Economics Macro Project

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Suppose the 2025 unemployment rate was 9.5%, and had been in that range for six months, and the consumer price index, the most common measure of inflation, was virtually unchanged over the same time period, indicating that there are virtually no inflationary pressures in the economy at that time. Assume you are the President’s Chief Economic Advisor, and she is relying on your advice.

The President wants to know what has caused the above economic situation (excessive unemployment and virtually no inflation) to occur. (Please discuss this in terms of the general cause(s) of excessive unemployment and stable prices.) Additionally, she would like to know what policy actions the government could enact in order to eliminate the nation’s stated economic problem.

Please prepare a short memo (paper) in which you discuss:

the possible cause(s) of the above problem (9.5% unemployment and virtually no inflation) in terms of valid economic theory. (Again, please discuss this in terms of the general cause(s) of excessive unemployment and stable prices.)
the potential discretionary fiscal policy actions that might be undertaken in order to eliminate the problem.
the potential monetary policy that might be undertaken in order to eliminate the problem.
Also,

Be sure to explain how and why these actions will help to eliminate the problem. (These explanations should be complete and accurate and done in terms of economic theory.)
Which action would you personally recommend the President enact? Why? (There is no one correct response to this “personal preference” question. The correctness of your response depends on the completeness and economic correctness of your explanation.)
Finally,

Would your explanation of the cause of the problem and your suggested policy actions be different if the economy was facing an unemployment rate of 9.5% and an inflation rate of 10%?
How would you explain the existence of both unemployment and inflation at the same time?
What policy action(s) would you suggest the government undertake to eliminate this two-sided problem and how would it work to lessen both unemployment and inflation simultaneously?
(Again, these explanations should be complete and accurate and done in terms of economic theory.)

DETAILED PROJECT DIRECTIONS:
This project is worth 100 points and should be submitted (is due) no later than midnight Sunday April 26, 2015. If the paper is submitted after that date, the grade will be reduced 5 points for each day it is late.
Write me (the President) an economic memo (essay) discussing the problems outlined above. The paper should be about 4 pages in length but can be longer if necessary. (Please try to keep your paper to a maximum of 6 pages.)
In your paper discuss the factor(s) that may have caused unemployment to rise to 9.5% in 2025 while inflation is virtually non-existent. (Again, please discuss this in terms of the general cause(s) of excessive unemployment and stable prices.)
Discuss what discretionary fiscal policy actions the government could enact in order to eliminate this high unemployment rate (which is combined with no inflation) and explain how these actions can eliminate the excessive unemployment.
Additionally, discuss what monetary policy actions the Federal Reserve could enact in order to eliminate this high unemployment rate (which is combined with no inflation) and explain how these actions can eliminate the excessive unemployment.
Which action would you personally recommend the government enact? Why? (There is no one correct response to this “personal preference” question. The correctness of your response depends on the completeness and economic correctness of your explanation.)
Finally, discuss the factor(s) that may have caused the second hypothetical situation – the unemployment rising to 9.5% and the inflation rate rising to 10% – to occur.
What policy action(s) could the government enact in order to eliminate this combination of excessive unemployment and high inflation? How could this action (these actions) eliminate both the excessive unemployment and the high level of inflation?
All explanations must be done in terms of economic theory.
Once again, the paper should be about 4 pages in length, double-spaced, with normal margins (about 1 inch) and normal font size (usually size 12). (The paper can be longer than 4 pages if necessary, but please try to keep your paper to a maximum of 6 pages.)

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