1. The approved budget for 1997, reduced government spending in housing and urban development, health and human service, and education. Ignoring any other modifications, how would Classical and Keynesian economists explain the short and the long-run effects on real output, price, and unemployment? Show your answer with a graph.

2. The vertical long run AS curve compatible with classical economics implies that AD only determines the price level. Keynesians insist that the AD affect output and employment, but not the price level. What differences in assumption about prices partially account for these different perspectives?

3. Find the aggregate supply curve when:

• a. The production function is Q = 3LK, labor demand Ld = 10-2w/p, labor supply is Ls = 4w/p, and capital stock in the economy is fixes at K = 4.
• b. Is the AS curve derived in "a" representative of the classical, Neo-Classical, or extreme Keynesian cases?
• c. How would your answer to "a" and "b" change if the real wage were fixed at 3?

4. Derived the equilibrium price level and output for an economy with the following characteristics:

• a. Consumption is C = 10-5p, investment I=20, government spending is G = 15, aggregate supply is Qs=5+p.
• b. What happens to production and prices if government spending rises to G = 25?
• c. How would your answer to "a" and "b" change if AS were Qs = 10?

5. If the national product of a country grew by 10% without inflation, and total expenditures grew by 5%. By how much has the money supply grown? Do these results support the neutrality of money argument? Explain.

6. During the early 1980s, the United States experienced both increases in the price level and reductions in the levels of production and employment. How can the AS-AD model explain this situation? What would have happened if the government increased its spending to ameliorate the decline in production?

7. An important macroeconomic issue that countries are facing is the integration trend all over the world. More specifically, the EU short and long-term effects in the US have been the source of disagreement among economists. In the short-run, they agree on a recessionary impact in the economy. Would classical and Keynesian economists agree in an increase of unemployment as well? Would they agree in the long-term effects? Show your answer with graphs. Be sure to explain the assumptions and mechanisms by which you arrive to your answer.

8. During the last two weeks, the dollar rose against the euro after US stocks rose and Germany's central bank left interest rates unchanged. Rising stocks help the dollar because investors need dollars to buy US securities. In addition, Germany's record-low interest rates boost the dollar by making euro-denominated deposit rates less attractive. Would classical and Keynesian economists agree in the impact that a rising dollar would have on real output? Would they agree in the long-term effects? Show your answer with graphs. Be sure to explain the assumptions and mechanisms by which you arrive to your answer.

9. Consider an economy described by the following equations: Q = 5,000; G=1,000, T= 1,000, C= 250 + 0.75 (Q-T), I = 1000 - 50 r

a. Compute private, public, and national savings.
b. Find the equilibrium interest rate.
c. What would the new national savings be if G rises to 1,250?
d. What is the impact of "c" on interest rates? Is there any crowding out effect?