1. An article in the Wall Street Journal observes: For 2008. productivity grew by an astounding 2.8% from 2007 even as the U.S. economy suffered through its worst recession in a decade". How is it possible for labor productivity to increase if output is falling? Discuss.
2. Briefly explain which of the following policies are likely to increase the rate of economic growth of a nation.
a. Government increases public spending to finance a conflict with a neighboring nation.
b. The legislative provides more funds for low-interest loans to higher education students.
c. The legislative passes a law that extends access to high-quality health care to another fifteen percent of the population.
3. The diagram on the left illustrates the Aggregate Expenditure (AE) line of a fictional country. Potential output is 516 trillion.
a. What is the autonomous expenditure? What is the marginal propensity to consume of the typical family? Justify your answers.
b. Suppose Real GDP is 58 trillion dollars. what happens to firms' inventories? What are firms likely to do in the future?
c. What is equilibrium real GDP? What is the size of the simplified multiplier?
e. If autonomous expenditure falls by 52 trillion. what is the size of the recessionary output gap?
f. You work as a staff economist at the Council of Economic Advisors of this fictional country. Write a brief memo discussing how the executive could design a stimulus package aimed at closing the recessionary gap.
4. Briefly explain why the aggregate expenditure line is upward sloping while the aggregate demand curve is downward sloping.