Question of the Day: Day Ten

The questions below should be answered within the context of the Aggregate Demand/Aggregate Supply model.

1. Assume that there is an increase in income (e.g. Government sends $100 checks to all students taking Econ 202). Compare how the economy would be affected if this increase in income was spent on beer and fast food, versus where the increase in income is spent buying newly issued stock.

2. Assume that the government begins spending large amounts of money, and pays for that expenditure by printing money. If consumers expect the price level to rise significantly, then they are likely to react by seeking an increase in their nominal wage. How would these changes in spending (and increase in the money supply) and then wages affect the economy?