Econ 305 Question Paper

Problem Set # 4 [75 Points]
Econ 305 – Prof: Henry Terrell
Due: May 9th, 2008 before 9:00 AM

Name: ID: TA:

Problem 1 [25 Points]
Consider the following extended classical economy (in which the misperception theory holds):
AD Y=600+20(M/P)
SRAS Y=YFE +2(P - Pe)
Okun’s Law (Y-YFE)/YFE=-2(u-unr)
Full-employment output YFE=1000
Natural unemployment rate unr=0.06

a) Suppose that the money supply M=1000 and that the expected price level Pe=50. What are the short run equilibrium values of output Y, the price level P, and the unemployment rate u? What are the long run equilibrium values of these three variables?
What are the new short run equilibrium values of output Y, the price level P, and the unemployment rate u? What are the new long run equilibrium values of these three variables?

Problem 2 [25 Points]
In a certain economy the expectations-augmented Phillips curve is:
(=(e – 2(u-unr) and