MACROeconomics

DIRECTIONS:

1. For all problems show your work if you want credit.
2. Please indicate with arrows an increase or decrease in your final answers.

PROBLEM 2 

Using the WS and PS relations, graphically illustrate the effects of the following events on the natural rate of unemployment and on the real wage.

1. An reduction in unemployment insurance
2. Less stringent antitrust legislation
3. Increase in minimum wage

PROBLEM 3

Suppose the economy is initially operating at Yn. Now suppose the Fed conducts a monetary contraction where M^s decreases.

1. Using AS and AD, and IS-LM graphs, illustrate the initial equilibrium, and medium run equilibrium.
2. What are the initial effects of the decrease in M^s Y, r, I, and C?
3. What happens to u and Y relative to their natural levels during: the short run, and the medium run?
4. What are the medium effects of the decrease in M^s on P, Y, r, I, and C?