2)

A)The government of the United States is stimulating the economy in 2021 with a package of temporary fiscal expenditure (i.e., public consumption) in addition to what it had planned to spend at the beginning of the year. We want to know how this package affects the U.S. economy this year relative to what would have happened in the absence of the package. Assume that the interest rate, aggregate price level, expected inflation rate, and other net taxes in the U.S. are all exogenously given. In this situation, as a result of the temporary increase in fiscal expenditure (and compared to what would have taken place in its absence), the equilibrium level of U.S. GDP

a.may increase or decrease.

b.will decrease.

c.will not change.

d.will increase.

B) In the scenario described in part A above, we would like to explore in more detail how the fiscal stimulus affects the components of GDP in the short-run equilibrium of the economy. As a result of the temporary increase in fiscal expenditure this year,

a.both private consumption and net exports increase.

b.both private consumption and net exports decrease.

c.private consumption increases and net exports decrease.

d.private consumption remains unchanged, but net exports increase.

e.private consumption increases, but net exports remain unchanged.

C) In the scenario described in parts A and B, we want to know how fiscal stimulus in the U.S. would affect the European Union (EU) economy. Assume that government expenditure, interest rates, aggregate price level, expected inflation rate, and net taxes in the EU are all exogenously given. Also, assume that the interest parity condition holds and the expectations of the future economic trends in the two economies remain unchanged. In this situation, if the U.S. stimulus package is implemented, the IS curve of the EU economy

a.would not shift.

b.would shift to the left.

c.would shift to the right.

d.may shift to the right or to the left depending on the situation.

D) In the scenario described in parts A and B above, suppose that the size of the fiscal stimulus implemented is $400 billion and this consequent change in equilibrium income is $500 billion. This outcome is obtained under the assumption that the Fed keeps the interest rate constant. Economists at the Fed would like to know what would have happened if the interest rate would have been allowed to rise as the stimulus was implemented. They have estimated that in that case the rise in GDP would have been $200 billion rather than $500 billion. This means that without the Fed's policy of keeping interest rate constant, the fiscal stimulus would have crowded out investment and net exports by

a.$200 billion.

b.$300 billion.

c.$400 billion.

d.$500 billion.