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Explain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.
a) Households decide to save a larger share of their income.
b) Sri Lankan farmers suffer a prolonged period of unfavorable weather conditions for agriculture.
c) Increased job opportunities overseas cause many people to leave the country.
) List some empirical examples to support each theory which explains why the short-run aggregate supply curve is upward sloping.
2.2. Consider the following scenario. Initially the economy has 90 million people working, 10
million people unemployed, and 20 million people not in the labor force. Then prospects for the
economy improve. Five million people who previously were not in the labor force now join the 10
million previously unemployed in looking for work. For now, the economy remains with 90
million workers. What happens to the unemployment rate
Suppose there are 180 million employed people and 20 million unemployed people.
a) What is the unemployment rate? (5 marks)
b) Suppose that 5 million unemployed people give up their search for jobs and become
discouraged workers. What is the new official unemployment rate?
billions and i as a percentage; a 5 percent interest rate implies i = 5.)
C 5 0.8(1 2 t ) Y (P1)
t 5 0.25 (P2)
I 5 900 2 50 i (P3)
−−G 5 800 (P4)
L 5 0.25 Y 2 62.5 i (P5)
−−My−
P 5 500
4.* a. Show that a given change in the money stock has a larger effect on output the less
interest-sensitive is the demand for money. Use the formal analysis of Section 11-5.
b. How does the response of the interest rate to a change in the money stock depend on the
interest sensitivity of money demand?
A) Use appropriate diagrams and explain how the LM curve is derived.
B) Use appropriate diagram explain underway circumstances monetary policy is
(i) Completely ineffective
(ii) Most effective
A) Explain fully the conditions on which a workers bargaining power depends.
B) Define a reservation wage and explain why firms want to pay more than the reservation wage.
C) use an illustrative diagram to show and explain how the natural rate of unemployment is affected by an increase in unemployment benefits.
b. How does the increase affect the equilibrium level of income?
c. How does the increase affect the equilibrium interest rate?
Explain fully the conditions on which a worker’s bargaining power depends.
