Assume the United States is currently in a long-run equilibrium with unemployment at its natural rate of approximately 5.0% and president Trump decides to build a wall between the U.S. and Mexico. Assume the U.S. pays for this wall.
A. Illustrate, with a diagram of the AS-AD model, the short-run effects of this increased fiscal spending on output and the price level.
B. How could the Fed offset the effects in part (a)? Explain
C. Illustrate, using the theory of liquidity preference model, the impact of the fed’s actions on the interest rate.
D. Assume the U.S. will not pay for the wall. It is better to pay for the wall through increased taxes or through debt financing (Selling Treasury bonds)? Explain the costs and benefits of each alternative.