Note: Please clearly label your answers submission sheet by…
Note: Please clearly label your answers submission sheet by section (Parts 1-4) and question number so it is straightforward to grade. Part 3: Recent Consequences of the Self-Correcting Mechanism (20 points, 5 each) We can think of the pandemic environment beginning in late 2021 as one where Y > Y* in the short run. Let’s think of some implications of being in this situation for various macro outcomes we care about in the absence of policy intervention. For each of the following questions, mark the true answer. (Note: It does not matter why Y is currently higher than the potential level (Y*) when answering the questions below). Consumers are standard non-liquidity constrained PIH consumers. No policy takes place to return the economy to Y* (i.e., the economy gets to the long run with the self-correcting mechanism). 1. Which of the following is true about real wages (W/P) in the short run relative to real wages in the long run when Y > Y* in the short run? Real wages in the short run will be higher than real wages in the long run. Real wages in the short run will be lower than real wages in the long run. Real wages in the short run will be the same as the real wages in the long run. It is uncertain whether real wages in the short run will be higher or lower than real wages in the long run. 2. Which of the following is true about prices in the short run relative to prices in the long run when Y > Y* in the short run? Prices in the short run will be higher than prices in the long run. Prices in the short run will be lower than prices in the long run. Prices in the short run will be the same as prices in the long run. It is uncertain whether prices in the short run will be higher or lower than prices in the long run. 3. Which of the following is true about investment (I) in the short run relative to investment (I) in the long run when Y > Y* in the short run? Investment in the short run will be higher than investment in the long run. Investment in the short run will be lower than investment in the long run. Investment in the short run will be the same as the investment in the long run. It is uncertain whether investment in the short run will be higher or lower than investment in the long run. 4. Which of the following are true about the aggregate demand (AD) curve in the short run relative to the aggregate demand curve in the long run if Y > Y* in the short run? The aggregate demand curve in the short run will be to the right of the aggregate demand curve in the long run. The aggregate demand curve in the short run will be to the left of the aggregate demand curve in the long run. There will be no change in the aggregate demand curve between the short run and the long run. It is uncertain whether the aggregate demand curve in the short run will be to the right or the left of the aggregate demand curve in the long run.