Explain how each of the following will affect the economy, by analyzing each case in an SRAS-AD diagram and determine in each case the effects on…

Explain how each of the following will affect the economy, by analyzing each case in an SRAS-AD diagram and determine in each case the effects on real GDP and the general price level:

  1. The interest rates are raised by the Fed.
  2. “Fracking” for gas and oil expands, and oil & energy prices in the U.S. fall.
  3. The stock market soars and American wealth expands significantly.
  4. The government cuts government spending on transfer payments.
  5. Many labor unions demand, and get, large wage-increases.

Exchange Rates: US$1 = 6.43 yuan in 2011 and US$1 = 6.12 yuan in 2013.

  1. The data show that the dollar appreciated against the Chinese yuan. True or False?
  2. The indicated change in the exchange rate will tend to (increase/decrease) US exports to China and (increase/decrease) imports from China.
  3. Applying the SRAS-AD model, we’d say that the effect of this given change in the exchange rate is to make the general price level in the US (increase/decrease), while total production and employment will (increase/decrease).

If the government cuts personal income taxes, then AD would tend to increase. But this effect on AD might be weakened by what?

Transfer payments (Tr) have a more direct impact on AD, more so than government purchases (G). True or False? Explain briefly.

The macroeconomic problem faced by an economy whose actual GDP is below potential GDP is _____________ (unemployment / inflation). To deal with this situation, the government needs to shift AD to the _________________ (right / left) where the intended goal is to increase _______________ (GDP / gen P).

If we already have a budget deficit, then an expansionary fiscal policy will tend to reduce the deficit. True or False? Explain.

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