When the economy is at the recovery stage, both output gap and growth rate are positive? True/ False? Explain. Discuss the impact of monetary policy tightening with regards to both unemployment and inflation with respect to both the short run and long run?

Economy questions

1. [ 4 points ] When the economy is at the recovery stage, both output gap and growth rate are positive? True/ False? Explain.

2. [ 4 points ] Assume that input prices decrease and the government decides to cut spending. In this scenario, what would happen to output (Y), the overall price (P), and unemployment

(U)? Illustrate these changes on a graph.

3. [ 4 points ] Discuss the impact of monetary policy tightening with regards to both unemployment and inflation with respect to both the short run and long run?

4. [ 4 points ] Assume that the unemployment rate (U) equals 8 %. Suppose that the natural rate of unemployment (U*) equals 5 % and the coefficient σ is 0.6. Use Okun’s law to answer the following:

A. Find the output gap ratio to the potential output?
B. If the potential output equals 160, calculate the actual output?

5. [ 4 points ] On a graph, show the impact of the permanent supply shock on unemployment and inflation in the long run and in the short run?