Afinancial crisis: suppose the economy starts with gdp at potential, the real interest rate and the marginal product of capital both equal to 3%, and a stable inflation rate of 2%. a mild financial crisis hits, that raises the risk premium from zero to 2%.

a. analyze the effect of this shock in an is/mp diagram.
b. what policy response would you recommend to the federal reserve? what would be the effect of this policy response on the economy?
c. how would your answer to part b) change if the financial crisis were very severe, raising the risk premium to 6%?
d. what other policy responses might be considered in this case?

Florence invested in a factory requiring. federally-mandated reductions in carbon emissions. how will this impact florence as the factory's owner? a. her factory will be worth less once the upgrades are complete. b. her factory will likely be bought by the epa. c. florence will have to invest a large amount of capital to update the factory for little financial gain. d. florence will have to invest a large amount of capital to update the factory for a large financial gain.

In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society? a. two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells. b. two airlines dominate air travel between city a and city b, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities. c. two superpowers decide whether to build new weapons or to disarm. d. in all of the above cases, the cooperative outcome of the game is good for the two players and bad for society

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