Macroeconomics

Two important policy goals of the government and the Fed are to keep unemployment and inflation low, while at the same time making sure that GDP is increasing at an average of 3% per year. It is important to have the right mix of policies and that all the variables be timed perfectly.

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. What is the first action you would take as the president? As the chairman of the Fed? Why? What would be your subsequent steps? Make sure you include both the positive and negative effects of your actions and include the trade-offs or opportunity costs.

Include the following concepts in your discussion:

Demand and supply of money
Income and Productivity
Interest rates
Okun’s law
The Phillips curve
Taxation
Government spending
Wages
Aggregate supply
Aggregate demand
Long run and short run
Costs of inflation
The multiplier and the tax multiplier
An open vs. a closed economy
The idea of tax rebates to stimulate the economy

Part 2: Assume the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this change any policy changes you discussed in Part 1?

Objective:
Describe the concept of macroeconomic equilibrium.
Discuss how aggregate demand and aggregate supply determine equilibrium price and output in the short-run and long-run.
Describe the concepts and measurement of gross domestic product, unemployment, and inflation.
Explain what is meant by business cycles and economic growth and describe the factors that contribute to each.
Discuss the multiplier concept, how it is computed, its qualifications, and its limitations.
Describe and illustrate the concepts, tools, and implementation of fiscal policy.
Demonstrate understanding of macroeconomics through the discussion of contemporary economic issues.