Understand the Great Recession through Macroeconomic Modeling

Instructions: • Your exam should be word-processed, 12-point font, Times New Roman, double-spaced, 1-inch margins. • You will need to provide at least 4 additional sources to support your arguments. • Your paper should be between 1400-3000 words (excluding graphs and models). • This exam should be thought of as a research paper, with a clear thesis and supporting arguments, as well as an introduction and conclusion. Show interest in your insights and thoughtfulness on the material presented in class. Support your arguments with economic logic (theories, modeling, etc.) • Citations should be provided in text with bibliography (in the style you prefer, but be consistent). • This should be written in an academic, formal tone. • The exam is due o You will submit your exam electronically on Blackboard via Turnitin (an anti-plagiarism software). You will find this under the “Exams” folder under the “Course Documents” tab. o Due Date: Friday December 14, 2018 o Submit your paper in .pdf format with title “Firstname Lastname Final Exam” Understand the Great Recession through Macroeconomic Modeling a. Essay Part A: Describe the lead up and the causes of The Great Recession. In your opinion, what was the most important factor that led us to The Great Recession. Identify the initial shock in terms of aggregate demand. Was the initial shock an IS or LM shock? Support your arguments with economic theory and at least one additional source. b. Model Part A: Assume that in 2005, the US economy was operating at full employment GDP. Show this initial equilibrium in the ADAS model. Then, based on your “Essay Part A,” show the Great Recession in the ADAS model (i.e. model what happened in 2007 and the following years). Label clearly all axes, curves, the initial shock, multiplier effect, and the GDP gap that results. Explain your model in words and the results that you show. c. Essay Part B: Following The Great Recession, the US government and the Federal Reserve instituted historically unprecedented policies in the face of financial ruin. Explain and describe these policies, referencing the ISLM model (which curves are being affected and how) and the ADAS model (which curve were they trying to affect and how?). d. Model Part B: Starting with a new graph, draw the US economy in 2009, in the depths of the Great Recession. That is, your initial equilibrium should reflect your conclusions from “Model Part A”. Show the effects of one of the policies discussed in part “c”. Label clearly all axes, curves, the initial shock, multiplier effect, and the effect on GDP that results. Explain your model in words and the results that you show. e. Essay Part C: Do you think the policy response of the US government and the Fed were correct (e.g. too little, to much, wrong focus)? In your opinion, how could they have done better? Support your opinion with your analysis above, economic theory, and at least one additional source. f. Essay Part D: Do you think the United States economy is in danger of another Great Recession in the near (next 40 years) future? Identify at least one factor you think is most telling. What do you suggest we do to avoid this fate? Support your opinion with your analysis above, economic theory, and at least one additional source. g. Essay Part E: Compare and contrast these mainstream understanding above (ISLM and ADAS) with one of the heterodox theories of financial crises. Do you think one perspective is more accurate or useful? Support your opinion with your analysis above, economic theory, and at least one additional source. h. Essay Part F: Given all of your analysis and conclusions above, compare and contrast the two movies you watched about the Great Recession (The Big Short and Money, Power, and Wall Street) in terms of their impact (especially for the “general” population who doesn’t get to study the recession in as much detail as we do in Intermediate Macro).

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