Assignment

OUTPUT GAPS

1. Describe the conditions of an economy during an expansionary gap, where the economy's output is beyond full-employment. What is the primary concern of policy makers?

2. Describe the conditions of an economy during a contractionary gap, where the economy's output is less than full-employment. What is the primary concern of policy makers?

FISCAL POLICY

1. Given an expansionary gap, what two fiscal tools can policy makers use to encourage the economy to return to full-employment?

2. Given a recessionary gap, what two fiscal tools can policy makers use to encourage the economy to return to full-employment?

3. Assume an economy is in recession and is experiencing an output gap of $500 billion (i.e. actual GDP is less than Potential GDP). If the Marginal Propensity to Consume is .8, how much "stimulus" government spending would be needed to return the economy to full employment? Explain how you reached these results.

4. What are the arguments as to why allowing the Federal government to run a deficit won't cause the economy to go bankrupt? (2 points)

MONEY, BANKING AND MONETARY POLICY

5. Describe the function of money in a market economy?

6. If US Currency is no longer backed by gold or silver, what ultimately gives it value?

7. Given an expansionary gap, what three monetary tools can policy makers use to encourage the economy to return to full-employment?

8. Given a recessionary gap, what Federal Open Market Operations (FOMO) actions would the FED use to help the economy return to full-employment?

9. Describe what FOMO actions can be used to reduce inflation. Include an explanation of how such actions cascade to cause the economy to return to full-employment (track the steps from FOMO action, to money supply, to interest rates, to aggregate demand, etc.)

10. If the required bank reserves is 10%, how much total money will be created if banks received deposits from FOMO of $10 billion and then lent all their excess reserves? (Hint: use the money multiplier)