Principles of MacroeconomicsFinal Examination: Summer 2015As you answer these questions, be sure that you EXPLAIN YOUR ANSWERS IN DETAIL AND SHOW YOURCALCULATIONS. Remember you are showing off how much you know about economics and one or twosentences shows me you don’t know very much.Question One: Fiscal PolicyAssume the United States economy has the following:GDP is $16,000 billion down from $16,350 billion eight months ago.Unemployment is at 7.4% up from 5.7% six months ago.Inflation is stable at 1.7%.1. Explain in detail the problem the country is facing.2. What is the size of the GDP gap?3. Government could address the problem with either increasing government spending, cuttingtaxes or both. If the government decided to increase spending to address the problem, by howmuch should spending be increased? If the government decided to cut taxes to address theproblem, by how much should taxes be cut?4. Should the government cut taxes or increase spending or some combination of both to addressthe problem?5. What could happen to make the policy you recommended in Question 4 ineffective? On thisquestion, be sure to read the section in your text beginning on page 298. Don’t just makesomething up. It will take a paragraph or two to answer this question because you need to relatethe specific complication to the scenario described in the question.Question Two: Monetary PolicyAssume the United States economy has the following:GDP is $17,700 billion up from $16,350 billion four years ago.Unemployment is at 4.9% down from 7.7% three years ago.Inflation is at 3.2% up from 1.2% four years ago.1. Explain in detail the problem the country is facing.2. Should the Federal Reserve adopt an easy money or tight money policy?3. Which policy tool should the Federal Reserve use to carry out the policy you recommended inQuestion 2?4. What could happen to make the policy you recommended in Question 2 ineffective? On thisquestion, be sure to read the section in your text beginning on page 372. Don’t just makesomething up. It will take a paragraph or two to answer this question because you need to relatethe specific complication to the scenario described in the question.
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