fluctuations,arguing that the close correlation between money and output arises because fluctua ions in output ions in the money supply,not the cadNoeesote。etsCeoyecaraoncao reverse.Her does not affect real variables such as output and employment. iv.The flexibility of wages and prices.Most of microeconomic analysis assumes that prices adjust to equilibrate supply and demand.Advocates of real business cycle theory believe th mists should make the me assu umption.They argue that the stickiness of wages and prices is not important for understanding ec onomic fluctuations.Critics of real business cycle theory point out that many wages and prices are not flexible.They believe that this inflexibility explains both the existence of unemployment and the non-neutrality of money Staggering of price adjustment by individual firms affect the 3.Staggered price adjustment significantly slows the adjustment of the price level after a monetary contraction.When any one firm adjusts its price,that firm will be reluctant pric very much,s large change would alter itsr price(its pric It of these incremental changes is tha firm in the economy has gone through one round of price adjustment,the aggregate price level will not have fully adjusted to its new equilibrium level. 4.Why do many economists project increasing budget deficits and government debt over the next several decades? 4.Many economists project increasing budget deficits and government debt over the next several decades because of changes in the age profile of the population.Life ssteadly nereged and bith rates have fallen.Asa resutthe e oming a larger shar of the population.As more people for"entitlements"of Social Security and Medicare,govemment spending will rise automatically over time.Without changes in tax and expenditure policies,government debt will also rise sharply 5.Describe four problems affecting measurement of the government budget deficit. 5.Standard measures of the budget deficit are imperfect measures of fiscal policy for at least four reasons.First they do not correct for the effects of inflation.The measured deficit should equal the change in the govemment's real debt,not the change in the aldebt Second,such measures donot offset changes in govemment liabilitie with changes in govemment assets.To measure the govemment'soverall indebtedness we should subtract government assets from government debt.Hence,the budget deficit should be measured as the change in debt minus the change in assets.Third,standard measures omit some liabilities altogether such as the pensions of government workers fluctuations,arguing that the close correlation between money and output arises because fluctuations in output cause fluctuations in the money supply,not the reverse.Hence,advocates of real business cycle theory argue that monetary policy does not affect real variables such as output and employment. iv.The flexibility of wages and prices.Most of microeconomic analysis assumes that prices adjust to equilibrate supply and demand.Advocates of real business cycle theory believe that macroeconomists should make the same assumption.They argue that the stickiness of wages and prices is not important for understanding economic fluctuations.Critics of real business cycle theory point out that many wages and prices are not flexible.They believe that this inflexibility explains both the existence of unemployment and the non-neutrality of money. 3. How does Staggering of price adjustment by individual firms affect the adjustment of the overall price level to a monetary contraction. 3.Staggered price adjustment significantly slows the adjustment of the price level after a monetary contraction.When any one firm adjusts its price,that firm will be reluctant to change its price very much,since a large change would alter its real price(its price relative to other firms).The result of these incremental changes is that even after every firm in the economy has gone through one round of price adjustment,the aggregate price level will not have fully adjusted to its new equilibrium level. 4.Why do many economists project increasing budget deficits and government debt over the next several decades? 4.Many economists project increasing budget deficits and government debt over the next several decades because of changes in the age profile of the population.Life expectancy has steadily increased,and birth rates have fallen.As a result,the elderly are becoming a larger share of the population.As more people become eligible for“entitlements” of Social Security and Medicare,government spending will rise automatically over time.Without changes in tax and expenditure policies,government debt will also rise sharply. 5.Describe four problems affecting measurement of the government budget deficit. 5.Standard measures of the budget deficit are imperfect measures of fiscal policy for at least four reasons.First,they do not correct for the effects of inflation.The measured deficit should equal the change in the government’s real debt,not the change in the nominal debt.Second,such measures do not offset changes in government liabilities with changes in government assets.To measure the government’s overall indebtedness, we should subtract government assets from government debt.Hence,the budget deficit should be measured as the change in debt minus the change in assets.Third,standard measures omit some liabilities altogether,such as the pensions of government workers