MGMT 673 Problem Set 51. For each of the following economic conditions place an X in the table to indicate the appropriate range in the Aggregate Supply CurveConditionKeynesianIntermediateClassicalUnemployment is above the historical averageThe nation’s factories are running at capacityAny increase in GDP will be accompanied by high inflationThe nation is suffering through a severe recessionA mid-point in the business cycle expansion phaseGDP can increase without an increase in the Price Index2. 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.FactorAS shift right(increase in AS)AS shift left(decrease in AS)World oil prices increase substantiallyEnvironmental Protection Agency enacts broad pollution restrictionsBusiness taxes are reducedInternal combustion engine fuel efficiencies are greatly increasedAdverse winter weather persists for months more the normalNew restrictions slow immigrationFederal 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.FactorCIGNER or LReal interest rate decreasesConsumers and executives become more confident in the economic futureThe stock market risesChina’s economic growth slowsCongress increases spending for in the current fiscal yearTariffs are imposed by many countries to protect domestic employmentThe US Import/Export bank eliminates guarantees for loans to foreign airlines to purchase Boeing aircraftCongress enacts tax incentives for firms purchasing new equipment and facilities4. For each of the following government economic actions place an X in the table to indicate whether the action is fiscal or monetary policy.ActionMonetaryFiscalTaxes are increased on the wealthiest 1% of householdsThe Fed purchases Mortgage-backed securities (MBS)The US Treasury borrows money to finance increased government spendingThe federal government provides a rebate to first time home buyersThe President signs and enacts the Affordable Care ActThe Fed promises to keep interest rates near zero for an extended time5. 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.
