A.Sketch the Aggregate Demand, Short-Run Aggregate Supply, and Long-Run Aggregate Supply of an economy in long-run equilibrium.

Problem Set 4: Due Friday, February 28

Econ 105: Intro to Economics

1 A.Sketch the Aggregate Demand, Short-Run Aggregate Supply, and Long-Run Aggregate Supply of an economy in long-run equilibrium.

B. Suppose economists the dollar appreciates against all other currency. Explain how that impacts imports into the United States and exports from the United States.

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C. How does the dollar appreciating impact AD, SAS, and LRAS? Show the short-run impact on the graph in A. How does real GDP change in the short-run? How about the price level?

D. In the absence of any actual increase in technology, capital, or labor, how will the real GDP change in the long run according to the classical view of the AS-AD model? What happens to the price level in the long-run? Explain, showing the long-run effects on the graph in A.

2 A.Sketch the Aggregate Demand, Short-Run Aggregate Supply, and Long-Run Aggregate Supply of an economy in long-run equilibrium.

B. Suppose the Federal Reserve decreases the money supply. How does that affect the equilibrium interest rate?

C. Does an increase in the money supply impact AD, SAS, or LRAS? Show the impact on the graph in A.

D. Why might the Federal Reserve choose to decrease the money supply?

3 A. Sketch a graph depicting the classical view of the labor market. Show the equilibrium wage and employment level.

B. Assume wages are downwardly sticky. How might this help explain higher unemployment in economic downturns using the graph in A?

C. Graph the labor market again. Now impose a minimum wage above the equilibrium wage level. Explain how that may contribute to unemployment. How would unemployment due to the minimum wage change in economic downturns according to your graph?

4. Conduct independent research on the recent. Financial crisis to address the following questions. A somewhat technical and long work, but from leading experts in housing economics discussing some of this can be found here:

http://www.russellsage.org/sites/all/files/Rethinking-Finance/Willen.rsage_paper_2_11pw.pdf

However, it's not necessary that you use this particular work. Please do cite the work that you end up using.

A. Describe two plausible explanations for why the housing market collapsed in 2007.

B. Why did the collapse in the housing market result in trouble for commercial banks like Wachovia and Washington Mutual?

C. Why did the collapse in the housing market result in trouble for investment firms like Bear Sterns?

D. Describe three things the US (either through Congress or the Federal Reserve Bank) has done in response to the financial crisis to either mitigate the damage of the crisis or prevent future crises.

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