Directions: Answer ALL the sections below
are expected to use your knowledge of Module 2 to answer these
questions. You are NOT required to do research i.e hunt down data or
statistics to answer any of these questions. In fact, I really don’t
want any statistics or data I want you to use the economic definitions
and concepts from Module 2 & 3 to explain your answers. This
project is intended to help you examine concepts you have studied in the
textbook and videos, and apply these concepts to potential situations.
Your graphs should be correctly labeled and support your answers. A
correctly labeled graph or diagram must have all axes and curves clearly
labeled and must show directional changes.
Assume that the United States economy is operating below full employment.
- a)Define full employment – hint this is what economist call the natural rate of unemployment
- b)Explain why we expect to have some degree of unemployment regardless of how well the economy is doing
a correctly labeled graph of long-run aggregate supply, short-run
aggregate supply, and aggregate demand, AND show each of the following
when the economy is below full employment
- i.Current equilibrium output and price level, labeled as Y1 and PL1
- ii.Full employment output, labeled as Yf
that the Federal Reserve targets a new federal funds rate to reach full
employment. Should the Federal Reserve target a higher or lower
federal funds rate
- e)Given the Federal Reserve action you
identified in part (b), draw a separate correctly labeled graph of the
money market and what the effect on the nominal interest rate
that policy makers pursue a fiscal policy rather than a monetary policy
in (B). Assume that the marginal propensity to consume is 0.6, and the
value of the recessionary gap is $400 billion.
- i.If the
government changes its spending without changing taxes to eliminate the
recessionary gap, calculate the minimum required change in government
- ii.If the government changes taxes without changing
government spending to eliminate the recessionary gap, will the required
change in taxes be greater than, smaller than, or equal to the minimum
change in government spending in part (Fi)? Explain your answer.
the government lowers income tax rates to eliminate the recessionary
gap. Will each of the following increase, decrease, or stay the same.
Explain your answers.
- i.Aggregate Demand
- ii.Long-run Aggregate Supply.