Quiz 8: Macro 2008 (Bonus quiz out of 22!

) Name _____________________ Section Friday Saturday

For this quiz, make the following assumptions. Use the model of the economy developed in class. ssume consumers are non!liquidity constrained, non! "icardian #$% consumers. ssume N& is fi'ed at zero. ssume e'pected inflation has no effect on money demand. ssume no monetary or fiscal policy takes place, unless otherwise indicated. ssume all changes are une'pected and permanent (unless told otherwise). *astly, assume the economy is initially in long run equili+rium (i.e, , - ,.). Notes: When discussing the long run co!"are the initial conditions to the ne# long run equili$riu!% &lso assu!e no inco!e effect on la$or su""l'% Question ( /hich of the following are definitely true if there is a permanent (and une'pected) increase in 0F#1 (2 points each 3 45 points total) ,ou should +e a+le to graph this out 3 we did this in class. Note 3 i did not tell you what happened to prices in the short run 3 so, lots of things are am+iguous. ,ou should +e a+le to prove this to yourself. a. 0he aggregate demand curve will +e shifted right in the short run

0rue (as 6 and the autonomous part of $ increase). +. 0he $S curve will +e shifted right in the long run.

0rue (as 6 and the autonomous part of $ increase). c. 0he *7 curve will +e shifted right in the long run.

False 3 we do not know what happens to prices in the long run, so we do not know what happens to the *7 curve. d. 8utput will increase in the short run.

0rue (+oth 9 and S" S shift right). e. 8utput will increase in the long run.

0rue (,. increases). f. Structural deficits will fall in the long run.

0rue (as ,. increases, ta' receipts increase 3 all else equal). g. 0he marginal product of la+or will rise in the long run.

0rue (/:# - 7#N 3 /:# will definitely increase as 0F# increases 3 this came from quiz 2 or ;). h. #rices will increase in the short run.

False 3 #rices are am+iguous in the short run (depending on what happens to S" S relative to 9). i. #rices will increase in the long run.

False 3 #rices are am+iguous in the long run (depends on what happens to prices in the short run).

Question 2 () "oints) /hile giving the Samuelson *ecture (named after noted economist #aul Samuelson) on Fe+ruary 2<, 4==5, Federal "eserve >overnor ?dward >ramlich discussed the pros and cons of many monetary rules (rules the Fed can use to conduct monetary policy). 8ne such rule was the constant rate of growth in the money supply (6"8>). >ramlich noted one prominent twentieth century economist was a ma@or proponent of a 6"8> monetary rule. /ho was that prominent economist1 ,our answer should +e one name. Friedman