# Suppose that laws are passed banning labor unions

November 24, 2016

Economics 305

Dr. Neri

Problem Set No. 5 due in class on Friday Oct. 23 Late papers will not be accepted

1. Suppose that laws are passed banning labor unions and that resulting lower labor costs are passed along to consumers in the form of lower prices. Use the aggregate demand/aggregate supply model presented n Chapter 9 to illustrate graphically the impact in the short run and the long run of this favorable supply shock. Be sure to label:

a. the axes; b. the curves; c. the initial equilibrium values; d. the direction the curves shift; e. the short-run equilibrium values; and f. the long-run equilibrium values.

2. Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

a.

If the economy is initially in long-run equilibrium, what are the values of the price level (P) and Y?

b. What is the velocity of money in this case?
c. Suppose because banks start paying interest on checking accounts, the

aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run

values of P and Y?
d. What is the velocity of money in this case?
e. With the new aggregate demand function, once the economy adjusts to long-

run equilibrium, what are P and Y? f. What is the velocity now?

3. Simple Keynesian-Cross Model.
The economy of Bernankistan is characterized by the following equations,

(1) C = 100 + .75Yd = 100 + .75(Y – T) (2) I = 300
(3) G = 75,
(4) T = 100

a. Solve for the equilibrium level of income.
b. Calculate the government spending and tax multipliers.
c. If G increases by 25(from 75 to 100), find the new equilibrium level of income. d. Suppose now taxes depend upon income such that T = -40 +.4Y:
i. Solve for the equilibrium level of income.
ii. Calculate the government spending and tax multipliers.

4. I have posted an Excel file named “Okun’s Law containing data for 3 countries.

1. Use the Excel graph function to prepare a graph for each country using the Okun’s Law formulation. Highlight the data (do not highlight the data titles), Click on Insert, click Scatter.

2. There is a feature “Add Trend Line”. Put your curser on a data point on the graph, right click. Click “Linear” to fit a straight line to the data. Click “display equation” and “display R-square”

3. What is the change in the growth rate in RGDP for a one-percentage point change in the unemployment rate for each country?

4. What is the growth rate in RGDP when there is no change in the unemployment rate for each country?

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