Quiz 7: Macro 2007
Name
_____________________
Section
8:30
10:00
6:00
For this quiz, make the following assumptions. Use the model of the economy developed
in class.
Assume consumers are non-liquidity constrained, non-Ricardian PIH
consumers. Assume there are no income effects on labor supply. Assume NX is fixed at
zero. Assume expected inflation is always constant. Assume no monetary or fiscal
policy takes place, unless otherwise indicated. Assume all changes are unexpected and
permanent (unless told otherwise). Assume changes in government spending have no
effect on TFP. Lastly, assume the economy is initially in long run equilibrium (Y0 = Y*).
Note: When discussing the long run, compare the initial conditions to the new long
run equilibrium.
Question 1
True/False/Uncertain: Explanation determines the grade (like on the midterm). Restrict
your answer to what is happening within the IS-LM market and focus on the portion of
the statement below that is italics. Justify your answer with intuition. (4 points). Again,
your answer should be no more than 3 sentences.
In the short run, a permanent increase in government spending will cause both the IS
curve to shift right and the LM curve to shift left (as prices increase). As a result, the net
effect on Y is ambiguous.
Question 2
Suppose there is a permanent increase in government spending (with no Fed action).
Which of the following are true?
a.
b.
c.
d.
e.
The percentage change in nominal wages between the short run and the long run
will be greater than the percentage change in prices between the short run and the
long run.
The labor supply curve will shift right in the short run as Y increases.
The IS curve will shift left between the short run and the long run as I falls.
The SRAS will be shifted left in the long run.
The real money supply will be unchanged in the long run.
Over 
Question 3
Suppose that the central bank conducts a one-time permanent increase in the nominal
money supply (from M0 to M1). Which of the following are true about the economy in
the short run and the long run?
a.
b.
c.
d.
e.
The IS curve will definitely shift right in the short run.
The LM curve will definitely shift right in the long run.
Prices will definitely increase in the long run.
Interest rates will definitely fall in the long run.
Consumption will definitely increase in the short run.
Question 4
Suppose there is a permanent decline in consumer confidence. Assume that this decline
in consumer confidence was only a change in expectations. In other words, the change is
not associated with any actual change in TFP (i.e., TFP is held constant). Moreover,
assume that FISCAL policy (specifically, a change in G) is used to return output to its
long run level. Which of the following are true about the economy in the short run and
the long run given the fiscal policy? (Assume that the fiscal policy takes place after the
short run).
a.
b.
c.
d.
e.
f.
Nominal wages will increase in the long run.
The IS curve will be shifted left in the long run
The LM curve will be shifted left in the long run.
The AD curve will be shifted left in the long run.
The labor demand curve will be shifted left in the short run.
Investment will fall in the long run.