(1) Suppose that on average, unemployed workers find jobs at the rate of 30% per period and employed workers loose jobs into unemployment at a rate of 2% per period. Assume the size of the labor force is forever fixed.

1. Beginning with an unemployment rate of 5% this period, what will be the unemployment rate next period.
2. What is the steady state unemployment rate?

(2) There was a political coup in Zimbabwe and the new military dictatorship is promising to raise government expenditure on goods.

(Label all axes and curves carefully. Mark key points/coordinates)

1. Using the aggregate demand and aggregate supply graph, show what are the long run consequences of government spending increase for the price level.
2. Assume that the monetary authority wants to prevent the change in the output level that the expenditure increase would cause.What can it does and what consequences will its actions have for the interest rate (short run), and price level (long run)? Show using relevant diagrams.