment resulting when real wages are held above equilibrium is called unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called unemployment. A) efficiency; inefficiency B) efficiency; structural C) frictional; efficiency D) structural; frictional 7. When the real wage is above the level that equilibrates supply and demand: A) the quantity of labor supplied exceeds the quantity demanded. B) the quantity of labor demanded exceeds the quantity supplied. C) there is no unemployment. D) the labor market clears. 8. Unions contribute to structural unemployment when collective bargaining results in wages: A) above the equilibrium level. B) below the minimum wage. C) below the equilibrium level. D) above the level of unemployment compensation. 9. Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to: A) reduce labor turnover. B) improve the quality of the firm's labor force. C) increase worker effort. D) reduce the firm's wage bill. 10. Data on unemployment in the United States show that: A) most spells of unemployment are long. B) most weeks of unemployment are attributable to the long-term unemployed. C) members of the labor force over age 55 have the highest unemployment rates. D) the average unemployment rate for the United States was lower in the 1980s than in the 1970s. 11. Business cycles are: A) regular and predictable. B) irregular but predictable. C) regular but unpredictable. D) irregular and unpredictable. Page 3

4 12. The statistical relationship between changes in real GDP and changes in the unemployment rate is called: A) the Phillips curve. B) the Solow residual. C) the Fisher effect. D) Okun's law. 13. Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run. C) sticky in both the short and long runs. D) flexible in both the short and long runs. 14. The aggregate demand curve is the relationship between the quantity of output demanded and the. A) positive; money supply B) negative; money supply C) positive; price level D) negative; price level 15. Along an aggregate demand curve, which of the following are held constant? A) real output and prices B) nominal output and velocity C) the money supply and real output D) the money supply and velocity 16. When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is and the aggregate demand curve shifts. A) greater; inward B) greater; outward C) lower; inward D) lower; outward 17. In the long run, the level of output is determined by the: A) interaction of supply and demand. B) money supply and the levels of government spending and taxation. C) amounts of capital and labor and the available technology. D) preferences of the public. Page 4

5 18. The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: A) the labor supply. B) the supply of capital. C) the money supply. D) technology. 19. The natural level of output is: A) affected by aggregate demand. B) the level of output at which the unemployment rate is zero. C) the level of output at which the unemployment rate is at its natural level. D) permanent and unchangeable. 20. If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) is horizontal. B) is vertical. C) slopes upward and to the right. D) slopes downward and to the right. 21. If the short-run aggregate supply curve is horizontal, then a change in the money supply will change in the short run and change in the long run. A) only prices; only output B) only output; only prices C) both prices and output; only prices D) both prices and output; both prices and output 22. Which of the following is an example of a demand shock? A) a large oil-price increase B) the introduction and greater availability of credit cards C) a drought that destroys agricultural crops D) unions obtaining a substantial wage increase Page 5

6 23. Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: A) decreasing the money supply. B) increasing the money supply. C) decreasing the price level. D) increasing the price level. Use the following to answer question 24: Exhibit: Shift in Aggregate Demand 24. In this graph, initially the economy is at point E, with the price P 0 and output Y. Aggregate demand is given by curve AD 0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD 2. The economy moves first to point and then, in the long run, to point. A) A; D B) D; A C) A; B D) B; A Page 6

7 25. The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a price level, or allow the price level to return to its original level, but with a level of output in the short run. A) higher; higher B) higher; lower C) lower; lower D) lower; higher Problem 26~27: Analytic problems Please give your answers in the blank space below each problem. 26. If the economy were at a steady-state unemployment rate with a separation rate of 0.02 per month and a job-finding rate of 0.10 per month, and the labor force was 100 million, how many individuals would lose their jobs each month? (Hint: first, labor force = employed workers + unemployed, that is, L = E + U; second, we can write the steady-state condition using E, U, s, and f, where s denotes the separation rate and f, the job-finding rate, ) Page 7

8 27. Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500. a. If the economy is initially in long-run equilibrium, what are the values of P and Y? b. If M increases to 2,000, what are the new short-run values of P and Y? c. Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y? Page 8

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