Question

4 Short Answer (20 MARKS) 1. Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve. 2. Suppose that the Bank of Canada unexpectedly decreases the money supply. What will happen to unemployment in the short run? What will happen to unemployment in the long run? 3. Why do many economists advocate a consumption tax rather than an income tax? 4. The following chart, published by the Wall Street Journal, shows the debt-to-GDP ratios for several countries. The obvious outlier in this chart is Japan. (Source: http://goo.gl/umZMId) Debt Buildup Gross government debit as a percentage of GDP for major Industrialized countries 250" Japan 150 Italy US UK France Canada Germany 100 SO O 1995 2000 Esmas Serie Montary Rund The Wall Street Journal a. What was Japan's debt-to-GDP ratio in 2013, compared to other countries? b. What are the possible effects of a large government debt?

Answer 1

1. The vertical long-run aggregate supply curve as well as the vertical long run Phillip curve reflect the classical dichotomy. According to the vertical long-run aggregate supply curve, the economy will be at its natural rate of output in the long run, and it doesn't not change with the change in price level. It should be kept in mind that the natural rate of output depends on the natural rate of unemployment. On the other hand, according to the vertical Phillips curve, the economy will be at the natural rate of unemployment in the long run, and that it doesn't change with the change in inflation rate. Hence the above mentioned two curves are consistent regarding the fact that the real variables are not affected by nominal variables which is put forward by the classical dichotomy.