Author Question: For this question, assume that expectations of P and A are correct. Now suppose that there is a 1 ... (Read 8 times)

jazziefee · **on:** Jun 30, 2018

For this question, assume that expectations of P and A are correct. Now suppose that there is a 1 increase in A. Given this information, which of the following will occur?

A) a 1 increase in the real wage and a reduction in the natural rate of unemployment
B) a 1 increase in the real wage and no change in the natural rate of unemployment
C) no change in the real wage and an increase in the natural rate of unemployment
D) no change in the real wage and a reduction in the natural rate of unemployment

Question 2

In the model discussed in Chapter 3, why do we assume G and T are exogenous?

What will be an ideal response?

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

Answer to Question 1

B

Answer to Question 2

It is based on two arguments: First, government do not behave with the same regularity as consumers or firms, so there is no reliable rule we could write for G or T. Second, treating G and T as exogenous help explore the implications of alternative spending and tax decisions.