Problem
Suppose the U.S. is at a macroeconomic equilibrium.
I. What component of expenditures is impacted by each of the events below, and in what direction (increase or decrease)?
i. Government consumption expenditures are reduced to balance budgets.
ii. The Chinese economy is slowing and might go into a recession.
iii. Businesses are optimistic about the outlook for the national economy.
II. Suppose each of the events above have equal weight and that the combined impact is enough to cause a macroeconomic disequilibrium. What type of disequilibrium will occur, and how will that impact the economy?
III. Suppose your company sells a normal good. How would it be affected in this case?
IV. Suppose your company anticipates these events and wants to "manage" the business cycle. What is one action that it can take in each of the following areas: marketing and pricing, capital expenditures, and human resource management.
V. How do some of the impacts mentioned in (II) relate to the Phillips curve?
VI. What would the Federal Reserve do with the discount rate and with the reserve requirement if it wanted to use monetary policy to deal with the problem in (II)? Explain how the money supply is affected by these actions.
VII. Calculate the money multiplier if the reserve requirement is 0.08.
VIII. Suppose the Fed engaged in $6 billion in open market operations to deal with the problem in (II). What would it do? Using the money multiplier calculated in (VI), how would the money supply ultimately be affected by this action?
IX. Show graphically how the monetary policy in (VI) would affect the equilibrium in the money market. Explain how interest rates are impacted by this policy and in turn how that would affect the economy.
X. What would the government do if it wanted to use fiscal policy to deal with the problem in (II)? Discuss how lags would impact the effectiveness of using fiscal policy compared to monetary policy in this situation.