Question
2. [18 points] On November 17, the White House announced that it plans to spend billions expanding Covid vaccine manufacturing in the U.S. (2.a)
2. [18 points] On November 17, the White House announced that it "plans to spend billions expanding Covid vaccine manufacturing in the U.S." (2.a) Use the AD/AS model to predict the short-run and long-run effects of this fiscal shock on output, prices, real and nominal wages, employment, and unemployment, ignoring possible productivity effects. How will your answer change if the infrastructure spending generates a positive productivity effect? (2.b) The US is an open economy. Consider the open-economy IS/LM model and assume the dollar is freely floating. What will be the effects of this fiscal policy on US output and interest rates, the dollar exchange rate, and foreign (Rest-of-the-World) output and interest rates? (2.c) Use the Solow model to predict the effects of the higher government spending on US steady-state income per capita. [Hint: what is that fiscal policy's effect on the US national saving rate?] How does your answer change if spending on vaccines also raises multifactor productivity?
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