General Instructions: Each numbered question presents a scenario, and it develops the scenario through several sub-questions a, b, etc.Answer these questions. To answer each of the sub-questions, identify whether there is a real shock, an aggregate demand shock, or both, or neither. Identify whether the shock is positive or negative. Identify whether the shock is temporary or lasting. (The preceding doesnt apply to certain sub-questions, but where it does apply should be obvious. If you have any doubts, contact me.)For each question draw a diagram of the events in the economy (and the sub-questions) using the AS/AD model. Also, answer in words any questions that I ask about growth, inflation, unemployment, and/or policies. Base your answers on your diagram. For reference, Tucontain two tables that list the kinds of factors that cause real shocks and the kinds of factors that shift AD. Draw diagrams clearly and label them well.

1A. Ohio averages around 19 tornadoes per year. But, in 2022, there will be no tornadoes in Ohio. a. How will economic growth and inflation in Ohio compare between 2021(assumed to be a normal tornado year) and 2022, other things equal?

1b. What if, in addition to having no tornadoes in 2022, Ohio also has a change in its business climate: a widespread fear takes hold in 2022based on thinking that, due to problems in the US auto industry, Ohio may soon see many factories shut down? How will Ohios growth and inflation compare in 2022to 2021 in this case?

22. In 2022, rumors of a new, vaccine-resistant strain of COVID cause fear a new quarantine and lock-down may hit the economy soon. Stock prices and urban real estate prices fall sharply. Assume the US started 2022at full employment. . What happens to growth and inflation in the USA in 2021and on into 2022and 2023?

2b. What happens to growth and inflation in 2022 if instead, it turns out that the rumors were not true?

3. In the fictional country of Upbugia, inflation has risen in recent years to 15% per year. a. Upbugias central bank has become independent: not under the governments direct control. The new head of Upbugias central bank has vowed to bring inflation under control. If Upbugias central bank tries to bring inflation down to 2% per year, what happens to inflation and real GDP growth in the short run? And what happens to inflation and growth in the long run?

3b. The Prime Minister of Upbugia has vowed to keep unemployment at or near the natural rate. How will the government of Upbugia (led by the Prime Minister) likely respond to the (independent) Central Banks anti-inflation policy (from part a) if the government reacts to it in the short run? If there is no financial crisis going on, what effects could the governments policy have on inflation and growth in the short run? And what effects will it have in the long run?

4. Suppose that in 2021, Coronavirus vaccines are highly effective, the US economy grows 5%, the Standard and Poors 500 index rises 6%, while inflation settles at 2%. This in turn causes a sharp rise in the indexes that track consumer and business confidence.

4a. How will the rise in consumer and business confidence affect inflation and growth going into 2022?

4 b. If the Federal Reserve has a goal of keeping inflation at 2%, how might the Fed respond in 2022? How would this affect inflation and growth in the short run and long run?

4C. What if, in 2022, US stock indices fall(due to a financial panic in Asia). This makes the indexes of consumer and business confidence falling sharply. If the Fed had still taken the actions in part (b), what might happen to inflation and growth in the US in 2022 in the short run and on into the long run?

5. In the 2008 financial crisis, stock and property prices fell by large percentages, many people lost their homes, and many financial firms failed or had to severely restrict lending to shore up their capital.

5a. Describe how these events would have changed growth, unemployment, and inflation between 2008, 2009and in the long run (say 2013maybe)assuming there was not any government intervention. Assume the financial crisis itself is confined to 2008.

5b. In fact, there was government intervention. Federal Reserve and the Federal Government used monetary policy and fiscal policy to respond to the crisis. How does the AS/AD model predict that these policies would impact inflation and growth in the short run and long run?

5c. What really happened to inflation, unemployment, and growth between 2008 and 2013?(Use the St. Louis Feds FRED database to look these data up.)