ECON A175 - Factors that Effect Aggregate Supply

Question # 00540015 Posted By: dr.tony Updated on: 06/04/2017 06:34 AM Due on: 06/04/2017
Subject Economics Topic Microeconomics Tutorials:
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Factors that Effect Aggregate Supply and Aggregate Demand Aggregate Demand 1. Income (+) 2. Wealth (+) 3. Population (+) 4. Interest rates (–) 5. Credit availability (+) 6. Government deficit (+) 7. Taxation (–) 8. Foreign demand (+) 9. Investment (+) 10. Expectations (a) Inflationary (+) (b) Income (+) (c) Wealth (+) (d) Interest rate (+) 11. $ Exchange Rate (–) Aggregate Supply 1. Costs (a) Labor (wages) (b) Resource 2. Investment (prior) 3. Productivity 4. Interest rates 5. Credit availability 6. Foreign supply 7. Expectations (a) Profits (b) Inflationary (c) Interest rate 8. Taxation (+): An increase in this factor causes the curve to shift right. (–): An increase in this factor causes the curve to shift left. (–) (+) (+) (–) (+) (–) (+) (?) (?) (–) 1. On June 1, 2017 the economy was in both
short-term and long-term equilibrium.
Unemployment was at 4.4%, which at the time,
was considered the natural rate. The labor force
participation rate was still at a 30 year low of
63%. Suddenly OPEC (Organization of
Petroleum Exporting Countries) cuts its
production of oil by 20% in an attempt to raise
oil prices. At the same time the state
legislatures in California, Texas, Pennsylvania,
North Dakota, Oklahoma and Ohio enact new
laws that make the extraction of oil using
hydraulic fracturing illegal. The results of these
actions send the price of oil to $110 per barrel.
GDP was measured at $19 Tr. at the end of the
first quarter (March) 2017. As result of the
increase in the price of oil, by the end of the
third quarter (September) 2017 the real GDP
was at $18.75 Tr. and unemployment was at
5.5% and climbing each month. By the end of the third quarter, Congress has also been unable to pass any legislation regarding tax, trade, infrastructure
spending, entitlement or regulatory policies. The federal deficit for the fiscal year that ends October 1, 2017, assuming a
blended 30% tax rate of GDP output, was projected to be $500 B without taking into consideration the shrinking economy.
The FOMC went forward at its June 2017 meeting with its 4th Fed Funds rate hike setting the Fed Funds rate target at 1.0%1.25% and giving forward guidance that one more rate increase could be expected by yearend. In addition, they announced
that they would begin selling Treasuries and Mortgage Backed Securities on January 1, 2018 to reduce the size of their
balance sheet. They indicated selling at pace of approximately $250B per quarter. The Required Reserve Ratio is 10%.
The trade deficit for the third quarter 2017 was $150 B and $1 = 7.00 Yuan, 111 Yen, 0.90 Euro and 19 Pesos. Due to higher
fuel prices, at the end of the third quarter inflation was running at 2.5%, which is higher than the Fed’s target.
You have been asked to give fiscal policy advice to the Congress and monetary policy advice to the FOMC to improve the
economic situation. Explain what monetary and fiscal policy recommendation(s) you would make to try and improve
economic performance over both the short-term and long-term. The following items should be included in your explanation:
1. (35 points) Graphically illustrate the situation using the AS/AD model both at the end of 3rd quarter 2017 and at the time
your policies have taken full effect. Numerically accurate, easy-to-read graphs with complete, time illustrating labels that
show changes to output and price levels are expected.
2. (45 points) Explain in legible, complete sentences the reasoning for selecting each policy recommendation and how each
recommendation will help achieve your intended result (the particular policy’s transfer mechanism) and whether that
recommendation will improve the economy’s short-term performance, long-term performance or both.
3. (10 points) Calculate a new federal deficit for 2017, if any, and identify the cyclical versus structural amounts. In a list
number all your recommendations. Explain in legible, complete sentences how your overall recommendations would impact,
if it all, exchange rates, the budget deficit, balance of trade, and any other key economic indicators. Remember the effects of
one policy recommendation may offset another.
4. (10 points for clarity, cohesiveness and structure)
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