1) Draw an "aggregate supply-aggregate demand" diagram that shows an economy suffering from high levels of unemployment. Show the effects of the following events on the Aggregate Demand curve.
a) An increase in RGDP in Europe and Japan
b) A decline in U.S. households' expectations of their future income.
c) A reduction in Medicaid and Medicare benefit levels.
d) An increase in business expectations of future aggregate demand growth
e) An increase in government spending on military hardware
f) A sharp decline in the value of foreign currencies relative to the value of the $.
g) A decline in the prices of real estate and existing residential housing. h) A rise in the price level due to a sharp increase in the price of oil.
2) Explain carefully why an initial change in aggregate demand will shift the aggregate demand function by a multiple of the initial change in output.
3) Suppose that two economies initially have the same level of real income and both suffer unanticipated declines in their sales of exports of $50 billion. Country "A" has higher tax rates and a higher level of government spending than economy "B". Otherwise, the two economies are similar in every respect. Which country will suffer the greatest decline in employment as a result of the decline in exports? (Hint: think about multiplier effects and which country will have the higher multiplier!)
4) Agree or disagree and explain: "The Aggregate Demand for goods and services in an economy must at every moment equal the value of Real Gross Domestic Product because both are defined to be the sum of (C+I+G+X-IM)."
5) Why do economists attempting to forecast short run future changes in real GDP and employment look closely at data on business inventories and unfilled orders? What conclusion could be drawn if the volume of unfilled orders and average length of delivery times decreased while inventories increased dramatically?
6) Agree or disagree and explain. "The AD schedule slopes downward because real income rises as the price level declines and everybody buys more as their real income rises."
7) Visit https://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm and read Fed Chairwoman Janet Yellen's semi-annual testimony to the US Congress on Feb 10, 2016 about the state of the economy and the context of her monetary policy perspectives. What were her expectations about AD growth over the next 6 - 12 months? Which (if any) components of AD did she expect to grow faster than in the past? Why? Which (if any) did she expect to slow down and why?
Note: If the url does not show up, you may go to federalreserve.gov and click on news and events then 2016 speeches and testimony for Janet Yellen on Feb 10, 2016 on her testimony to the US Senate and Banking Committe.