Introduction to Marco EconSee attachment 

Problem Set 4: Due Friday, February 28 (at the beginning of class)

Econ 105: Intro to Economics

1) A. Sketch the Aggregate Demand, Short-Run Aggregate Supply, and Long-Run Aggregate

Supply of an economy in long-run equilibrium.

B. Suppose economists the dollar appreciates against all other currency. Explain how that

impacts imports into the United States and exports from the United States.

C. How does the dollar appreciating impact AD, SAS, and LRAS? Show the short-run impact

on the graph in A. How does real GDP change in the short-run? How about the price level?

D. In the absence of any actual increase in technology, capital, or labor, how will the real

GDP change in the long run according to the classical view of the AS-AD model? What

happens to the price level in the long-run? Explain, showing the long-run effects on the

graph in A.

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2) A. Sketch the Aggregate Demand, Short-Run Aggregate Supply, and Long-Run Aggregate

Supply of an economy in long-run equilibrium.

B. Suppose the Federal Reserve decreases the money supply. How does that affect the

equilibrium interest rate?

C. Does an increase in the money supply impact AD, SAS, or LRAS? Show the impact on

the graph in A.

D. Why might the Federal Reserve choose to decrease the money supply?

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3) A. Sketch a graph depicting the classical view of the labor market. Show the equilibrium

wage and employment level.

B. Assume wages are downwardly sticky. How might this help explain higher unemployment

in economic downturns using the graph in A?

C. Graph the labor market again. Now impose a minimum wage above the equilibrium wage

level. Explain how that may contribute to unemployment. How would unemployment due

to the minimum wage change in economic downturns according to your graph?

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4. Conduct independent research on the recent financial crisis to address the following ques-

tions. A somewhat technical and long work, but from leading experts in housing economics

discussing some of this can be found here:

http://www.russellsage.org/sites/all/files/Rethinking-Finance/Willen.rsage paper 2 11pw.pdf

However, it’s not necessary that you use this particular work. Please do cite the work that

you end up using.

A. Describe two plausible explanations for why the housing market collapsed in 2007.

B. Why did the collapse in the housing market result in trouble for commercial banks like

Wachovia and Washington Mutual?

C. Why did the collapse in the housing market result in trouble for investment firms like

Bear Sterns?

D. Describe three things the US (either through Congress or the Federal Reserve Bank) has

done in response to the financial crisis to either mitigate the damage of the crisis or prevent

future crises.

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