1. Discuss the costs of inflation (give two negatives) and the costs to the economy if the FED uses contractionary Monetary policy to fight it (give at least one negative).

2. Net Exports are added into Aggregate Expenditures: AE = C + I + G + NX. Explain net exports and why we add it to our model of the Macroeconomy.

3. Consider the following Economy: C = 1000 + .75Yd; Yd = Y - T + TR; T = 600, TR = 200; G = 500; I = 1000 -10,000r; r = .04; Imports =200; Exports = 100.

Solve for Equilibrium Income.

Now, the U.S. uses expansionary Monetary Policy to encourage Investment, And Interest rates fall to .02. What is the new equilibrium income?

What is the likely impact of lower interest rates in the U.S. (relative to other countries) likely to have on the value of the dollar and imports and exports?