Economic

Unit 3 and Unit 4 Problem Set

Directions for the Problem Set

· The problem set answers should only contain answers. Do not retype the questions.

· Answers for the problem set have to be typed using 12-point font and double spaced.

· All answers are to be typed, including any calculations.

· Answers should be given in a paragraph form that provides a thorough explanation. A one sentence answer is not adequate. Even in the case of calculations, they should be explained.

· Graphs are to be neatly hand drawn.

· Graphs are to be clearly labeled

· Graphs are to be inserted into the paragraph of the answer

· All answers must be submitted through Safe Assign, which checks for plagerism. You should be doing your own work.

· All problem set answers have a one time submit through Safe Assign. Be sure you submit your final problem set answers. (Papers are not accepted through email)

· The problem set answers must have the ability to open in order to be graded. A Word document is the safest option.

1. Assume the United States economy is macroeconomic equilibrium at full employment, when it experiences a technology boom that improves technology across industries and improves productivity. Evaluate the effect on the AD curve, AS curve, LRAS curve equilibrium price level and equilibrium output. Explain your answer and in addition provide a graph that reflects your explanation. (25 points).

2. Starting at macroeconomic equilibrium at full employment, show the effect of completely expected contractionary monetary policy using an aggregate demand–aggregate supply (AD–AS) model and discuss. (25 points)

3. An economy is operating with an output that is $400 billion dollars below its natural rate of $2000 billion dollars and fiscal policy makers want to close the recessionary gap. The central bank agrees to hold the interest rate constant so there is no crowding out. The marginal propensity to consume is 4/5. In which direction and by how much would the government spending need to change to close the gap? Fully explain your answer and provide a graph that shows the initial situation. (25 points)

4. The following information is given about the Bank of Brookhaven. The deposits for the bank are $800,000. The bank has reserves of $250,000. The reserve ratio is 12.5% (25 points)

a. Provide a T account for the bank that shows the deposits, reserves, and loans for the bank.

b. What is the amount of the required reserve?

c. Does the bank have any excess reserves? If yes, how much?

d. What is the maximum amount of money the bank can loan?

e. If the reserve ratio changed to 20% would anything change?