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Homework 4
Economics 101
Chapter 6
1) If the rate of job separation is 0.02 per month and the rate of job finding is 0.10 per
month, what is the natural rate of unemployment?
2) Assume that a society consists of two types of workers. For type A, 3 million workers
lose their jobs each year, and each one takes a year to find a new one. For type B, 36
million workers lose their jobs each year (3 million per month), and each takes one month
to find a new job. Thus at any given time, 6 million are unemployed in this economy.
a. How many “spells” of unemployment occur each year in this economy?
b. What percentage of the “spells” are only one month long?
c. If you take all the workers unemployed each year and multiply each by the length
of his or her unemployment “spell,” how many “months” of unemployment would
there be in this economy each year?
d. Of all the unemployment, how many are accounted for by the workers
unemployed a year at a time?
Chapter 4
1) Suppose that in Taiwan the velocity of money is constant, real GDP grows by 6% per
year each year, the money stock grows by 9% per year, and the nominal interest rate
is 7%.
a. Using the quantity theory of money and the Fisher relation, what should be the
inflation rate and the real interest rate in Taiwan?
b. Suppose the central bank of Taiwan decides to lower inflation by lowering the
money supply growth rate to 8% (all else constant). Now what would be the
equilibrium values of inflation and the nominal interest rate? (Assume the
Classical Dichotomy holds here.)
2) In 1996 Spain tried to lower inflation by taking the advice of the quantity theory of
money and lowering its money growth rate in that year. Spanish officials were
surprised that inflation did not fall. Use the money demand approach to inflation
where money demand is a function of expected future inflation, to offer an
explanation for this stubborn inflation. (Hint: prior to 1996 the Spanish government
had been relying to some degree on seigniorage, the inflation tax, to finance its
budget, and it was not able to increase other taxes to replace the lost seigniorage when
it lowered money growth.)
3) Suppose a country has a money demand function (M/P)d = kY, where k is a constant
parameter. The money supply grows by 12 per years, and real income grows by 4
percent per year.
a. What is the average inflation rate?
b. How would inflation be different if real income growth were higher? Explain.
c. Suppose, instead of a constant money demand function, the velocity of money in
this economy was growing steadily because of financial innovation. How would
that affect the inflation rate? Explain.
Chapter 9
As part of the Y2K problem two years ago, it was feared that bank computers and
ATMS might malfunction on January 1. The Federal Reserve was actually quite
concerned about this. Analyze this situation in terms of aggregate demand and
aggregate supply curves from chapter 9 (based on the quantity theory of demand
where price is fixed in the short run but flexible in the long run). Regard this as a fall
in money velocity that is temporary, just affecting the short run but returning to
normal in the long run.
a) Which should the Federal Reserve worry about: a possible recession or excessive
inflation? Explain.
b) Discuss what monetary policy actions you would suggest to prevent any such
problems. (Be specific about what you would do in the short run and in the long
run.)