Extra Credit Assignment 1 (potential 5%)

1. Draw the AS-AD representation of an economy in a Recessionary Gap

a. Label the curves

b. Label the axes

c. Label the equilibrium output and price

2. Policymakers familiar with Keynesian Economics might attempt expansionary fiscal policy in order to address the shortfall in output. Name the two most common sources of expansionary fiscal policy. Cite one example of expansionary fiscal policy enacted by the U.S. government. [the recent recession and the Great Depression would be good places to look for such material]

3. Draw, on a second graph, the effects of expansionary fiscal policy on the AS-AD model from question 1.

a. Include the original curves

b. Include arrows showing the direction of the curve shift

c. Consider using subscripts to denote the time period

d. Label all the same stuff as in q1 (there’s just more of it now)

4. Draw, on a third graph, an economy that is currently in equilibrium at the LR potential output level.

5. Would monetary policy be effective in leading to long-run growth in output in this scenario (at LR potential output)? Show the effects of expansionary monetary policy on an economy that is currently producing at its potential. (graph. Note: more than one curve might shift)