Suppose there is a new Federal Law called the New Clean Air Act which goes into effect on Earth Day 2021. In this act, all factories within the United States whose carbon emissions are not up to a certain standard will be immediately put out of commission and dismantled. Using the classical framework answer the following: 

a. This is an exogenous shock to one of the variables or parameters within our model. Describe what this variable/parameter is and how it is impacted from the policy change. 

b. Show graphically the effects of this policy on Production, Labor Market, and Aggregate Supply/Demand (3 graphs total). Label your axis, show the shifts of the lines, changes in variables, and the new equilibrium. 

c. What are the effects on the level of employment? 

d. What are the effects on the real wage? 

e. What are the effects on level of output? 

f. What are the effects on the price level? g. What are the effects on the velocity of money? 

h. In order to soften the impact of this policy, Federal Reserve Chair, Jay Powell, decides to expand the money supply. Show graphically how this expansion of the money supply will impact output and prices in the AD/AS space. What are the consequences of this expansion and will it help soften the blow from the New Clean Air

Answer rating: 100% (QA)

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