7. (14 marks) Recently, an economist estimates that the potential economic growth rate of the US has changed from 2.5% to 1.5%.

Using the concept of production function, explain TWO reasons for such a change. Illustrate your answer with reference to the development of the US economy in the past two decades. (7 marks)

In response to ONE of the reasons you have stated in (a), explain ONE government policy to tackle the change. Be specific with your suggestions.

(3 marks)

Suppose the Fed targets for an inflation rate of 3%. Using the Quantity Theory of Money, suggest appropriate long-term policy of money supply growth rate according to the new potential growth. State your assumptions.

(4 marks)