Reference no: EM133522462

Question 1

Suppose the economy is operating at potential GDP, something like was the case for the U.S. in mid-2018. The unemployment rate has reached historic lows, suggesting that the economy is at full employment. Now suppose that due to an economic slowdown in Europe, U.S. export sales decline.

Suppose potential GDP occurs where Y = $10,000 billion. Suppose that the marginal propensity to consume is 0.75. If we assume that both taxes and imports are given then the simple expenditure multiplier formula applies. Suppose exports fall by $100 billion. Use the multiplier formula to estimate the change in GDP. Suppose further that for every one percentage point that GDP falls below potential, the unemployment rate will rise by half of one percentage point. How much then will the unemployment rate rise due to the decrease in exports?

Question 2

The U.S. unemployment rate increased from 4.6% in July 2001 to 5.9% by June 2002. Would you expect that a change of this kind is more likely to be due to cyclical unemployment or a change in the natural rate of unemployment? Why?
As the baby boom generation retires, the ratio of retirees to workers will increase noticeably. How will this affect the Social Security program? How will this affect the standard of living of the average American?
Given the federal budget deficit in recent years, some economists have argued that by adjusting Social Security payments for inflation using the CPI, Social Security is overpaying recipients. What is their argument, and do you agree or disagree with it?

Question 3:

Changes in the value of a nation's currency affect the nation's net exports, and thus GDP. How might this make a large country, like the U.S., more willing to adopt a flexible exchange rate regime than a small country, like Belgium?

Question 4:

The Great Recession was the most serious economic downturn in U.S. history since the Great Depression. The recession began in December 2007. Interest rates at the time were very low, close to zero. Despite the American Recovery and Reinvestment Act of 2009, a nearly $800 billion fiscal stimulus, and an expansionary monetary policy, the economy is only now getting back to normal in 2015.

In retrospect, what set of macro policies, if anything, should we have conducted to achieve a better recovery? Show using the AD/AS model and explain your reasoning.