Download Note: Solve this test. In a separate sheet, explain very briefly your

Degree in Economics and Finance Macroeconomics II. Professor: Carlos Llano; Teacher Assistant: Nuria Gallego Group 421 Problem Sets nº 5: Lectures 4 and 5 Note: Solve this test. In a separate sheet, explain very briefly your chosen option, using a brief explanation (2 or 3 lines each), a scheme or a graph. But be clean and clear in the presentation! 1.
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If the level of production is above than the natural one, and the government wants to achieve this without increasing the price level, what is the correct policy to be applied? a) Increase taxes b) Increasing public expenditure c) To increase the money supply d) Not to do anything because the economy returns to full employment in the medium term A permanent and significant increase in the “unemployment public insurance” will result in: a) A reduction in the natural rate of unemployment b) An increase in the natural rate of unemployment as it raises the “power of negotiation of employees” c) Aggregate Supply shifts to the left, to reach, in the medium‐term, a new and smaller potential output of the economy. d) b) and c) are true. Suppose an economy described by the AS‐AD model, an initial situation where the economy is in a short term equilibrium with cyclical over‐employment. During the mid‐term automatic process of adjustment you would expect: a) An increase in wages, prices and the money supply in real terms. b) A decrease in the money supply in real terms and in the private investment. c) Nominal wages will decrease. d) The expected price level remains constant. Under the model of AS‐AD and starting from a situation of equilibrium in the short and mid term: a) An expansionary monetary policy reduces interest rates in the short term but in the medium term do not vary. b) An expansionary fiscal policy raises interest rates in the short term and in the mid‐term. c) Fiscal policy is ineffective in achieving increases in production in the mid‐term. d) All are true. According to the Phillips curve and assuming adaptive expectations: a) If in period t inflation is the same as in t‐1, the effective unemployment rate coincides with the natural rate of unemployment. b) If in period t the inflation rate is higher than in t‐1, the effective unemployment rate will be higher than the natural unemployment rate. c) If in period t the inflation rate is lower than in t‐1, the effective unemployment rate will be lower than the natural unemployment rate. d) None of the above is true. Indicate the wrong answer: a) Okun's law relates the rate of unemployment to the output growth in the economy. b) Okun's law relates the unemployment rate and the inflation rate. c) According to Okun's law the natural growth of an economy is the one that keeps the unemployment rate stable. d) According to Okun's law the variation of the unemployment rate may be less than the increase in the output above the natural rate due to an increase in productivity. 7.
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Indicate the wrong answer in relation to inflation: a) A country's inflation is always motivated by aggregate demand, which increases production above the natural level. b) Inflation in one country may be motivated by demand or supply shocks. c) For the classics, following the quantity equation of money with V = constant, inflation is primarily due to an increase in money supply over the production growth. d) Inflation has different effects depending on whether it is expected or unexpected. Some economists argue that some level of inflation is even desirable. When a central bank faces a trade‐off between unemployment and inflation: a) should be aware that the sacrifice ratio tells you how many "points of unemployment * year" (or percentage points of reduction in the GDP) will have to bear for each point of reduction in the inflation rate. b) The sacrifice ratio could be lower if the agents are following "rational expectations" and are able to foreseen the decision of the Central Bank. c) This sacrifice ratio could be higher if the economy is suffering "hysteresis". d) All are true.