1. [18 points] In April 2021, the Biden Administration announced plans of $2.3 trillion government spending on infrastructure over the next several years.

(1.a) Use the AD/AS model to predict the short-run and long-run effects of this plan on output, prices, real and nominal wages, employment, and unemployment, ignoring productivity effects. How will your answer change if the infrastructure spending actually increases productivity?

(1.b) The US is an open economy. Consider the open-economy IS/LM model and assume the US dollar ($) is freely floating against the Chinese yuan (). What will be the effects of the US fiscal policy on US output and interest rates, the $/ exchange rate, and Chinese output and interest rates? How would your exchange rate answer change if the Fed responds by tightening monetary policy?

(1.c) The government intends to fully fund the $2.3 trillion with higher (mostly corporate) taxes. Use the Solow model to predict the effects of the Biden plan on the US steady-state income per capita, assuming positive productivity effects. [Hint: what is the plans effect on the US national saving rate if the plan is fully funded with taxes?] How does your answer change if the higher corporate taxes discourage private saving? If the plan is not fully funded with higher taxes?