.The U.S. Congress is expected to pass legislation this month lowering taxes and increasing spending for the year 2011. Fiscal stimulus is often thought to have a "multiplier" effect on aggregate demand, with $10 billion of additional stimulus leading to more than $10 billion of additional spending.

a. Explain why such a multiplier effect may occur.

b. Explain how each of these might affect the amount of output expansion resulting in the short run from each dollar of stimulus:

(1) Whether the stimulus is spending or tax reduction, and whose taxes are reduced

(2) How sensitive real interest rates are to additional government borrowing.

(3) How wages respond to increased employment.

Modern aggregate-supply theory asserts that firms will respond differently to a change in price resulting from an increase in aggregate demand depending on whether the change was anticipated or unanticipated. Use one of the three models discussed in classthe wage-contract model, the menucost model, or the misperceptions modelto explain why the response to anticipated vs. unanticipated demand shocks would be different and how this difference leads to the conclusion that the SRAS curve slopes upward while the LRAS curve is vertical.

2.2. Elmo is a rational consumer. When buying apples and bananas in a competitive market, he chooses to buy 7 apples at $1.50 each and 4 bananas at $2.00 each. What, if anything, can we say about whether Elmo would have higher utility with each of the following commodity bundles than with his current one?

a. 8 apples and 4 bananas

b. 6 apples and 5 bananas

c. 8 apples and 3 bananas

5.Define each of the following terms: Each definition is worth 4 marks a. flexible exchange rate b marginal tax rate c. bank rate d. dumping e. Phillips Curve

6.When the Bank of Canada sells bonds to the public, (circle the appropriate answer) (i) the money supply decreases / increases (ii) interest rates decrease / increase (iii) consumer spending decreases / increases (iv) GDP decreases / increases (v) the unemployment rate decreases / increases

7.Using a diagram in your answer, show the impact of government imposing a price floor on beef.

8.What variables are included in the expenditure approach to calculating GDP?

9.If a sales tax was imposed on a product that had a price elasticity coefficient of -0.4 and a unitary price

elasticity of supply, the majority of the tax burden (or tax incidence) would fall on the consumer.r