1. Suppose that the firms' markup over cost is 10%, and that the wage determination equation is W=P(1-u). What is the natural rate of unemployment?

2. Suppose the markup over costs increases to 20%. What is the new natural rate of unemployment? Show the change from number 1 to number 2 on a graph.

3. One of the possible explanations for why unemployment is so high in some European countries is that these countries have very liberal unemployment benefits. Does the model of the natural rate of unemployment support such a conclusion?

4. Suppose that the multiplier is found to be higher than it was thought to be. What does that do to the slope of the Aggregate Demand Curve?

5. Suppose that because of more intense international competition, firms reduce their markups. What does that do to the position of the Aggregate Supply Curve?

6. Suppose that the LM curve is vertical. What would the AD curve look like? What would happen to the AD curve if there was a change in government spending?

7. Use the IS-LM Aggregate Demand, Aggregate Supply model to describe what happens to the interest rate, the price level, and GDP of a country (in the short run and in the long run) if there is an increase in taxes.

8. Use the IS-LM Aggregate Demand, Aggregate Supply model to describe what happens to the interest rate, the price level, and GDP of a country (in the short run and in the long run) if its central bank sells bonds in the open market.

9. Suppose that it becomes clear that all the forecasters were wrong about the price level and it is turning out to be lower than had been expected. What is your prediction about the change in P and Y in the near future?

10. "Since money is neutral, it is not sensible to use active monetary policy" Comment on this statement.

11. Compare the effect on Y of a given increase in consumer confidence in:

a. The Z-Y model

b. The IS-LM model

c. The IS-LM AS,AD model (short run)

d. The IS-LM AS,AD model (long run)

12. Suppose that the short run effects of a change are an increase in prices, a decrease in income, and a increase in interest rates. What kind of a change might have caused these results? Limit yourself to a single change.