1. Many of the resources devoted to the January 2009 U.S. stimulus package encouraged investment in research and development of new technologies and infrastructure investment, and transportation. Assuming this policy results in a positive productivity change for the U.S. economy, what does aggregate demand and supply analysis predict in terms of inflation and output? Use a graph to demonstrate.
2. Suppose the inflation rate remains relatively constant, and output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this is possible.
3. Classify each of the following as a supply or demand shock. Use a graph to show the effects on inflation and output in the short run and the long run.
a) Financial frictions increase.
b) Households and firms become more optimistic about the economy.
c) Favorable weather produces a record crop of wheat and corn in the Midwest.
d) Steel workers go on strike for 4 weeks.
4. Suppose the current administration decides to decrease government expenditures as a means to cut the existing government budget deficit.
a) Using a graph of aggregate demand and supply, show what the effect would be in the short run. Describe the effects on inflation and output.
b) What would be the effect on the real interest rate, inflation rate, and output level if the Federal Reserve decides to stabilize the inflation rate?
5. Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fluctuations in output and inflation.
6. As monetary policymakers care about inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.
7. How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate supply shock occurs? Use graphs of aggregate supply and demand to demonstrate.