Neoclassical economics does NOT argue _______ Question 1 options: GDP is determined by supply factors such as resources and technology, not aggregate demand government regulation is generally good for the overall economy the market system has the self-adjusting mechanism that fixes unemployment and recession in the long run as long as wages, prices, and interest rates are flexible raising minimum wage generally creates unemployment

An economy has an unemployment rate of 11% and real GDP grows by 2.5% annually. A treasury official says next year's expected growth rate of 4% is ecpected to bring down the enemployment rate to 8% within one year. However, an economists disagrees as it is non consistent with macroeconomic research. -who is correct? the treasury official or the economist and why?

Question 2 Let us assume a neoclassical economy with two distinct factors of production; Water and Soil, denoted by W and S respectively. The production function is Y = W0.33 50.67. The aggregate price level is equal to 7. a) Derive the demand function for Soil in this economy. b) Assume that the economy has 40 Water and 20 Soil. If the nominal factor prices can adjust to equilibrate demand and supply, what is the nominal factor price of Soil? Question 3 Imagine that you are a lender in a loan contract with a nominal interest rate of 14 percent. Your expected inflation was 5 percent when you signed the contract, but the actual inflation is realized as 4 percent. a) What is ex-ante real interest rate for this loan contract? b) What is ex-post real interest rate for this loan contract? c) Remember that you are a lender in this loan contract. Did the realized inflation make you better off or worse off? Why? Question 4 An economy has a monetary base of 3000 TL. Households keep 10 percent…

Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how will this policy affect output and the price level in the short run and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer.