Macroeconomics Answers

The two scenarios from this exercise were: 1. Consumers save the full proceeds of the tax cut. 2. Consumers save 1/4 of the tax cut and spend the other 3/4. Which of these two scenarios do you think is more realistic? Why is this question important?
In both scenarios, public saving falls by $200 billion, and the budget deficit rises from $300 billion to $500 billion. 1. If consumers save the full $200 billion, national saving is unchanged, so investment is unchanged. 2. If consumers save $50 billion and spend $150 billion, then national saving and investment each fall by $150 billion. Prove it numerically.

What are the positive and negative effects of the minimum wage?

2. If AD shifts $60 for every $1000 change in consumer wealth, by how much will AD increase if the stock market rises in value by $400 billion?

3. 3. If AS decreases by $50 billion for every 1 percentage point increase in tax rates, by how much will AS shift to the left when the tax rate is raised from 35% to 40%?

What are the good and bad aspects of labor mobility between countries?

Is labor mobility helping to the developing and/or developed countries?

Do you think any international policies or national policies should be implemented to regulate or encourage or restrict the immigration of the workforce?

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
d. The Phillips curve shows an important trade-off faced by economic policymakers. This trade-off was used to point out the legitimacy of government intervention in the economy for many years.
(iii) What is the currently accepted belief about the Phillips curve? Hint: This question has to do with the long run versus the short run.

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
d. The Phillips curve shows an important trade-off faced by economic policymakers. This trade-off was used to point out the legitimacy of government intervention in the economy for many years.
(ii) The trade-off demonstrated by the Phillips curve seemed to fail during the 1970s. Why? What happened?

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
d. The Phillips curve shows an important trade-off faced by economic policymakers. This trade-off was used to point out the legitimacy of government intervention in the economy for many years.
(i) What is the Phillips curve? What does it show? Why is it important to economic policymakers?

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
c. Some people will argue against using either monetary or fiscal policy, instead supporting a laissez-faire approach to the economy. The well-known economist Milton Friedman, for example, believed in the permanent income hypothesis and was also a monetarist. What monetary policy prescription do monetarists support?

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.

b. The main argument against monetary policy is that it affects only nominal variables, not real variables. Explain this argument using the two methods below.
(i) Explain and show on a graph the short-run and long-run equilibrium changes in the AD/AS model from expansionary monetary policy. How does this support an anti-monetary policy stance?
Answer:

(ii) Explain the equation of exchange. What do quantity theorists believe, and why don't they support monetary policy?

3. There is debate concerning both monetary and fiscal policy. You’ll examine each separately, then together.
a. Below are two arguments against using fiscal policy. Explain each one.
(i) Permanent Income Hypothesis.
Answer:

(ii) Effects of a dollar of government spending versus a dollar of private spending.

Answer: