QUIZ 8: Macro Winter 2008

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Section Registered (circle one):

Q#i$ ass#m%tions (R&'()): Use the models developed in class and assume all curves are well behaved (i.e., IS slopes down in standard ways, LM slopes up in standard ways, etc.). Also, assume: ) all consumers are non!li"uidity constrained, non!#icardian $I% (as developed in class), &) '( ) *, +) e,pected in-lation has no e--ect on money demand, .) all chan/es are permanent and une,pected unless told otherwise, 0) t*ere is no income e++ect on la,or s#%%l(i.e./ act#al or e0%ected 123R c*anges do not c*ange la,or s#%%l- *o4e5er 123R is S6I33 allo4ed to c*ange and a++ect cons#m%tion it 7#st does not a++ect la,or s#%%l- ), 1) the economy is initially in lon/ run e"uilibrium at 23, 4) no monetary or fiscal policy takes place unless I tell you otherwise, and 5) 67$, ta,es, consumer con-idence, value o- leisure, population, /overnment spendin/, and the nominal money supply do not chan/e unless I tell you they chan/e N86&: Unless I tell -o# ot*er4ise/ 4*en I as9 -o# a,o#t t*e 38N: RUN/ -o# s*o#ld com%are t*e initial condition in t*e econom- 4it* t*e e5ent#al long r#n %osition o+ t*e econom- (com%are %osition 0 directl- 4it* %osition 2 #sing o#r notation +rom class). Q#estion ! (circle all t*e tr#e ans4ers 20 %oints total/ 2 %oint eac*) 8iven the above assumptions, which o- the -ollowin/ are de-initely true about a permanent increase in the price o- oil9 Assume that prices in the short run increase: ;e went over this "uestion in class. Let me summari<e: In short run: =oth A> and S#AS shi-t in (2 will -all and $ will increase (/iven the "ui< assumption). 'ote: In reality, $ could have done anythin/ ? but, I told you to assume that $ increased in the short run). IS will shi-t in (as @ -alls and autonomous part o- I -alls ? @ -alls because ;A$ will -all permanently (in the lon/ run) and I -alls because M$B -alls ? this is the same reason that the A> curve shi-ted in). 6he LM curve will shi-t in (as $ increases and MA$ -alls). 6he net e--ect o- the IS shi-tin/ in and the LM shi-tin/ in maCes 2 -all (we Cnew this -rom above) and maCes r ambi/uous. 6he net e--ect on total investment is also ambi/uous (as M$B -alls (holdin/ r constant) ? I -alls, but I is also a -unction o- r and we do not Cnow what happens to r). In the labor marCet, the labor demand curve will shi-t in (as oil "uantity -alls (as oil prices increase). Labor demand -alls because o- the complementarity we assumed between oil "uantity and worCers. In the lon/ run, real wa/es will -all. '3 will also -all in the lon/ run (as will 23 as both '3 and oil "uantity -all).

In the short run in the labor marCet, ;A$ will also -all (as ; is -i,ed and $ increased). ;here is the short run real wa/e relative to the lon/ run new real wa/e9 ;e do not Cnow. ' in the short run could be below or above the new '3. So, by de-inition, 2 in the short run could be either above or below the new '3. a. 6rue b. 6rue c. 6rue d. 6rue e. 6he mar/inal product o- labor will -all in the lon/ run. @onsumption will -all in the short run. 6he labor demand curve will shi-t le-t in the short run. Dutput in the lon/ run -alls. Dutput in the short run -alls.

6rue (M$' ) ;A$ i- we are on the -irmEs labor demand curve) -. 6rue /. 6he labor supply curve will shi-t ri/ht in the short run. 6he LM curve will shi-t le-t in the short run.

7alse ? there is no movement in the labor supply curve (we assumed there were no income e--ects on labor supply) h. 6he IS will be shi-ted le-t in the lon/ run.

6rue (IS shi-ts le-t and stays le-t ? so does the A> curve). i. 7alse F. Dutput per worCer will rise in the short run. Dutput in the short run will be lower than output in the lon/ run.

7alse (2A' ) real wa/es ? real wa/es -all in the short run).