ps2 - Name SID Problem Set#2 Due Tuesday October 2 2007...

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Problem Set #2 (Fall 2007) 1/3 Name: _______________________ SID: _______________________ Problem Set #2 Due Tuesday, October 2, 2007 Problem Sets MUST be word-processed except for graphs and equations. QUESTIONS 1. In 1998, the U.S. economy was in equilibrium at potential GDP with an inflation rate of 4%. In 1999, there was a substantial increase in investment in anticipation of Y2K. In 2000, the Federal Reserve engaged in a contractionary monetary policy of exactly the size necessary to completely offset the increased investment in 1999. Also in 2000, autonomous investment fell, reversing all of its 1999 increase. a. show the effects of these events on equilibrium output and the inflation rate and during 1999, 2000, and 2001. Also be sure to clearly identify where the economy and inflation settle when the adjustment process is complete. b. Provide a brief economic explanation for what happened to economic output and inflation because of the events described above. Also be sure to discuss where economic output and inflation finally settle at the end of the adjustment process. 2. Assume that the economy was operating at full employment in 1972 with a steady inflation rate. In 1973, there was a structural break in productivity growth. For the 10 years prior to 1973, productivity had grown by an average of 2.7% per year. For the 10 years following 1973, productivity grew by only 1.2%. Also in 1973, there was a quintupling of oil prices as OPEC raised the price of a barrel of crude oil from $2.50 to $12.50. Finally, in
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ps2 - Name SID Problem Set#2 Due Tuesday October 2 2007...

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