MGMT 673 Problem Set 5 | Complete Solution

MGMT 673 Problem Set 5

1.    For each of the following economic conditions, place an X in the table to indicate the appropriate range in the Aggregate Supply Curve
Condition    Keynesian    Intermediate    Classical
Unemployment is above the historical average            
The nation’s factories are running at capacity            
Any increase in GDP will be accompanied by high inflation            
The nation is suffering through a severe recession            
A mid-point in the business cycle expansion phase            
GDP can increase without an increase in the Price Index            

2.    Many exogenous factors can cause a shift in the Aggregate Supply Curve.  For each of the following factors, place an X in the table to indicate how the AS curve would shift.
Factor     AS shift right
(increase in AS)    AS shift left
(decrease in AS)
World oil prices increase substantially        
Environmental Protection Agency enacts broad pollution restrictions        
Business taxes are reduced        
Internal combustion engine fuel efficiencies are greatly increased        
Adverse winter weather persists for months more the normal        
New restrictions slow immigration        
Federal minimum wage is increased by 30%        

3.    Earlier we learned that Demand, which we now call Aggregate Demand, is comprised of 4 components: Consumption (C), Investment (I), Government spending (G), and Net Exports (NE).  Any exogenous factor that increases any of the component(s) will also increase Aggregate Demand.  For each of the following, place an X to indicate the component affected and an R (increase) or and L (decrease) to show whether the AD curve shifts Right or Left.  Consider only the primary effect.  
Factor    C    I    G    NE    R or L
Real interest rate decreases                    
Consumers and executives become more confident in the economic future                    
The stock market rises                     
China’s economic growth slows                    
Congress increases spending for in the current fiscal year                    
Tariffs are imposed by many countries to protect domestic employment                    
The US Import/Export bank eliminates guarantees for loans to foreign airlines to purchase Boeing aircraft                    
Congress enacts tax incentives for firms purchasing new equipment and facilities                    

4.    For each of the following government economic actions, place an X in the table to indicate whether the action is fiscal or monetary policy.
Action    Monetary    Fiscal
Taxes are increased on the wealthiest 1% of households        
The Fed purchases Mortgage-backed securities (MBS)        
The US Treasury borrows money to finance increased government spending        
The federal government provides a rebate to first time home buyers        
The President signs and enacts the Affordable Care Act         
The Fed promises to keep interest rates near zero for an extended time        

5.    For each of the following government actions, insert the original and shifted AD curve.  Insert an arrow to show the shift in the AD curve.  Here’s an example:
 
a.    While in a steep recession, the federal government enacts a stimulus program of increased spending and reduced taxes.  Inflation does not increase.  
 
b.    In Argentina, the government increases spending in order to win more votes in the upcoming election.  Inflation increases substantially but GDP increases slightly (demand pull inflation).  
 
c.    The central bank lowers interest rates to near zero, C and I increase modestly and inflation remains below the target rate of 2% annually.  
 
d.    A housing market bubble collapses, the economy enters a recession but previously high inflation falls to near zero.