MGEC06H3 Midterm: MGEC06-Sample Test1 solution.pdf
19 Jun 2014
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A positive demand shock that lasts for three periods will shift dad to the right. Dad stays there as log as the shock last three periods- and then returns to its original position. In the first three periods, while the positive demand shock persists the das adjusts up reflecting the inflationary gap. But when the demand shock dissipates the das starts adjusting downwards reflecting the deflationary gap. Eventually the economy returns to its original long run equilibrium. Page 2 of 13: [12 points)] assume that an economy"s production function is y = 2000l1/2. Suppose the labor supply curve is given by ls = 15,625(w/p). Solution: equilibrium real wage is (w/p for which labor demand is equal to labor supply, ld = ls, that is: (w/p) = 1000l-1/2 => ld = 1000,000(p/w)2. => w/p = 4 => nominal wage = 32. Note: this will be the negotiated nominal wage between the firm and workers and will remain fixed in the short-run.
