FINE 673 Problem Set 5

Revised on 8-20

1. For each of the following economic conditions, place an X in the table to indicate the appropriate range of the Aggregate Supply Curve

Condition	Keynesian	Intermediate	Classical
The nation is suffering through a severe recession
The nation's factories are running at capacity
RGDP and inflation are both growing at a moderate pace
The central bank is implementing contractionary monetary policies to reduce high inflation
A mid-point in the business cycle expansion phase
GDP is expanded but prices remain unchanged
Increasing job growth is accompanied by moderate inflation

1. Many exogenous factors can cause a shift in the Aggregate Supply Curve. For each of the following factors, place an X in the table to indicate how the AS curve would shift.

Factor	AS shifts left (decrease in AS)	AS shifts right (increase in AS)
World oil prices fall as technology increases oil production
Environmental Protection Agency increases restrictions on industrial pollution
Business taxes are reduced
Improved batteries allow for widespread adoption of highly efficient electric motors
Pandemic spreads across the world
New comprehensive immigration legislation increases immigration
Federal minimum wage is increased by 30%

1. Aggregate Demand comprises 4 components: Consumption (C), Investment (I), Government spending (G), and Net Exports (NE). An exogenous factor that increases any of the components will also increase Aggregate Demand. For each of the following, place an X to indicate the one component most directly affected (consider only the primary effect) and an L (decrease) or an R (increase) to show whether the AD curve shifts Left or Right.

Factor	C	I	G	NE	L or R
Firms reduce capital expenditures in anticipation of an imminent recession
Existing house prices rise
Foreign GDP falls as world enters recession
Congress increases spending for the current fiscal year
Tariffs are imposed by many foreign countries to protect their domestic employment
The US Import/Export bank reinstates guarantees for loans to foreign airlines to purchase Boeing aircraft
Congress enacts tax incentives for firms purchasing new equipment and facilities
Federal Reserve enacts policies to reduce credit card interest rates

1. For each of the following government economic actions, place an X in the table to indicate whether the action is fiscal or monetary policy.

Action	Monetary	Fiscal
The federal government reduces home mortgage guarantees
The central bank sells mortgage-backed securities (MBS)
The US Treasury borrows money to finance increased government spending
Congress reduces eligibility for Medicaid
The central bank gradually increases the federal funds interest rate
Federal income taxes are reduced

1. For each of the following exogenous (external) factors, show the shift in AS. The economy begins in the intermediate AS range, so for ease of analysis, the AS curve is depicted as modestly upward sloping and linear. Insert an arrow to clearly identify the shift. Below the graph, state the change - increase, decrease, or no change - in P and RGDP.

Here is an example of a completed graph. The red arrow is sufficient to show the new equilibrium.

\fP AS GDP Price Index Real GDPP AS GDP Price Index Real GDPP S AS GDP Price Index D RC Real GDPP AS GDP Price Index D RC Real GDP