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Unformatted text preview: 180.101 Principles of Macroeconomics, Fall 2011 Second Term Exam : Practice Problems 1. Consider the Great Depression, which was a recession in which both output and prices fell. Using just those facts, can you make any conclusions as to whether a fall in aggregate demand or in aggregate supply was the primary cause of the recession? What about the recession and stagflation (low or negative output growth with rising prices) of the 1970s? Explain. 2. Suppose that Americans become angry with the Australians because they have funny accents and drive on the wrong side of the road. As such, America declares war on Australia and, in preparation for the invasion, begins buying a lot of military equipment. At the same time, Australia begins sinking oil tankers shipping oil to the US. (a) Write down a model that will help you to analyze the effects of the war on output and prices in the US economy. (b) Explicitly identify the variables in your model that will be affected and state whether they increase or decrease. (c) Using the above, which curves shift, in what direction do they shift, and why? Remember to explain in intuitive/economic terms why the curves shift like they do (dont just refer to the equations)....
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- Fall '08