Economics 282
Fall 2000
B. Ferguson

For graphs, label axes, curves and relevant points on both axes. Use subscript 1 to designate initial equilibria, subscript 2 to designate new short run equilibria and (where relevant) subscript 3 to designate new long-run equilibria in cases where they differ from those shown by 2 (otherwise use 2 for long-run, if applicable).

1.	The Classical Quantity Equation
	a.	Write out the equation for the quantity theory of money, defining the symbols.
	b.	Specify the assumptions on the quantity equation which explain your answer to a.
	c.	Suppose that M is $4,000, P is $10 and Y is 30,000. Calculate V.
	d.	Now suppose that M = $4000, V = 25, and that Y = 30,000. Calculate P. Suppose M decreases to 3,500; calculate P again.
2.	The Classical Dichotomy
	a.	Draw three graphs to show the determination of output and prices in the classical model.
	b.	Show ALL of the effect(s) of a decrease in the money supply (M) on your diagrams. Label new equilibria for the relevant variables with subscript "2."
	c.	What is the "classical dichotomy?" Explain by referring to your graphs for a. and b.
	d.	What is money neutrality? Explain by referring to your graphs for a. and b.
	e.	Now draw an aggregate supply and demand diagram for the classical model and label the demand curve with the appropriate equation.
	f.	Using strict classical assumptions, a change in what variable (indicate increase or decrease) could cause the AD curve to shift outward.
3.	AS and AD
	a.	Define the aggregate supply curve.
	b.	In general, what will shift the AS curve to the right. Give two examples of specific changes in exogenous factors which will cause this.
	c.	Which assumptions lead to classical aggregate supply curve?
	d.	Which assumptions lead to the Keynesian aggregate supply curve?
	e.	Define the aggregate demand curve.
	f.	List three changes in exogenous factors which would cause the AD curve to shift leftward.
4.	Assume a classical AS curve:
	a.	What are the effects of a monetary expansion on P and Y? Explain your answer for Y, referring to classical assumptions.
	b.	Is a monetary expansion inflationary? Explain.
	c.	At a goods market equilibrium in an open economy, the following condition holds:
			S + TA - TR = I + G + NX
		(Note the similarity of this equation to the accounting identity from the GDP accounts, but keep in mind that here it is an equilibrium condition, not an identity.)
		Using classical assumptions about the determination of output, and assuming further that S and TA are both functions of Y, that G, TR, and NX are exogenous, and that I is a function of the interest rate, what must happen in this equation when G increases? Why? Explain in a sentence or two. (This is a hard question.)
	Now assume a Keynesian AS curve:
	d.	Is a monetary expansion inflationary? Would it affect output? If so, how?
	e.	Can you explain this result using the quantity equation, perhaps with different assumptions?
5.	The Phillips Curve
	a.	Write the equation for the Phillips curve, the version with next period’s wage on the left-hand side, and explain how one could derive a policy tradeoff from this equation.
	b.	Is this policy tradeoff stable over the long run? Why or why not?
	c.	How do the short and long-term Phillips curves differ? Consider slope and possible sources of shifts.
	d.	Draw and label (axes and curves) a short and long-run Phillips curve, on the same diagram, indicating any important points on either axis.
6.	The wage-employment relationship
	a.	Write the equation for the WN curve, with next period’s wage on the left-hand side. In a sentence or two, discuss this equation (what does it show?) Say more than one thing.
	b.	Draw a WN graph, adding in an aggregate demand for labor (ADL) curve. Start at an initial equilibrium at N*. Now suppose that a monetary or fiscal expansion has occurred. Show what happens on your graph in both the short and long run.
	c.	Explain the process of adjustment under b.

Link to Econ 282 Homepage

Link to Economics Department Homepage

Link to Grinnell College Homepage