Demand and Supply

Demand and Supply 
Two important policy goals of the government and the Fed are to keep 
unemployment and inflation low, while at the same time making sure that GDP is 
increasing at an average of 3% per year. It is important to have the right mix 
of policies and that all the variables be timed perfectly.

Assume that the country is in a period of high unemployment, interest rates 
are at almost zero, inflation is about 2% per year, and GDP growth is less than 
2% per year. Suggest how fiscal and monetary policy can move those numbers to an 
acceptable level. What is the first action you would take as the president? As 
the chairman of the Fed? Why? What would be your subsequent steps?

Include the following concepts in your discussion:

•	Demand and supply of money
•	Interest rates
•	Okun- law
•	The Phillips curve
•	Taxation
•	Government spending
•	Wages
•	Aggregate supply
•	Aggregate demand
•	Long run and short run
•	Costs of inflation
•	The multiplier

You are to also address the following questions:

•	Are you confident that this will solve the problem?
•	Do the same policy formulas apply in an open economy as well as a closed 
economy?
•	What are the consequences of a closed versus an open economy?

Assume that one of your economic advisors suggests that tax rebates are a 
good way to stimulate the economy.

•	How does the concept of the multiplier justify this initiative?
•	How is it computed?
•	Explain the theory behind the equation.
•	What sort of consumer behavior affects the multiplier, and how?
•	Another of your economic advisors thinks this is not a good idea. What would 
be the reasoning behind this?

In the meantime, as your economic advisors are arguing, the federal budget 
deficit keeps growing.

•	What is the impact on economic growth? How does the budget deficit hurt the 
economy?