Macroeconomics, partial 2 exam, BE202.01

Problem 1 (4 x 5 = 20 points)

For each of the next cases, does the AD or AS curve shift, and in what direction? Explain briefly.

1. The economy of the European Union has entered a recession. The European Union is the US’ largest exports market.

2. Productivity increases (without a change in nominal salaries)

3. Sharp increase in investments in Medicare (health care spending by the Federal government)

4. An increase in personal income taxes (no change in corporate profit taxes)

Problem 2 (2 x 10 = 20 points)

Assume that the economy from fictitious country Haringland has a Marginal Propensity to Consume (MPC) of 0.85, and experiences high economic growth, with historically low unemployment, and rapidly increasing price levels. Assume that prices are flexible, both upward and downward.

1. How large a change in taxes is needed to shift the aggregate demand curve leftward by $50 billion? Should the taxes increase or decrease?

2. Explain step-by-step how the change in taxes in a) is going to influence prices and real output.

DETAILED ASSIGNMENT

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