1. What is the Keynsian multiplier? Explain why the multiplier depends upon the share of new income that people spend upon domestic goods. Explain why the effective or true multiplier would be expected to be much smaller when the economy is near potential output.
2. The consumption function in an economy is C = 300 + 0.6 Y and planned investment is 200.
a. Plot planned aggregate expenditures against output/income and show the equilibrium level of output.
b. Plot the level of savings against output/income. Show the level of investment on the same graph. Show the equilibrium level of output.
3. Solve for the multiplier after adding net exports (NX) to planned aggregate expenditures so that AE = C + I + NX. Assume that the consumption function is C = a + b * Y. Now algebraically solve for the equilibrium level of output. How would an increase in net exports affect equilibrium output? Does the addition of net exports change the multiplier?
4. Draw a picture of an economy using the AS and AD curves and showing potential output. The picture should be drawn so that the economy is in a recession with high unemployment. Describe the fiscal policy that you would recommend. Show the effect of that fiscal policy on this picture. What other aspects of aggregate demand might be affected by this policy and how might that reduce the effect of the policy?
5. How does government spending and tax policies act as automatic stabilizers for the macroeconomy? Given the logic of the automatic stabilizers, why should we be concerned about deficit cutting efforts during a recession? What type of lags in fiscal policy are avoided by the automatic stabilizers? Why might we want to eliminate the deficits caused by fiscl stabilizers before a recession ends?
6. What is the non-accelerating rate of inflation? How does it relate to the natural rate of unemployment? What role do expectations play in determining the rate of inflation?
7. Draw and label a Phillips curve including the natural rate of unemployment and the non-accelerating rate of inflation. Label the economy as if it is in a boom. Show what will happen to the Phillips curve if the government keeps the economy in this boom for an extended period.
8. Name and describe the three types of lags in fiscal policy. If the fiscal policy being considered requires congressional action, which lag will be longest?