1. In a given economy the long run equilibrium growth of output is equal to 3%, the velocity of money is constant, the rate of growth of nominal money supply is constant and equal to 8%. Natural rate of unemployment is 6%; an increase in inflation rate equal to one percentage point will cause the unemployment rate to fall by 1/3 percentage point. An increase in unemployment rate by 1 percentage point will decrease the rate of growth of output by 3 percentage points.. Expectations are rational.
Note, that the dynamic Okun’s Law is given by: ΔY/Y = g - aΔu, where g is the potential output growth rate, a - parameter
Calculate the short and long run inflation and unemployment rate when:
· There is an unanticipated increase in the rate of money growth to 14%
· Expected inflation rises to 8%, due to expansionary fiscal policies; however the actual fiscal policy remains unchanged
· As a result of supply shock, the natural unemployment rate rises to 7%.
Labor Market.
1.Suppose that the firms’ markup over wage costs is 5% and wage setting equation is W = P(1-u).
What is the real wage?
What is the natural unemployment?
What will happen to unemployment, when markup decreases?
What will happen to unemployment, when unemployment benefits go up?
2.Consider the efficiency wage model.
The firm knows that the relationship between real wage and workers’ effort is the following:
Real wage
Effort
8
7
10
12
15
14
17
16
19
The marginal product of labor for this firm is
MPN = E(100-N)/15, where E is effort and N is the number of workers employed.
How many workers will this firm employ?
What will happen to potential output, when the supply of workers increase?
3.
Consider the following changes in the sticky-wage model.
Suppose that labor contracts specify that the nominal wage be fully indexed for inflation. How does this alter the aggregate supply?
Suppose now that indexation is partial (that is, fro every change in CPI the nominal wage rises, but by a smaller percentage) How does this alter the aggregate supply?
kamiltee