UMD ECON 202 Keynesian Microeconomic Principles Paper

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QUESTION 6

    1. In March, Congress passed a $1.9 trillion Covid relief bill that included, among other items, stimulus checks and increases in government spending to help accelerate the vaccine rollout. In this question, you’ll analyze the expected effects of this policy in the IS-LM model.
      Use an IS-LM diagram to show the effects of this policy on output and the interest rate. Label your figure completely (including all curves, axes, and equilibria), and explain what happens to output. (10 points)
    2. Now let’s consider expansionary monetary policy: (15 points)
      1. Use an IS-LM diagram to show the effects of expansionary monetary policy on output and the interest rate. Label your figure completely, and explain what happens to output.
      2. Do the two policy scenarios in Question 1 (the Covid relief bill) and Question 2 (expansionary monetary policy) have identical effects on output and the components of aggregate demand? Why or why not?
      3. Why couldn’t the Federal Reserve use traditional forms of expansionary monetary policy in March 2021 to help stimulate the economy?
    1. One important characteristic of the U.S. economy over recent decades is a widespread expansion in monopoly power. (15 points)
      1. What labor market parameter does this increase in monopoly power affect and why?
      2. Show the effect of this change on real wages and the natural rate of unemployment using the labor market model. Make sure to label your graph completely.
      3. Based on your answer to (b) what happens to real wages when the markup increases? Why?
      4. In the post-1970 U.S. economy, this rise in monopoly power has taken place alongside a series of institutional changes such as a decline in the prevalence of unions. What is the effect of these simultaneous changes on real wages and the natural rate of unemployment in the U.S. labor market? Support your answer graphically.

      QUESTION 3