Question 1. 

a. In the winter of 2010, many European countries experienced difficult times. As a consequence, their imports from the United States decreased. Use a graph to explain the effect on inflation, interest rates, and aggregate output of a decrease in net exports in the United States. 

b. Suppose that as a result of many years of investment in research and development of new technologies, an economy discovers a new way of producing energy using renewable sources, like wind or solar power. Explain the effects of this technological breakthrough on real interest rates, inflation, and aggregate output. 

Question 2. 

a. Problem 7, p.341. 
b. Problem 8, p.341. 

Question 3. 

Explain what is meant by the 'divine coincidence'. Assume that the economy is hit by a financial crisis. What should the central bank do? Now assume that the economy is hit by a natural disaster, such as a flood. What should the central bank do? Will the divine coincidence prevail in each case? Use the AD/AS model to show the impact of each shock and the effect of policy action taken by the central bank. 

Question 4. 

a. What is the 'time inconsistency' problem and what role does it play in the debate between advocates of discretion and rules in policy making? 

b. Explain how a credible nominal anchor helps improve the economic outcomes that result from a positive aggregate demand shock. 

Question 5. 

a. How does a supply side analysis of the effects of a tax cut differ from one that focuses solely on aggregate demand?

b. How does the Ricardian equivalence view of the effects of tax cuts (and budget deficits) differ from the traditional view? What objections to the Ricardian equivalence view have been raised?