• If government increases government spending by $100 million and increases tax by $100 million so that the fiscal deficit does not increase, what happens to GDP? (Hint: the conclusion is the same regardless the value of marginal propensity to consumer.)

4. AEM and AD/AS (8 MARKS TOTAL). A temporary economic boom in China pushes up that country's demand for Australian minerals. The boom ends quickly however and Chinese demand for Australian minerals falls back to normal levels. Assume that the Australian macro-economy begins in equilibrium for both the short-run and long-run. a. Use the AE-45 degree line graph and the AE equation to depict the way the Australian economy moves out of equilibrium as a result of the China boom. Then depict equilibrium being naturally restored after that boom ends. Briefly explain the economic intuition behind your answer. (4 MARKS) (Maximum length: one page) b. Use the AD-AS graph to depict the way the Australian economy moves out of equilibrium and back into equilibrium as a result of the sudden China boom. Then depict equilibrium being naturally restored after that boom ends. Briefly explain the economic intuition behind your answer. (4 MARKS)

5 Figure 1: Research and Development (R&D) expenditures as a percentage of Gross National Product (GNP) Given the data above, how would you rank the countries above in terms of predicted future real GDP per capita growth? Explain your answer.

6. Real and nominal interest rates (2 MARKS) (Maximum length: half-page) Figure 1 shows the trend in real rates for the Federal Funds rate in the US (equivalent to the short- run money market interest rate) from 1956-2010. Why are the real rates sometimes negative? Use the Fisher Equation and speculate about how short-run output gaps over that period might have led to temporarily negative real interest rates.

For each of following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. a) An easing of monetary policy by the Reserve Bank (a downward shift in the policy re- action function)

1.

4.

3.

Assume three Solow economies without technological progress and pro- duction function Y = √K-L. Each economy starts with capital per worker equal 9. Population growth equals 4% and savings rate equals 30% in each economy. Economies differ only in the depreciation rate: in country A it equals 1%, in country B it equals 2%, and in country C it equals 6%-

Consider the DMP model and a technological change that reduces the costs of recruiting for firms, K. At the same time, there is an increase of the unemployment insurence benefit, b.