Macro & Micro economics
Answer the questions below using information from Taylor (Chapters 12-14) and the cited Wall Street Journal articles (copies are located in the Homework 3 folder under the Content tab in ANGEL).
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1. Use the aggregate demand and aggregate supply model to illustrate and explain how each of the following will affect the equilibrium price level and real GDP. (Hint: Review the Think Economics site at

a. The Consumer Confidence index rises and retail sales increase.
b. The economies of our major trading partners’ contract.
c. Government spending in the United Statesdecreases.
d. U.S. Workers expect higher future inflation and negotiate higher wages now.
e. Technological improvements increase productivity

2. Answer the following after reading the Wall Street Journal Op-Ed article Keynes vs. Hayek: The Great Debate by Gerald P. O’Driscoll Jr. (July 7, 2010). and viewing Fear the Boom video http://www.youtube.com/watch?v=d0nERTFo-Sk and Fight of the Century video http://www.youtube.com/watch?v=GTQnarzmTOc
a. On Oct. 17 1932 in a letter to the Times of London, John Maynard Keynes and his colleagues made the case for spending. What was the basis of their argument to support public spending?
b. On Oct. 19, 1932 Friedrich A. Hayek and his colleagues responded. What was their greatest disagreement with Keynes?
c. Use the AS/AD model to illustrate and explain Keynes’ recommendation for solving the problems in the macroeconomy in 1932. (graph)
d. Use the AS/AD model to illustrate and explain Hayek’s recommendation for solving the problems in the macroeconomy in 1932. (graph)
e. Use the AS/AD model to illustrate and explain President Obama’s policies to solve the problems in the macroeconomy. (graph)
f. According to O’Driscoll are President Obama’s policies more closely aligned with Keynes or Hayek. Why?