1. The economy is at full employment. An increase in
government spending causes the government deficit to increase.
(a) Draw an aggregate supply and demand graph showing the
economy at full employment. Show on the graph and explain completely the
impact of the increase in government spending on each of the following.
(i) Price level
(ii) Real Output
(b) Explain how the increase in the deficit will affect
each of the following in the long run.
(i) Nominal interest rates
(ii) Real interest rates
(c) Define each of of the following
(i) Government deficit
(ii) National debt
(d) Do each of the following.
(i) Identify one tax policy the government could use to
promote long-run economic growth in this economy.
(ii) Explain how this tax policy will promote long-run growth.
(iii) Draw a production possibilities curve for this economy that
produces capital goods and consumption goods. Show how this tax policy
will affect this economy's production possibilities curve.
Answer to #1
2. Assume that the Federal Reserve System
sells bonds in the open market, and that commercial banks hold no excess
reserves.
(a) Explain in detail how the Federal Reserve's action
affects the commercial banks' reserves and the interest rates.
(b) Show graphically what happens in the money market
when the Federal Reserve sells bonds.
(c) Explain the effects of the Federal Reserve's action
on each of the following.
(i) Investment
(ii) Aggregate Demand
(iii) Output
(iv) The price level
Answer to #2
3. In Country X, labor productivity is
growing at 3.2 percent per year, and the nominal wage rate is constant.
(a) Discuss the impact of this rate of
growth in productivity on each of the following.
(i) The price level
(ii) Real wage rate
(b) Now, the rate of growth of labor
productivity in Country X falls to 2.0 percent per year, while the rate of
growth of labor productivity in other countries remains constant and higher
than in Country X. Discuss the consequences of Country X's decline in
relative productivity on each of the following.
(i) Exports of Country X
(ii) The international value of Country X's currency
(iii) Employment in Country X in the short run
Answer to #3
