MGEC06-2014 Summer Test1 solution.pdf

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University of Toronto Scarborough
Economics for Management Studies
Victor Yu

UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT OF MANAGEMENT MGEC06 Topics in Macroeconomic TheorySummer 2014Instructor A Mazaheri Test1 Saturday February 7 Instructions This is a closed book test You have 2 HoursGood LuckLast Name First NameIDFOR MARKERS ONLYQ1 Q2 Q3 Q4 Total MarksEarned Maximum 40 20 20 12 92 Marks PossibleThe University of Torontos Code of Behaviour on Academic Matters applies to all University of Toronto Scarborough students The Code prohibits all forms of academic dishonesty including but not limited to cheating plagiarism and the use of unauthorized aids Students violating the Code may be subject to penalties up to and including suspension or expulsion from the UniversityAnswer all following questionsQuestion1 40 Points Answer the following questionsa 8 Points An economy is characterized by the following AD Y200MSP e SRAS YY25PP 1323 LRAS Y KLSupply of capital K300Supply of labour L300 n Okuns LawYY Y20uu n Natural rate of unemployment u005 5Suppose that the money supply has been constant for many years at MS600Now suppose there is an unexpected increase in autonomous consumption such that the AD curve becomesY250MSPe and uWhat Use the ASAD model to find the shortrun equilibrium values of Y P Peare the values of cyclical unemploymentWhat are the new longrun values of Y P P and u Show your answers in one ASAD diagram making sure to label all the critical points SolutionThere is no shock as the money supply has been constant for many years therefore expected price will be equal to the actual price and3231300300300Y600300200Y DPe3006YPP Now there is a shock but the expectation does not adjust therefore in the short runPage 2 of 15
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