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“1. Define the key terms below as they are defined in the textbook and explain, in your own words what those definitions mean to you (5 points), and then thoroughly analyzes each situation to answer the following questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume the economy is closed.
a. The government reduces the size of its deficit to zero (10 points).
Unit 9 [BU204 | Macroeconomics]
3
b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero (10 points).
c. At any given interest rate, businesses become very optimistic about the future profitability of investment spending. Assume the budget balance is zero (10 points).
2. Define the key terms below as they are defined in the textbook and explain, in your own words what those definitions mean to you (5 points), and then thoroughly analyzes each situation to answer the following questions
Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process and causes by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another. Use the diagrams below, resizing them as necessary, to illustrate your analysis. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output?
Unit 9 [BU204 | Macroeconomics]
4
a. There is a decrease in households’ wealth due to a decline in the stock market (15 points).
b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases (15 points).
3. Define the key terms below as they are defined in the textbook and explain, in your own words what those definitions mean to you (7 points), and then thoroughly analyzes each situation to answer the following questions
a. An economy in a hypothetical country is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies, giving specific examples, would help move the economy back to potential output?
a. A stock market boom increases the value of stocks held by households (8 points).
Unit 9 [BU204 | Macroeconomics]
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b. Firms come to believe that a recession in the near future is likely (8 points).
c. Anticipating the possibility of war, the government increases its purchases of military equipment (8 points).
d. The quantity of money in the economy declines and interest rates increase (8 points).
Unit 9 [BU204 | Macroeconomics]
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4. The table below shows the United States components of M1 and M2 in billions of dollars for the month of December in the years 1998 to 2007 as published in the 2008 Economic report of the President.
Year
Currency in circulation
Traveler’s checks
Checkable deposits
Money market funds
Time deposits smaller than $100,000
Savings deposits
M1
M2
Currency in circulation as a percentage of M1
Currency in circulation as a percentage of M2
1998
460.5
8.5
626.5
728.9
952.4
1,605.0
1999
517.8
8.6
596.2
819.7
956.8
1,740.3
2000
531.2
8.3
548.0
908.0
1,047.6
1,878.8
2001
581.2
8.0
592.6
962.3
976.5
2,312.8
2002
626.3
7.8
585.6
885.3
896.0
2,778.2
200
662.5
7.7
635.9
818.7
3,169.1
Unit 9 [BU204 | Macroeconomics]
7
3
777.4
2004
697.6
7.5
671.2
697.1
829.9
3,518.3
2005
723.9
7.2
643.4
699.9
995.8
3,6721.4
2006
748.9
6.7
611.4
799.4
1,170.4
3,698.6
2007
759.0
6.3
599.2
976.1
1,216.8
3,889.8
a. Complete the table by calculating M1 (5 points), M2 (5 points), currency in circulation as a percentage of M1 (5 points) , and currency in circulation as a percentage of M2 (5 points). What trends or patterns about M1, M2, currency in circulation as a percentage of M1, and currency of circulation as a percentage of M2 do you see (5 points)? What might account for these trends (12 points)?
5. Considering the flow of money throughout a country’s economy and the importance of the proper level of money supply, answer the following questions.
a. Discuss how money is created within the banking system (15 points)
b. Discuss how in the United States, the Federal Reserve uses monetary policy to control the money supply. (17 points)
6. After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. Yet after six months of strong positive economic growth, the unemployment rate has fallen only slightly below what it was at the end of the recession.
a. How can you explain why the unemployment rate did not fall as much although the economy was experiencing strong economic growth? (15 points)
Unit 9 [BU204 | Macroeconomics]
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b. Explain how and why the unemployment rate fluctuates with the inflation rate as is depicted in the Short-Run Phillips Curve. (17 points)”
– Sent to Economics Expert Tutor on 10/19/2010 at 8:28pm
“
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