Principles of Macroeconomics Dr. HartmannFall 2011 Worksheet #4 Due: TBA1. Review: Answer the following questions in terms of its impact on the U.S. economy. Assume marginal propensity to consume in the U.S. equals .9. Fill in columns 2-4.Given change in Autonomous AEDirection of shift or movement in AE (Circle one.)Direction of shift or movement in AD (Circle one.)Size of shift/ movement of AD ;Size of Δ in GDPDecrease of $5b in C b/c drop in U.S. real GDPShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Decrease of $5b in C b/c of drop in U.S. consumerexpectationsShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Increase of $6b in S b/c of drop in U.S. consumerexpectationsShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Increase of $5b in NX b/c of risein quality per $ of Amer. goods Shift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Increase of $7b in NX b/c the U.S. price level dropsShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Increase of $8b in NX because foreign price level riseShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $Decrease of $10bin NX because ofdrop in foreign RGDPShift Up AE /Shift Down AE /Movement Along AE to left/ Movement Along AE to RightShift Up AD/ Shift Down AD/ Movement Along AD to left/ Movement Along AD to Right$ ; $2. In 1993, Congress failed to pass President Bill Clinton's $16 billion economic stimulus package intended to create jobs. A major criticism was that this new spending was not matched by tax increases. a. Assume the U.S. economy is below potential output and Congress has passed a law that requires that an increase in spending of $16 billion must be matched or balanced by an equal increase in taxes. The MPC is .75 and real GDP must be increased by $20 billion to reach potential output (i.e., U = NRU). What impact will the increases in government spending and taxes by $16 billion each have on RGDP? Will the economy reach potential? Show work on separate sheet.b. Instead assume the government decides to increase government spending by $16 billion and simultaneously reduce taxes by $16 billion. What impact will this have on aggregate output, i.e., real gdp? Will they reach potential output? Show work on separate sheet.3. In the mid 1980s, the leaders of the G71 countries agreed to lower the value of the U.S. dollar relative to foreign currencies. This made American goods relatively less expensive and Japanese goods, for instance, relatively more expensive than before. a) How will the changes in relative prices affect real GDP for the U.S. in the short run, the long run, and the long-long run? Use NX, AE, AD, SRAS, and LRAS curves to demonstrate your point. Four graphs should be provided in your analysis to be considered complete. [Assume a) consumer purchases are sensitive to relative price changes, b) the government does not intervene and help out the market by raising T and/or lowering G+R, and 3) the Federal Reserve does not intervene and use monetary policy to counter the unexpected change in AD.] Hint: Use cookie cutter approach to guide you through the steps. Step 1. Step 2. Step 3.Step 4 – 7b) Fill out the following table based on your graphical analysis for part (a).Real GDP (Circle One.) Price Level (Circle One)Short Run Impact Rise Fall Returns to P.O. Rise FallLong Run Impact Rise Fall Returns to P.O. Rise FallReturns To Original PLLong-long run Impact* Rise Fall Remain The Same --------------------------* Hint for the long-long run analysis: Just because foreigners are buying more American products does that mean the U.S.’s potential output – maximum sustainable output – has increased?1 A group of countries and a loose organization of national economic and monetary authorities committed to working out economic and currency exchange rate issues. In the mid 1980s, the countries included France, Germany, Italy, United Kingdom, U.S., Canada, and Japan.4. Distinguish between discretionary fiscal policy and automatic stabilizers. Provide some examples of automatic stabilizers. Explain the impact of automatic stabilizers on disposable income as the economy moves through the business cycle. (See chapter 12 pages 254 and 262-263.) Place write-up on separate sheet.5. Application: provide one example of a government legislation that would shift the LRAS and one type of a government legislation that would not shift LRAS. [Try to be creative and explain why shifting or not shifting potential output.] Place write-up on separate sheet.--------------------------------------------------------------------------------------------------------------------------Cookie cutter approach for chapter 11 policy problems: (hwk question #3 & optional problems #1-3Step 1: Identify which AE component is changing (C, I, G, or NX) and how that component is changing (shift or move along curve).Step 2: Shift AE curve in appropriate direction.Step 3: Once you have this information, you know if you should shift or move along the AD curve. Step 4: Draw your AD, SRAS, and LRAS curves. Assume you are in long run equilibrium and label the point with the letter A. Also assume that the expected price level is 100.Step 5: Shift the AD in the appropriate direction given your analysis in step 3. Label the new equilibrium with the letter B. Now you have derived the short-run impact on price level and real gdp. Step 6: Move the appropriate curves to get back to long run equilibrium. Label the new equilibrium with the letter C. Now you have derived the long-run impact on price level and real gdp.Step 7: Finally, determine if one shifts the LRAS in the