Question

1. First, write the equation that represents the Okun's law relationship. Second, what does Okun's law represent? Express what the empirical evidence has proven to be true, as it may relate to any form of Okun’s relationship. Both formula and the numerical evidence on that formula are required.

2. In the best way you can, relate how an expansionary monetary policy can affect the economy by ONLY applying the three main theories of Phillips Curve, Okun’s Law, and Aggregate Demand together.

3. What is Purchasing Power Parity all about? You are not supposed to offer just one sentence that is just related to the issue. You are supposed to assume you are talking to a sharp student with a major other than economics. How best can you make it clear to her?

Hint: US $100 is a lot of money in a third world country, and not so much in the U.S.A.

4. (A) Applying a production function, make a mathematical and graphical model to explain Constant Returns to Scale, Increasing Returns to Scale, and Decreasing Returns to Scale. Provide an example for each.

Explain through your production function (diagram) about the impact of an improved technology.

(B) Does money buy happiness? Explain it most clearly, referring to the empirical evidence.

5. (A) Is the following equation, is it possible to be called IS curve in an open economy? Why? Explain please. Also, explain all the variables involved in the equation.

(B) Is the above equation the same thing as expressing equilibrium in the goods market? Is it possible to have equilibrium level of output, where the trade balance may show a deficit or a surplus? Explain through a clear graph, like what I presented through my lecture/slides.

6. In an open economy context,

• graph and explain the demand for domestic good.
• graph and explain aggregate demand, inclusive of exports and imports.
• The demand for domestic goods is obtained by subtracting the value of imports from domestic demand and then adding exports. Show how to graph that in a quadrant system, and explain it carefully.
• Graph net exports and explain it most clearly, without ever forgetting to label everything you draw in it, including the two axes.

Answer 1