Download Quiz 5

QUIZ 5: Macro – Fall 2016
Name: ___________________________
Section Registered (circle one):
Friday a.m.
Mail Folder (circle one):
Campus
Friday p.m.
Saturday
Gleacher
Quiz assumptions (READ!): Use the models developed in class with our standard assumptions.
In particular, assume:






Note:
Note:
All consumers are non-liquidity constrained, non-Ricardian PIH (as developed in class)
Expected inflation has no effect on money demand; NX = 0 .
All changes are permanent and unexpected unless told otherwise
There is no income effect on labor supply (i.e., actual or expected PVLR changes do not
change labor supply).
The economy is initially in long run equilibrium at Y*
TFP, taxes, consumer confidence, value of leisure, population, government spending, and the
nominal money supply do not change unless I tell you they change
Unless I tell you otherwise, compare the long run to the initial condition.
You should use a macro worksheet or scrap paper when answering the questions.
Question 1 (circle all the true answers – 10 points total, 1 point each)
Which of the following are definitely true about a permanent increase in consumer confidence?
Assume the Fed has a policy goal of keeping prices close to their initial level. Assume the economy
gets to the short run equilibrium before the Fed policy takes place. (Again, assume no income effect
on labor supply). Finally, note whether the question is asking you to compare short vs. long run,
initial condition vs. long run, or initial condition vs. short run.
a.
Investment will (I) fall between the initial condition and the long run.
b.
Real money supply will fall between the initial condition and the long run.
c.
The labor demand curve will shift to the left between the short-run and the long-run.
d.
The percentage change in prices (P) between the short run and the long run will be the same
as the percentage change in nominal wages (W) between the short run and the long run.
e.
The IS curve will shift to the left between the short run and the long run.
f.
The aggregate demand (AD) curve will be shifted right in the long run (relative to the initial
position).
g.
Structural deficits will fall between the initial condition and the short run.
h.
The money demand curve will be shifted left in the long run (relative to the initial position).
i.
The velocity of money will remain constant between the initial condition and the long run.
j.
The short run aggregate supply curve (SRAS) will be shifted right in the short run (relative to
the initial position).
Question 2 (circle all the true answers – 6 points total, 1 point each)
Suppose there is an unexpected permanent increase in government spending (G). Consider the
following two scenarios. In scenario A, the economy will return to its long run position via the selfcorrecting mechanism (i.e., no policy intervention). In scenario B, the economy will return to the
long run via Fed Policy (where the Fed has a goal of keeping Y close to Y*). Which of the following
are true?
Note: When I ask about the long run, I want you to compare it to the initial condition.
a. In the long run, nominal wages (W) will be higher in scenario A relative to scenario B.
b. In the long run, real wages (W/P) will be higher in scenario A relative to scenario B.
c. In the long run, real interest rates (r) will be higher in scenario A relative to scenario B.
d. In the long run, the IS curve will be shifted to the right in scenario A but not in scenario B.
e. In the long run, the AD curve will be shifted to the right in scenario A but not in scenario B.
f.
In the long run, the money demand curve will be shifted to left in scenario B relative to
scenario A.
Question 3 (circle all the true answers – 4 points total, 1 point each)
Suppose there is an unexpected permanent increase in the nominal money supply (M). Suppose that
the economy returns to its long run equilibrium via the self-correcting mechanism. Which of the
following are true?
a. The IS curve will be shifted right in the long run (relative to the initial position).
b. The AD curve will be shifted right in the long run (relative to the initial position).
c. In the long run, the percentage increase in nominal wages will equal the percentage increase
in the nominal money supply.
d. Investment (I) will rise in the long run (relative to the initial position).