1. The economy of Whoville is described by the following equations: AD: Y = 4000+2(M/P) SRAS: Y=Y +100(P-P²) Okun's Law: (Y-Y)/Ỹ = −2(u−u”) In this economy full-employment output Y equals 6000, money supply M equals 4000, and the natural rate of unemployment u" equals 0.05. Suppose that Whoville has been in this long run equilibrium for a while and is expected to stay in the long run equilibrium with no changes to fiscal or monetary policy. Please calculate the expected price level Pe for Whoville in the long run. A totally unexpected increase in money supply occurs, raising it from 4000 to 4488. Given this unexpected increase, please calculate the short-run equilibrium values of the price level, expected price level, output, and unemployment rate (leave your answer for u as a fraction). Using what you calculated, report the values of cyclical unemployment and unanticipated inflation (leave this in fraction too). What is the slope of the expectations-augmented Phillips curve in Whoville? What is the tradeoff between unemployment and inflation for the Whoville economy?

Table 24.4 describes Santhers economy. Plot the AD/AS curves and identify the equilibrium. Would you expect unemployment in this economy to be relatively high or low? Would you expect prices to be a relatively large or small concern for this economy? Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium. How will the shift in AS affect the original output, price level, and employment?

After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why?

If inflation rises unexpectedly by 5, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: A union member with a COLA wage contract Someone with a large stash of cash in a safe deposit box A bank lending money at a fixed rate of interest A person who is not due to receive a pay raise for another 11 months

Explain how the natural rate of unemployment may be higher in low-income countries.

How is cyclical unemployment illustrated in an AD/AS model?

Is the increase in labor force participation rates among women better thought of as causing an increase in cyclical unemployment or an increase in the natural rate of unemployment? Why?

Do you think perfect indexing is possible? Why or why not?

List three practical problems with the Keynesian perspective.

The U.S. unemployment rate increased from 4.6 in July 2001 to 5.9 by June 2002. Without studying the subject in any detail, would you expect that a change of this kind is more likely to be due to cyclical unemployment or a change in the natural rate of unemployment? My?