Download Homework 3 Macroeconomics 105.18 Instructor: Shana M

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Homework 3
Macroeconomics 105.18
Instructor: Shana M. McDermott
Due Date: Monday, November 25th, 2013
35 points
1. Aggregate demand and Aggregate Supply Analysis
The following data is taken from http://research.stlouisfed.org/fred2/categories/18.
Year
Actual GDP
Potential GDP
2001
9875.6
9805.5
Price Level (In 2000
billions of $)
101.507
2002
9977.3
10121.1
103.553
a. Use dynamic AD/AS analysis to illustrate what happened between 2001 and 2002 when AD
does not increase as much as potential GDP. (5 points)
b. What is the growth rate for potential GDP between the 2 years? How long will it take for
potential GDP to double? (2 points)
c. What is the inflation rate between these two years? (2 points)
2. Use the dynamic model of AD/AS to illustrate a situation where the economy is growing but
experiencing inflation in the long-run. (5 points)
3. Monetary Theory
a. If the money supply is growing at a rate of 5% per year, real GDP (real output) is growing at a
rate of 1% per year, and velocity is constant, what will the inflation rate be? (2 points)
b. If the money supply is growing at a rate of 5% per year, real GDP (real output) is growing at a
rate of 1% per year, and velocity growing at 2% per year instead of remaining constant, what
will the inflation rate be? (2 points)
4. Monetary policy
a. What are the four main goals of monetary policy? (3 points)
b. What tools does the Federal Reserve use to conduct monetary policy? (3 points)
5. Fiscal Policy
a. What is fiscal policy? (3 points)
b. What is crowding out? (Note: you can also reference chapter 10 for crowding out in the
financial system). (3 points)
c. Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a
long-run equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and
short-run aggregate supply such that the condition of the economy will induce the president and
the Congress to conduct contrationary fiscal policy. Briefly explain the condition of the economy
and what the president and the Congress are attempting to do. You should provide a graph and a
2 sentence explanation. (5 points)
Extra Credit:
7. Review for the Final Exam
IRAQ
Guns (y-axis)
0
2
4
6
8
IRAN
Butter (x-axis)
8
6
4
2
0
Guns (y-axis)
0
1
2
3
4
Butter (x-axis)
4
3
2
1
0
a. Who has the comparative advantage in producing Guns? Who has an absolute advantage in
producing Guns? Explain (2 points)
b. Can these two countries gain from trading guns and butter if each specializes and trades half of
what they make? (2 points) Hint: Each country specializes in the good that they have a
comparative advantage in.
c. Explain opportunity costs and give an example. (1 point)