Problem 1: In a labour market, explain using diagrams the effect of decreasing the employment protection on the equilibrium real wage and the natural unemployment rate.
Problem 2: The Aggregate Demand (AD) captures the negative relation between output and the price level. It can be derived from the equilibrium conditions in both goods and financial markets. In light of this statement, discuss how the aggregate demand curve is derived. Furthermore, show what will happen to the aggregate demand if nominal money supply is decreased. Use diagrams in support of your answer.
Problem 3: Consider an economy which is in recession. Use the AD-AS framework to explain how the government can use its policies to move out of this recession over the medium run. Use a diagram to support your answer.
Problem 4: The Aggregate Supply (AS) captures the positive relation between output and the price level. It can be derived from the behaviour of the labour market. In light of this statement, show how the short-run aggregate supply is derived. Explain what happens if the expected price level changes. Use diagrams in support of your answers.
Problem 5: The equilibrium condition in financial markets is known by the LM relation. Explain using a diagram the financial market equilibrium, showing how the LM curve is derived. Moreover, what are the factors that cause the LM curve to shift?
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