Directions: Answer ALL the sections below
You 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.
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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
- c)Draw 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
- d)Assume 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
- f)Assume 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 spending.
- 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.
- g)Assume 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.