What is monetary and fiscal policy?

1. The model depiction at left is from your textbook, showing an economy in recession at output level E₀. Based on this position of the economy please do the following.

- Explain one monetary and one fiscal policy solution implemented by the federal government that may put an end to the recession.
- Name two “drawbacks” that limit the potential success of fiscal policy being used to fight a recession. Name two “drawbacks” that limit the potential success of monetary policy being used to fight a recession.
- Explain what is likely to happen in the economy if there is no expansionary fiscal or monetary policy put in place to close the recessionary gap at point E₀. Fully explain what is likely to transpire in the economy incorporating the aggregate supply and demand model as well as other economic concepts from this course. Put in simpler terms, what happens in the economy if no fiscal or monetary policy is employed at point E0 to move the aggregate demand curve to AD₁? Your response to part C. must include a graph that accompanies your explanation.
- 2. Gather some information on key economic aggregates in the recent past and determine whether the economy was above or below potential GP during January 2018. Some variables you should include in your answer are the inflation rate, inflation expectations, the unemployment rate, other labor market indicators, the level of output in both nominal and real terms, and the level of the money supply. Consider trends in these values and include credible news stories you uncover in your inevitable google search as well. You will undoubtedly find estimates of potential GDP, that is not the “total answer here,” in all cases you must provide empirical support for your determination as to where the economy is. Your answer should begin with a clear statement of what potential GDP is.
- 3.Find a suitable article from either The Wall Street Journal or The Economist relating to the macro economy of the US and include an interpretation in the context of an economic model (i.e. AD/AS, financial markets, PPF, etc.) where the interpretation clearly identifies the effect or impact of that article’s topic on the economy. Include a way to find the article, preferably a PDF or a URL. A graph showing the economy prior to the events in the article and after the events in the article chosen must also be included in the provided answer.
4. Please refer to the data from FRED, the Picture shown on the last page of this exam. The data “behind” the picture is in the attached excel spreadsheet “ECONFinalDollarPound.” Both the picture and the data show the ($/pound) rate over the May 2016 through October 2016 period. You can look at the picture and see a clear pattern of appreciation and depreciation. Please refer to the picture and the data and answer the following:

Did the dollar depreciate or appreciate against the British Pound between May 2016 and October 2016? Fully explain. Quantify the change in the dollar numerically.
Did the dollar depreciate or appreciate against the British Pound between October 2016 and April 2018? Fully explain. Quantify the change in the dollar numerically.
There is a small firm exporting specialty mushrooms from Britain to the United States. The firm is named Mushy Mushrooms and their product is known and consumed the world over. Mushy Mushrooms are a “high-end” mushroom. In Britain, one package of mushrooms sold for 25 Pounds in October 2016 and the price of Mushy Mushrooms, in Britain hasn’t changed through April 2018. Ignoring transportation costs, tell me the price in Baltimore MD of Mushy Mushrooms in October 2016 and in April 2018. Explain any calculations you do. You can find the exchange rate information you need in the attached excel spreadsheet data file “ECONFinalDollarPound.” Assume that purchasing power parity exists for Mushy Mushrooms and that the price difference in Baltimore and in Britain is solely due to the changing exchange rate.

Explain what happens to the price of exports from US to Britain if the dollar appreciates. Fully explain and give a numerical example based on the data provided.