1674159501 2a exam june 2022

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Macroeconomics of Finance June 22, 2022 - Prof. Anna Florio – 75 minutes Part I In a given country the total population is composed by 1000 individuals (all non-institutional civilian people): 564 are working and 36 are looking for a job. a) Find the size of the labor force and calculate the unemployment rate (u). In this economy, the labor productivity is 2 and the wage setting process is described by W/Pe = Z − 200u, where Z is the unemployment insurance provided by the government. b) Find the Price Setting equation for a mark-up level µ = 1 and draw it. c) Find the natural unemployment rate and the natural level of output if Z = 10. Provide a figure to show the natural unemployment rate and define it. d) Analyze if and how the natural unemployment rate changes if the unemployment-sensitivity of the real wage decreases. Provide a figure to show you answer and explain the intuition. e) Derive the AS curve. f) Employing the framework you find more appropriate, show graphically and explain how the central bank could reduce the inflation rate. If you list different approaches, stress the advantages and the disadvantages of each. g) How does your answer change if the sensitivity of the inflation rate to the unemployment rate decreases? The Economist, a couple of weeks ago, published an article where you could read: “much of the work of taming inflation can be done by resetting expectations at a lower level. The real economy would then not need to bear the weight of the adjustment. …It is more game theory and less econometrics”. h) Explain this sentence and comment it employing the framework you adopted under point f). Part II Consider the (slightly modified) model by Diamond and Dybvig (1983) where there are 3 periods (t, t+1 and t+2) and an investment opportunity in…