Select any two (2) of the following questions to answer, then click on the Compose Written Assignment button below and follow the instructions you find there. As you develop your essay, remember to include not only text materials but also contemporary materials as well. These can come from various sources and can reflect domestic and/or global concerns.
1. Suppose that the liquidity effect is small, people monitor changes in the money supply carefully, and prices and inflation expectations adjust rapidly. In this situation, describe the movement of the nominal interest rate when there is a permanent decline in the growth rate of the money supply?
2. In the liquidity-preference framework, suppose that the Fed changes the money supply to keep the nominal interest rate unchanged whenever the demand for money shifts. Describe what happens to the quantity of money and the nominal interest rate if the money-demand curve shifts to the right.
3. Describe how a decrease in government defense spending causes the AD curve to shift. What is the effect on the price level and output in the short run? In the long run?
4. Show the impact of a reduction in the money supply on the economy. You may assume that the economy begins in long-run equilibrium. Be sure to show that impact on output and the price level on both the short and the long run.
5. Suppose that an increase in people’s expected inflation rate in the coming year would deduce their demand for money. How would a shock to the expected inflation affect output and the price level in the short run and in general equilibrium?
6. In the two-period model described in chapter 13, suppose that a household’s income in period 1 increases at the same time that the interest rate decreases. Is the household better off or worse off? What will happen to its savings? You might want to think about a household that was a saver before the change and another that was a borrower.
7. What are expectations, and why are they important in macroeconomic models? What would you think about a macroeconomic model that assumed that people’s expectations of inflation were constant, even though eh inflation rate changed over time?
8. What is the difference between homogeneous-agent models and heterogeneous-agent models? Which do you think is more realistic? Which do you think are more difficult to work with because it is technically more complicated?
9. In the current debate on tax reform there is a proposal to implement a national sales tax in place of income taxation. What effect would such a tax have on: both aggregate demand and supply curves; on aggregate output and the price level?