ECO 252 Problem Set 5 1. Suppose that consumers decide to save less and instead spend a larger percentage of their incomes. Use Aggregate Demand-Aggregate Supply analysis to explain the effects of this change in spending on equilibrium GDP, unemployment rate, and inflation rate. The phrase "use Aggregate Demand-Aggregate Supply analysis" means that you should explain your answer in terms of how the change in spending will affect Aggregate Demand or Aggregate Supply, and then explain what happens step-by- step as a result of that change. A full-credit answer will explain the step-by-step process in correct order, indicating what causes what. 2. In 2011, a record-breaking earthquake hit Japan; the earthquake was followed immediately by a giant tsunami (a tidal wave). This natural disaster destroyed a lot of the productive capacity of the Japanese economy, including factories, roads, and power-generating facilities. a. Use Aggregate Demand-Aggregate Supply analysis to explain the short-run effects of the natural disaster on the Japanese economy. In particular, what did the tsunami do to Japanese GDP, unemployment rate, and inflation rate? b. Use Aggregate Demand-Aggregate Supply analysis to explain the effects of the natural disaster, which hit Japan and not the US, on the US. In particular, what did the tsunami do to US GDP, unemployment rate, and inflation rate? 3. Suppose that Congress raises the national minimum wage to $15 per hour (it's currently $7.25). Use Aggregate Demand-Aggregate Supply analysis to explain the effects of this increased minimum wage on equilibrium GDP, unemployment rate, and inflation rate. Fiscal Policy 4. Starting in March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided Economic Impact Payments of up to $1,200 per adult for eligible individuals and $500 per qualifying child under age 17. The payments were reduced for individuals with adjusted gross income (AGI) greater than $75,000 ($150,000 for married couples filing a joint return). For a family of four, these Economic Impact Payments provided up to $3,400 of direct financial relief. The COVID-related Tax Relief Act of 2020, enacted in late December 2020, authorized additional payments of up to $600 per adult for eligible individuals and up to $600 for each qualifying child under age 17. The AGI thresholds at which the payments began to be reduced were identical to those under the CARES Act. The American Rescue Plan Act of 2021 (American Rescue Plan), enacted in early March 2021, provided Economic Impact Payments of up to $1,400 for eligible individuals or $2,800 for married couples filing jointly, plus $1,400 for each qualifying dependent, including adult dependents. a. Use Aggregate Demand-Aggregate Supply analysis to explain the effects of these Economic Impact Payments on equilibrium GDP, the unemployment rate, and the inflation rate. b. In April 2020, the unemployment rate was 14.7%; in December 2020, the unemployment rate was 6.7%; and in March 2021, the unemployment rate was 6.0%. Explain whether the Economic Impact Payments were \"A Good Idea" in 2020 and 2021. 5. In November 2021, President Biden signed into law legislation to spend $1 trillion on repairing the nation's crumbling infrastructure, including roads, bridges, transit systems, and other forms of infrastructure. (Fixing the nation's crumbling infrastructure seems to be a goal of every president; President Trump had proposed similar legislation in early 2018). a. Is $1.9 trillion a big number? Explain how you know. b. Is President Biden's plan appropriate fiscal policy for the current economic situation (in November 2021, the unemployment rate was over 6%)? Explain your answer in terms of Aggregate Demand-Aggregate Supply. 6. The current inflation rate in the US is 7%, which is the highest it's been in 40 years. Describe the appropriate fiscal policy in this situation. You should be able to graph this fiscal policy in the Aggregate Demand-Aggregate Supply framework, though you do not need to submit a graph with your answer. 7. During the late 19703 the U.S. had both a high unemployment rate (about 10%) and a high inflation rate (over 12%). What fiscal policy would be more effective at bringing down both the unemployment rate and the inflation rate: changing government spending or changing income tax rates? Use Aggregate Demand- Aggregate Supply analysis to justify your answer. 8. Consider the following statement: "If Aggregate Demand is greater than Aggregate Supply, then prices on average will rise. As the price level rises, businesses will produce more, which will cause Aggregate Supply to increase. That increase in Aggregate Supply will bring the price level back down." Explain whether this statement makes Good Economic Sense. Identify the parts (if any) of the statement that make sense and explain why they make sense. Identify the parts (if any) of the statement that do not make sense and explain why they do not make sense