Author Question: Assume expectations of both prices and productivity are accurate,use the PS/WS relations, ... (Read 73 times)

Arii_bell · **on:** Jun 30, 2018

Assume expectations of both prices and productivity are accurate,use the PS/WS relations, graphically illustrate and explain the effects of an increase in the productivity on the natural rate of unemployment.

What will be an ideal response?

Question 2

Graphically illustrate and explain what effect a purchase of bonds by the Federal Reserve will have on the money market.

What will be an ideal response?

SomethingSomething · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

An increase in productivity shifts both the wage and the price-setting curves by the same proportion and thus has no effect on the natural rate.

Answer to Question 2

A Fed purchase of bonds will cause an increase in H and an increase in the money supply. At the initial interest rate, there will be an excess supply of money. The interest rate will fall to restore money market equilibrium. All else fixed, there will be no change in money demand.