Posted: December 12th, 2016
1. Assume that the consumption function equals
a + b YD = 100+0.8Y, and I = 100.
a. Find the equilibrium level of income with G = 0.
b. Find the equilibrium level of consumption.
c. Find the equilibrium level of saving.
2. Assume that a government increases both government spending and taxes by $200 billion so that the budget balance remains unchanged. What will happen to aggregate income? Explain the intuition behind this result.
3. What is the key difference between the classical and Keynesian aggregate supply functions? What is the key factor that drives these differences?
4. Compare and contrast the long run and short run effects of aggregate demand expansionary policies in the Monetarist model.
5. What is meant by the natural rate of unemployment? Is the natural rate of unemployment a constant value? According to the monetarist view, does expansionary monetary policy lower the natural rate of unemployment temporarily or permanently?
6. Define the concept of rational expectations . Do rational expectations mean that individuals do not make mistakes when forming their expectations?
7. Explain the new classical proposition of policy ineffectiveness .
8. Explain what is meant by a representative agent . Why do real business cycle models make this assumption? What is the problem with this assumption?
9. Define hysteresis. How do insider outsider models explain hysteresis?
10. The simple real business cycle model production function is shown as
y t = z t F(K t , N t ).
Describe the difference(s) in this production function and the original classical production function
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