DISCUSSION 10
1. Between two years the supply of money increases by 5%, the velocity by 1%, and
the real GDP by 2%. What is the rate of price inflation between those two years?
2. Explain graphically how an increase in money supply increases price level. You
will need graphs for both the market for money and market for goods.
3. There are sort of two “multipliers” we’ve been working with recently: 1/(1-MPC)
and MPC/(1-MPC). When do you use each one? More specifically, which one
would you use for ΔG, ΔI, ΔC, ΔTX, and ΔTR? Explain the intuition behind the
MPC/(1-MPC) one, i.e. how did we derive it?
4. If government does a balanced-budget increase in spending by $1000, and
MPC=0.8, what is the impact on AD?
5. Do you think MPC is higher for rich people or poor people?
6. Explain, in your own words, why LRAS is vertical.
7. Let’s show that “inflation is everywhere and always a monetary phenomenon.”
Consider this setup: we’re in a steady state economy (this means real variables are
not growing) and money grows at rate μ. Start with Mt+1 = (1+μ)* Mt and show
that π=μ.
8. Explain, in your own words, why SRAS is upward sloping.
9. Take a look at the graph below. Say we’re in equilibrium at D. If government
increases TR, what will be the impact? Your answer should be in the format of
three points (i.e. D in initial equilibrium, X in SR, Y in LR).
10. Still on the graph above, if there is a one-time reduction in the price of raw
materials, how will the economy move (answer in the same format as #9)?
11. On the same graph, what is cyclical unemployment at point C if Okun’s alpha =
1.5?
12. On the same graph, what is the short-run effect of a 20% increase in money
supply? Here your answer can be one letter.
13. Give a realistic example of a negative demand shock and draw the graph. Also
give a realistic example of a negative supply shock and draw the graph.
14. How does the Fed “fight” recessions? Name the two types of policies, and then
show graphically how they would negate a recession.
15. Let’s continue the scenario from #14, and now assume the Fed cannot react (for
whatever reason). Are we in a recession indefinitely? Show graphically how the
economy self corrects in the long run.
FINAL STUDY TOPICS
1. GDP deflator and CPI
2. Unemployment rate & unemployment types
3. Business cycles & Okun’s Law
4. Rate of return & future value
5. Fisher equation
6. Loanable funds market
7. Two theories of growth
8. Definitions & functions of money
9. Money multiplier
10. Money market
11. Expenditure multiplier
12. Aggregate demand components, shifters, and slope
13. Fiscal policy & crowding out
14. Monetary policy
15. Government budget: taxing, borrowing, or monetizing the debt
16. LRAS & SRAS
17. Monetary neutrality & money velocity
18. Keynesian theory