Economics 313

Fall 2013

Homework 3

Due Tuesday November 5

1. Does monetary policy become more or less effective when the responsiveness of investment to the interest rate increases. Explain graphically and intuitively.

2. Does fiscal policy become more or less effective when the responsiveness of investment to the interest rate increases. Explain graphically and intuitively.

3. Does monetary policy become more or less effective when the responsiveness of money demand to the interest rate increases. Explain graphically and intuitively.

4. Does fiscal policy become more or less effective when the responsiveness of money demand to the interest rate increases. Explain graphically and intuitively.

5. What do the results in problems 1 through 4 imply about the effectiveness of monetary and fiscal policy over the business cycle?

6. Use a graph of the price and wage setting equations to show how the unemployment rate changes when (a) food stamps become more generous, (b) the monopoly power of the typical firm increases.

7. (a) Derive the aggregate supply curve graphically and algebraically, and explain intuitively why it is positively sloped. (b) Show how the AS curve shifts when there is a change in inflationary expectations.

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