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Suppose Mexico can produce cars at an opportunity cost of eight computers for each car it produces. Indicate how both countries can gain from free trade.
How would the size of the crowding-out effect affect the size of the change in aggregate demand that would result from a given increase in government purchases?
Illustrate diagrammatically the short-run and long-run effects of a government budget deficit. Describe the mechanism that makes these effects different.
Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.
Analyze how the law of demand applies to a recent purchase that you made.
Explain the fiscal tools available to the federal government. Explain the limitations and problems associated with fiscal policy.
Why can a decrease in tax rates increase AS as well as AD, whereas an increase in government purchases will increase AD but not AS?
Explain why an equal dollar increase in both government purchases and net taxes would increase aggregate demand.
Why does it take a larger reduction in taxes to create the same increase in AD as a given increase in government purchases?
What is a recessionary gap? What would be the appropriate fiscal policy to combat or offset one? What is an inflationary gap?
If the current budget shows a deficit, what would an increase in taxes do to it? What would that increase in taxes do to aggregate demand?
Why are increases in both government purchases and net taxes at the same time expansionary or contractionary?
Why federal government actions that increase deficits considered expansionary fiscal policy and those that decrease deficits considered contractionary policy?
What would an increase in government purchases do to it? What would that increase in government purchases do to aggregate demand?
How do automatic stabilizers affect budget deficits and surpluses? How would automatic stabilizers be affected by an annually balanced budget rule?
Why would an increase in planned investment increase real GDP, but unplanned increase in inventory investment decrease real GDP, in aggregate expenditure model?
Why are unplanned inventory changes the key to predicting future changes in real GDP in the aggregate expenditure model?
Why can't an economy with an MPC greater than one reach a stable equilibrium in the aggregate expenditure model?
Consumption equals $32,000 when disposable income equals $40,000. What is the marginal propensity to consume? The marginal propensity to save?
What would happen to autonomous consumption if real wealth increased and expectations of the future became more optimistic?
What would happen to autonomous consumption if household debt fell and the interest rate rose over the same time period?
Why does the effect of a given increase in aggregate demand have a larger effect on real output in the short run, the more excess capacity exists in economy?
How does the slope of the Keynesian short-run aggregate supply curve depend on the degree of excess capacity in the economy?
Why do classical economists and Keynesian economists agree on the long-run effects of a fall in aggregate demand, but not agree on the short-run effects?
Distinguish cost-push from demand-pull inflation. Provide an example of an event or shock to the economy that would cause each.