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Macro models practice problems Get in to groups, grab boards and markers! Problem 1 • Hernandez’s economy is in a severe recession. • 1. Draw and label a model showing this. • 2. In Hernandezland, the average person saves 50 cents of every dollar they earn. Calculate the MPC and MPS of Hernandezland. • 3. If the government were to contract an Hernandezland company to make 50 million dollars worth of uniforms, what would be the aggregate result on GDPr? • 4. Draw that result and label it. • 5. Draw a foreign exchange chart to show the effects. • 6. What happens to Net Exports? Problem 2 • Biggsland’s economy is dealing with severe inflationary pressures due to an unchecked expansionary period. • 1. Draw and label this model. • 2. Biggsland citizens spend about 90 percent of all new money they earn. What are their MPC and MPS? • 3. The wise and wonderful Biggs institutes a new tax on citizens that collects 150 million dollars. What was the impact of this tax? • 4. Draw that result. Problem 3 • Livingstonia is at long run equilibrium. Livingstonia’s MPC is 0.75 • 1. Draw and label a graph showing this. • 2. Livingston goes to war with their neighbor Hernandez. This conflict leads to the government spending 10 billion dollars on local defense funding. What total impact would this have on Livingstonia’s economy? • 3. Draw that impact. • 4. How would this affect Net Exports, and Foreign Exchange rates? Problem 4 • Livingstonia is at long run equilibrium. Livingstonia’s MPC is 0.50 • 1. Draw and label a graph showing this. • 2. Livingstonia goes to war with their neighbor Hernandez. This conflict leads to the government spending 50 billion dollars on local defense funding. What total impact would this have on Livingstonia’s economy? • 3. Draw that impact. • 4. Livingstonia taxes 50 billion dollars to pay for the war, what would be the net change to AD? Board Problem Part 1 • Hernandez is having issues with a severe recession and the wise advisors to the great Hernandez met to advise him on a path solving this problem. Hernandez has a balanced budget. • 1. Draw a model describing this situation. • 2. Secretary of Defense George suggested to Hernandez an increase in military spending without a change in taxes would draw Hernandez out of its funk, and expand her iron fist of control. – Show how this would impact the aggregate model – Show how would this change the loanable funds and investment market. Board Problem Part 2 • Hernandez is having issues with a severe recession and the wise advisors to the great Hernandez met to advise him on a path solving this problem. Hernandez has a balanced budget. • 3. Secretary of Defense George suggested to Hernandez a massive tax cut to try to inspire greater consumption (on fire arms for her private army). – Show how this would impact the aggregate model – Show how would this change the loanable funds market and investment. Board Problem Part 3 • Hernandez is having issues with a severe recession and the wise advisors to the great Hernandez met to advise him on a path solving this problem. Hernandez has a balanced budget. • 4. Secretary of Defense George suggested to Hernandez that the best course of action is to allow the economy to self correct over time. – Show how this would impact the aggregate model MORE PRACTICE! YAY! • The nation of Hernandez has been in a severe inflationary gap for the last several years due to increased aggregate demand. The vicious and uncaring Hernandez is contemplating his options for solving this issue. • 1. Draw and label a model showing this • Solution 1: Notably raise taxes to reign in his citizenry's spending. • 2. Draw how this would impact the model • 3. What kind of policy is this? Expansionary/Contractionary? Discretionary/Automatic? MORE PRACTICE! YAY! • The nation of Hernandez has been in a severe inflationary gap for the last several years due to increased aggregate demand. The vicious and uncaring Hernandez is contemplating his options for solving this issue. • Solution 2: Notably cut government spending programs. • 1. Draw how this would impact the model • 2. What kind of policy is this? Expansionary/Contractionary? Discretionary/Automatic? • How would this affect Net Exports, and Foreign Exchange Rates? MORE PRACTICE! YAY! • The nation of Hernandez has been in a severe inflationary gap for the last several years due to increased aggregate demand. The vicious and uncaring Hernandez is contemplating his options for solving this issue. • Solution 3: Do absolutely nothing, perhaps buy a lot of sunscreen and take a vacation in Tahiti. • 1. Draw how this would impact the model • 2. What kind of policy is this? Discretionary/Automatic?