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Unformatted text preview: Homework 12 ECON 010, Fall 2011 Question 1: AD-AS Model and Money Market Analyze the credit card revolution in the 1980s. Suppose the demand for money goes down, because agents now have credit cards to carry out market transactions. a. Start in the money market and illustrate what happens to money demand and the quantity of money and interest rates in equilibrium. b. Suppose that the economy is currently operating at potential GDP. Trace the development in the money market further into the AD-SRAS-LRAS diagram, assuming there is no long-run growth. Describe what happens to equilibrium GDP and prices. c. Describe what will happen in the long-run to equilibrium level of GDP and prices. d. Discuss what will happen in the long-run to employment, real wages, and real interest rates. Question 2: AD-AS Model and Fiscal Policy Suppose that the economy is currently operating below potential GDP. The government has decided to cut taxes in an effort to increase output. Suppose that the government can calculate the exact amount by which it will need to cut taxes by in order to close the deflationary gap....
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This note was uploaded on 04/04/2012 for the course ECON 010 taught by Professor Stein during the Fall '07 term at UPenn.
- Fall '07