Your assignment must be submitted stapled at the beginning of class on the due date. You must show your work in order to receive credit. If you do not show your work, then you will not receive credit. On the diagrams, label the initial equilibrium Point A. Label the new short-run equilibrium Point B. Label the new long-run equilibrium Point C (Question #1 only). Also, on your diagrams, clearly label the equilibrium values. For example, Y1*, Y2*, and Y3*. If your diagrams are not clear or are not labeled correctly, you will NOT receive credit, so please take time to carefully label your work. NOTE: You will need to review information in the Mankiw textbook AND the Romer reading to complete these problems.

Question 1: Planned Expenditures/Keynesian Cross

Using the planned expenditures/Keynesian cross diagram for each letter below, illustrate how each of the following affects the economy's short-run equilibrium. State which exogenous variable in the model is changing. State how the following variables are affected in this model (increase, decrease, no change): output, income, consumption, the real interest rate and investment.

a) An increase in business confidence.

b) A decrease in government spending.

c) A decrease in household taxes.

d) A decrease in household wealth.

Question 2: Keynesian Cross and IS/MP

Using the planned expenditures/Keynesian cross diagram AND the IS/MP diagram for each letter below, illustrate how each of the following affects the economy's short-run equilibrium. Your two diagrams must be aligned vertically and must be consistent to receive credit. Your diagrams MUST clearly illustrate any intermediate/endogenous shifts that occur when applicable (label these Point B' on your graphs). Please label your diagrams consistent with the way we worked through these problems in class. State which exogenous variable in the model is changing. State how the following variables are affected in this model (increase, decrease, no change): output, income, consumption, the real interest rate and investment. a) Increase in government spending.

b) Increase in household taxes.

c) Increase in government spending and increase in household taxes by the same amount. d) Increase in consumer confidence.

e) Federal Reserve decreases the interest rate.

f) Decrease in business confidence.

Question 3: IS/MP/IA Model

Using the IS/MP and AD/IA diagrams, illustrate each of the following scenarios. For these questions, you may assume that inflation is exogenous in the short run. State the short-run effects on the following variables: r*, Y*, C, and I* for each case below. Also, state which exogenous variable is changing (T, G, the consumption function, the investment function, or supply shock). Label the initial equilibrium point A and the new short-run equilibrium Point B. Do not analyze the long run outcomes in this question.

a) The central bank implements an exogenous expansionary policy.

b) Government spending decreases.