1. Assume a technological advance leads to lower production costs. Show the effect of such an event on national income, unemployment, inflation, and interest rates with the help of an AD-AS diagram. Assume completely flexible wages. How would your analysis differ (if at all) if wages were rigid?
2. In a classical world with technological change, if the nominal money supply is increased over time, how will the level of output and prices behave in the long run?
3. Comment on the following statement as true, false or uncertain and justify your answer with a diagram and a written explanation. "If nominal wages were more flexible, expansionary policies would be more effective in reducing the rate of unemployment."
4. "The unemployment rate is zero at the full-employment level of output." Comment on this statement. In your answer, discuss how the labor sector adjusts to an equilibrium after a price change.