1.In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.

1. A large increase in the price of the homes people own.
2. Rapid growth in the economy of a major trading partner.
3. The development of a major new technology offers profitable opportunities for business.
4. The interest rate rises.
5. The good imported from a major trading partner become much less expensive.

2.In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation?

1. A tax increase on consumer income.
2. A surge in military spending.
3. A reduction in taxes for businesses that increase investment.
4. A major increase in what the U.S. government spends on healthcare.

5.How would a decrease in energy prices affect the Phillips curve?

6.Does Keynesian economics require government to set controls on prices, wages, or interest rates?

7.List three practical problems with the Keynesian perspective.

6.A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom is caused by economic investment expenditure?

7.How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?

8.A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?

9.Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rater?