Macroeconomics for Managers

1. Using the AD/AS model what are the short run effects on inflation and output in response to each
   one of the following shifts in AD?
   A. An increase in personal income taxes.
   B. A stock market boom has led to an increase in consumer wealth.
   C. A decrease in the level of foreign GDP or real income.
   D. The Federal reserve conducts an open market purchase which lowers the interest rate.
   Topic: AD/AS Model
2. Using the AD/AS model what are the short run effects on inflation and output in response to each
   one of the following shifts in SRAS?
   A. An increase in expected inflation.
   B. A sudden increase in the labor force due to immigration policy changes.
   C. Technological advancement that increases worker productivity.
   Topic: AD/AS Model
3. Suppose a recent report by the University of Michigan has suggested that consumer confidence has
   been up for the most recent quarter of this year. This indicates that consumers are feeling confident
   about the state of the economy.
   A. Beginning in the long-run equilibrium in the AD/AS Model explain and demonstrate the
   impact of this increase in consumer confidence in the short run.
   B. Assuming that the government and Federal Reserve do NOT respond to this shock, how
   does the economy return to its long-run equilibrium (graph and explain)?
   C. Relative to part B, what would happen to the long run equilibrium if the Federal Reserve
   decided to respond to this consumer confidence shock by conducting an open market sale
   that leads to an increase in the interest rate. (graph and explain)?
   Topic: AD/AS Model
4. Assume there is an unexpected increase in the price of oil.
   A. Beginning in the long-run equilibrium in the AD/AS Model explain and demonstrate the
   impact of this increase in oil prices in the short run.
   B. Assuming that the government and Federal Reserve do NOT respond to this shock, how
   does the economy return to its long-run equilibrium (graph and explain)?
   C. Relative to part B, what would happen to the long run equilibrium if the Federal Reserve
   decided to respond to this increase in oil prices by conducting an open market purchase
   that leads to a decrease in the interest rate. (graph and explain)?
   BUAD 516: Macroeconomics for Managers Problem Set 2
   Topic: AD/AS Model
5. Assume there is a pandemic that results in a series of economic lockdowns that lead to both an
   decrease in C and I.
   A. Beginning in the long-run equilibrium in the AD/AS Model explain and demonstrate the
   impact of this pandemic in the short run.
   B. Assuming that the government and Federal Reserve do NOT respond to this shock, how
   does the economy return to its long-run equilibrium (graph and explain)?
   C. Relative to part B, what would happen to the long run equilibrium if the Federal Reserve
   decided to respond to this pandemic by conducting an open market purchase that leads to
   a decrease in the interest rate. (graph and explain)?

Sample Solution