1. This question asks you about the macroeconomic effects of the Covid-19 pandemic.

a. In lecture, we drew a distinction between the amount of GDP we would like to have, YSafe (which may be less than normal output, Y*, because of the public health consequences of producing our usual level of output), and our actual level of output, Y (which may be less than normal output, Y*, because of the impact of the pandemic on planned spending). Give an example of a possible development related to the pandemic that would be likely to have a substantial impact on Y with little impact on YSafe.

b. We also discussed possible long-run consequences of the pandemic on the determinants of potential output per person. How and why might the pandemic affect the normal employment-to-population ratio (N*/POP), and what would be the consequence of those developments on potential output per person (Y*/POP)?

2.What would you expect each of the following developments to do to the price of dollars in euros?

a. The incoming Biden administration eliminates the tariffs that had been imposed by the Trump administration on goods from the European Union (while the EU does not change its trade policy).

b. Large budget deficits in the Europe cause the real interest rate in Europe to rise relative to that in the United States.

c. Inflation is lower in the United States than in Europe.

d. There is a shift in European tastes toward American goods