a) What are the three fiscal policy tools and how would each be used to counter a contractionary gap? b) True or False and explain: Fiscal Policy is effective at reducing the duration of an economic contraction. c) If the spending multiplier is 2.5 and the economy is in a $500 billion contractionary gap, how much should I increase government purchases to eliminate the gap? d) Continuing with c, if the MPC is 0.8, how much would I need to increase transfer payments to eliminate the $500 billion contractionary gap? e) True or False and explain: Households always react to tax changes in a predictable manner. Module 6: Deficits and the Debt. a) Distinguish between deficit and debt. b) Explain what crowding out is and why it reduces the impact of fiscal stimulus. c) True or false and explain: The national debt represents a threat of bankruptcy. (For d and e) Suppose the interest on the debt was $600 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is spent on foreign goods). If interest is paid to the foreign sector, only 10% is spent here (the remainder is spent in foreign countries). Every dollar collected in axes to pay the interest cause domestic spending to fall 90 cents. The spending multiplier is 2. d) What is the net impact on GDP if all interest is paid domestically? e) What is the net impact on GDP if 30% of the interest is paid to the foreign sector? Module 7:  Gains from Trade (Parts a-c) Assume two countries, Gisslovia and Gerardania, both have 1200 units of labor that can be used to produce food or clothing. In Gisslovia it takes 4 units of labor to produce one unit of food and 3 units of labor to produce one unit of clothing. In Geradania it takes 3 units of labor to produce one unit of food and 2 units of labor to produce one unit of clothing. a) If each country allocated one-half of its labor to food production how much food would be produced? b) If each country allocated one-half of its labor to clothing production how much clothing would be produced? c) Suppose Gisslovia only produced food. If Gerardania produced enough food to keep the total amount equal to part a, how much clothing would they produce? d) What do we mean by comparative advantage? e) True or False and explain: Free trade allows countries to specialize in producing those goods in which they have the comparative advantage, which in turn, results in increased world production and income. Module 8: Trade Restrictions a) What is the "Infant Industry" argument for trade restriction? b) What is the "National Defense" argument for trade restriction? c) During the Great Depression, Congress passed the Smoot-Hawley Tariff, using the "Create Domestic Jobs" argument for trade restriction. In actuality, job loss in our export industries was greater than job gains in our import industries. Why? d) What is a tariff ? Does a tariff have a result from an import quota? e) Suppose a tariff allowed an industry to create 200,000 jobs paying an average of $22,500 per year. Before the tariff consumers bought 3 billion units (60% imported) at a price of $30. After the tariff they bought 2.75 billion units (none imported) at  a price of $36. How much did total consumer spending on the good increase and how much per new job?

a) What are the three fiscal policy tools and how would each be used to counter a contractionary gap?

b) True or False and explain: Fiscal Policy is effective at reducing the duration of an economic contraction.

c) If the spending multiplier is 2.5 and the economy is in a $500 billion contractionary gap, how much should I increase government purchases to eliminate the gap?

d) Continuing with c, if the MPC is 0.8, how much would I need to increase transfer payments to eliminate the $500 billion contractionary gap?

e) True or False and explain: Households always react to tax changes in a predictable manner.

Module 6: Deficits and the Debt.

a) Distinguish between deficit and debt.

b) Explain what crowding out is and why it reduces the impact of fiscal stimulus.

c) True or false and explain: The national debt represents a threat of bankruptcy.

(For d and e) Suppose the interest on the debt was $600 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is spent on foreign goods). If interest is paid to the foreign sector, only 10% is spent here (the remainder is spent in foreign countries). Every dollar collected in axes to pay the interest cause domestic spending to fall 90 cents. The spending multiplier is 2.

d) What is the net impact on GDP if all interest is paid domestically?

e) What is the net impact on GDP if 30% of the interest is paid to the foreign sector?

Module 7:  Gains from Trade

(Parts a-c) Assume two countries, Gisslovia and Gerardania, both have 1200 units of labor that can be used to produce food or clothing. In Gisslovia it takes 4 units of labor to produce one unit of food and 3 units of labor to produce one unit of clothing. In Geradania it takes 3 units of labor to produce one unit of food and 2 units of labor to produce one unit of clothing.

a) If each country allocated one-half of its labor to food production how much food would be produced?

b) If each country allocated one-half of its labor to clothing production how much clothing would be produced?

c) Suppose Gisslovia only produced food. If Gerardania produced enough food to keep the total amount equal to part a, how much clothing would they produce?

d) What do we mean by comparative advantage?

e) True or False and explain: Free trade allows countries to specialize in producing those goods in which they have the comparative advantage, which in turn, results in increased world production and income.

Module 8: Trade Restrictions

a) What is the "Infant Industry" argument for trade restriction?

b) What is the "National Defense" argument for trade restriction?

c) During the Great Depression, Congress passed the Smoot-Hawley Tariff, using the "Create Domestic Jobs" argument for trade restriction. In actuality, job loss in our export industries was greater than job gains in our import industries. Why?

d) What is a tariff ? Does a tariff have a result from an import quota?

e) Suppose a tariff allowed an industry to create 200,000 jobs paying an average of $22,500 per year. Before the tariff consumers bought 3 billion units (60% imported) at a price of $30. After the tariff they bought 2.75 billion units (none imported) at  a price of $36. How much did total consumer spending on the good increase and how much per new job?