QUESTION 1

1. 1. President Trump announces he is a closet communist and plans to tax the middle class "bourgeoisie" and give the money to the poor "proletariat." As a result, consumers become worried and expect their real incomes to drop.THE SOLUTION TO THIS QUESTION IS DEMONSTRATED IN THE MODULE 11 HELP VIDEOS.
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 2

1. 2. Saudi Arabia, a major oil producer, shuts down all oil exports; consequently, the price of oil in the US increases 400%.Assume a sloping AS curve.
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDPDeflatorIndex) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 3

1. 3. The government decides to enforce a little-known law that people with tattoos can only be paid 50% of what everyone else makes (The tattoo law). This increases government spending on enforcement of the law, and simultaneously decreases the cost of labor as an input for firms as firms begin to pay people with tattoos less. Assume no tattooed people quit. Assume consumption is not affected in the short run. (This is one of the scenarios where you need to draw two graphs with relatively large and small shifts in order to determine which variable is ambiguous.)
2. a. Thecurve and thecurve both shift (AD or AS)
3. b. The AS curve will shift(left or right)
4. c. The AD curve will shift(left or right)
5. d. The new equilibrium price level (GDP Deflator Index) will be(higher, lower, or ambiguous)
6. e. The new equilibrium real GDP will be(higher, lower, or ambiguous).
7. f. The unemployment rate will be(higher, lower, or ambiguous).

10 points

QUESTION 4

1. 4. The Covid 19 pandemic and associated "stay at home" shutdown of much of the economy causes the economy to enter into a sudden, severe recession with a high level of unemployment.While this may or may not eventually meet the definition of a depression, assume the AS curve is no longer sloping. Draw a horizontal AS curve and then draw the normal, sloping AD curve.Then, let's predict the impact on the economy if firms react to the initial shutdown by sharply lowering their expectations for a strong economy and expect demand for their sales to drop; consequently, firms cancel all their planned equipment purchases.
2. a. What shape is the AS curve in this scenario?(flat, sloping, or vertical)
3. b. Thecurve will shift (AD or AS)
4. c. The curve will shift(left or right)
5. d. The new equilibrium price level (GDP Deflator Index) will be(higher or lower or unchanged)
6. e. The new equilibrium real GDP will be(higher or lower).
7. f. The unemployment rate will be(higher or lower).

10 points

QUESTION 5

1. 5. It is December, 2020.The economy is at full employment real GDP. The stock market significantly increases in value and everyone's real wealth is significantly increased. ASSUME THE AS CURVE IS VERTICAL FOR THIS PROBLEM.
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher, lower, or unchanged).
6. e. The unemployment rate will be(higher, lower, or unchanged).

5 points

QUESTION 6

1. 6. Assume the general population (consumers and business owners) believe that the president and Congress will not be able to work together to craft and implement an effective response to the Covid 19 pandemic; consequently, consumers and firmsexpecta severe, multiple month recession and sharply reduce their spending.
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 7

1. 7. The Fed increases real interest rates. What is the medium-term effect (sloping AS)?
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

10 points

QUESTION 8

1. 8. All firms decide that the new augmented reality app "Pokemon GO" is a necessity, something that all employees should have immediately. As a result, firms buy a smart phone for every employee. What is the immediate (short run) impact on the economy?
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 9

1. 9. Six months after everyone has been given a smart phone with a Pokemon GO app, firms realize that improved morale has increased everyone's productivity. Ignoring any shifts from the preceding question, what is the medium-term impact on the economy due to this increased productivity? (Assume a sloping AS curve.)
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 10

1. 10. The real incomes of all major purchasers of US exports decreases due to the global pandemic recession.Just looking at this event, analyze the impact on GDP and price level.
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 11

1. 11. Tighter security at the US-Mexico border has reduced the inflow of migrant workers (legal and illegal) from Mexico.Assume these immigrants would have worked at jobs that otherwise would not be done, and assume that these immigrants spend their incomes on consumption in the US while they live in the US. Given these assumptions, how has the reduction of the inflow of workers from Mexico impacted the US economy, using the AD/AS model?
2. a. Thecurve and thecurve both shift (AD or AS)
3. b. The AS curve will shift(left or right)
4. c. The AD curve will shift(left or right)
5. d. The new equilibrium price level (GDP Deflator Index) will be(higher, lower, or ambiguous)
6. e. The new equilibrium real GDP will be(higher, lower, or ambiguous).
7. f. The unemployment rate will be(higher, lower, or ambiguous).

10 points

QUESTION 12

1. 12. Consumers expect the economy to get worse. Simultaneously, a price war between Russia and Saudi Arabia reduces the price of oil by 25%.Assume a sloping AS curve.
2. a. Thecurve and thecurve both shift (AD or AS)
3. b. The AS curve will shift(left or right)
4. c. The AD curve will shift(left or right)
5. d. The new equilibrium price level (GDP Deflator Index) will be(higher, lower, or ambiguous)
6. e. The new equilibrium real GDP will be(higher, lower, or ambiguous).
7. f. The unemployment rate will be(higher, lower, or ambiguous).

10 points

QUESTION 13

1. 13. The Russian government discovers a huge reserve of oil, generates lots of cash, and is able to pay all the back-pay it owes to the Russian citizens, plus $1,000, thereby increasing the real income of the Russian consumers. What is the impact on the US economy, assuming Russians like to buy US exports?
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).

5 points

QUESTION 14

1. 14. The world recession and decline in stock market values causes investors to shift money to lower risk, dollar-denominated assets.As a result, demand for US dollars increases, thereby increasing the strength of the dollar.For example, the Euro/$ exchange rate increases as the Euro weakens and the dollar strengthens.What is the impact on the US economy when the dollar strengthens?
2. a. Thecurve will shift (AD or AS)
3. b. The curve will shift(left or right)
4. c. The new equilibrium price level (GDP Deflator Index) will be(higher or lower)
5. d. The new equilibrium real GDP will be(higher or lower).
6. e. The unemployment rate will be(higher or lower).