Prof. Bryan Caplan

bcaplan@gmu.edu

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Fall, 1999

HW#4 (Please type all answers)

  1. Fill in the blanks in the following table. If the equilibrium nominal wage falls, mark the row with a check.
    2.

    Change in Equilibrium

    Real Wage

    Inflation

    Change in Equilibrium Nominal Wage

    Nominal Fall?

    -3%

    -3%

    		    

    -3%

    0%

    		    

    -3%

    +3%

    		    

    -3%

    +10%

    		    

    0%

    -3%

    		    

    0%

    0%

    		    

    0%

    +3%

    		    

    0%

    +10%

    		    

    +3%

    -3%

    		    

    +3%

    0%

    		    

    +3%

    +3%

    		    

    +3%

    +10%

    		    
  2. Suppose that the equilibrium real wage for low-skill labor in 1999 is $3.00/hour, and the federal minimum wage is $5.15. Draw the consequences on a S&D diagram. Assuming real labor demand, real labor supply, and the official minimum wage do not change, show what this market will look like in 2009 if the annual rate of inflation for the decade was (i) 0%; (ii) 2%; (iii) 10%; (iv) 25%. In each case, what will the real wage be in 1999 dollars?
  3. Draw two AS-AD diagrams, one with Classical AS, the other with Keynesian AS. Diagram the impact of an increase in AD in each case. How is the increase in output in the Keynesian case possible? Why is such an increase impossible in the Classical case?
  4. On two separate AS-AD diagrams, show: (i) the short-run effect of a decrease in AD; (ii) the subsequent shift of SRAS.
  5. Assume the price level is fixed at the initial intersection of money supply and money demand.
    1. Diagram the shortage that results from a reduction in the money supply.
    2. Show how such a shortage of money affects the market for loanable funds.
    3. On a third diagram, show how the changes in the market for loanable funds re-establish equilibrium in the market for money.
  6. Using AS-AD diagrams, show the short-run effects of the following:
    1. An increase in the money supply.
    2. A decrease in the money supply.
    3. A tax on credit card purchases.
    4. A 20% increase in the income tax (assuming spending and the money supply do not change).
    5. A decrease in government spending (assuming spending and the deficit do not change).
  7. Using an AS-AD diagram and a S&D diagram for the market for loanable funds, show the effect of a reduction in deficit spending assuming the Fed targets a nominal interest rate of 7%.
  8. The Korean War began in 1950 and ended in 1953. Calculate the growth rate of the monetary base for each of the years from 1948-1955, using the data at the following web site: http://www.stls.frb.org/fred/data/reserves/ambns. Was monetary growth higher during the Korean War than before and after?
  9. Using AS-AD diagrams, show what happens when:
    1. The public does not expect monetary policy will change, but it actually becomes more expansionary.
    2. The public expects monetary policy to become more expansionary, while actual policy stays fixed.
    3. The public expects monetary policy to become less expansionary, while actual policy stays fixed.
    4. The public expects monetary policy to become more expansionary, but actual policy becomes even more expansionary than expected.
    5. The public expects monetary policy to become less expansionary, but actual policy becomes more expansionary.
  10. Using Phillips curve diagrams, show what happens when:
    1. The public does not expect monetary policy will change, but it actually becomes more expansionary.
    2. The public expects monetary policy to become more expansionary, while actual policy stays fixed.
    3. The public expects monetary policy to become less expansionary, while actual policy stays fixed.
    4. The public expects monetary policy to become more expansionary, but actual policy becomes even more expansionary than expected.
    5. The public expects monetary policy to become less expansionary, but actual policy becomes more expansionary.
  11. Suppose you are the head of the central bank of Russia. What could you do to permanently regain the confidence of the Russian public? What could you do to temporarily regain their confidence, then trick them one last time?