1. Briefly discuss the costs to an economy of inflation and unemployment. (10) 2. If the desired level of investment spending (1) is greater than the level of national savings (S), are net exports (NX) positive, negative, or zero? Explain the connection between I, S, and NX (in words as well as mathematically). (10) 3. Drawing from the article "The Wizard of Oz as a Monetary Allegory" by Hugh Rockoff, compare inflation with deflation. Your discussion should include both positive and negative attributes (if they exist) of both phenomena. (20) 4. Assume the economy initially is in a long run equilibrium. Suppose the Congress and the President decide to decrease government spending dramatically on all federal programs. Meanwhile, the G-8 has unanimously decided to help U.S. exports to western Europe. At the same time, the Fed's policy is to prevent inflation from increasing beyond its current rate. Using the AD/AS model, briefly explain the short-run and long-run effects on inflation and real GDP that these policies will have. (20) 5. Suppose the Fed decides to use monetary policy to promote real GDP growth. Assume the Fed believes that the long term level of real GDP is too low and will do what it can to continually push real GDP above that level (both in the short run and the long run). Using the AD/AS model, discuss the success that such a policy might have. What can you say about money neutrality? (20) 6. Suppose the U.S. economy is in a recession (or in a weak recovery-the important point here is that the economy is weak). To provide consumers with an incentive to spend more of their disposable incomes, Congress and the President pass a law making it illegal for an individual to hold more than $100 in cash at any time. Furthermore, all adults who receive paychecks must spend at least 80% of their paychecks within two weeks of receiving said paychecks. Will this law be successful? Does its success depend on whether or not people abide by the law? Discuss. (20) 7. Suppose the U.S. economy is in a long run equilibrium. The Fed believes that this equilibrium level of real GDP is too low. Therefore, the Fed decides to boost the economy continually until it reaches a new, higher, long run equilibrium level of real GDP. If for some reason, the