Economics

Use either graph paper or computer software to answer questions that require a graph.  The following formula will be useful to calculate equilibrium GDP:  Y =  (a+ IPlanned +G-MPC*T)/(1-MPC).  Recall that a is the constant in the consumption equation.

Each part of a question is worth 5 points.  There are 100 total points.

1.  The unemployment rate in the U.S. is currently 4.9%.

a.  If the unemployment rate in March 2017 is 5.4%, what will be the rate of GDP growth according to Okun’s law?

b.  Suppose GDP growth this year is 2 percent.  What will be the rate of unemployment next year?

c.  Bonus.  Provide an economic explanation for why there is not a one-to-one relationship between the change in the unemployment rate and GDP growth.

2.  Use the graphs in the textbook to answer question 2.

a.  The 2008-09 recession was one of the worst economic downturns in the U.S. since the Great Depression.  What was the approximate growth rates of real GDP, consumption and investment in 2009?

b.  What was the peak  unemployment rates after the following recessions: i) 1975 ii) 2009?

3.  Use the following values to answer question 3.

C = 200 + .6(Y-T)

T = 200

G = 200

IPlanned = 120

a.  Graph planned expenditure against income, Y, using either graph paper or computer software.

b.  Calculate equilibrium GDP algebraically.

c.  Show that saving equals planned investment at equilibrium GDP.  Use numerical values.

d.  Show that planned expenditure (PE) equals Y in equilibrium.  (Calculate the value of all the components of planned expenditure and show that they sum up to Y).

e.  Suppose that GDP (Y) is equal to 1,400.  Calculate unplanned inventory investment.f.  Show unplanned inventory investment graphically (in the same graph as part a) when GDP is equal to 1,400.

f.  Suppose planned investment increases from 120 to 160.  Calculate the new equilibrium GDP.

g.  What is the value of the multiplier in this example?

h.  The multiplier is the change in GDP resulting from a change in autonomous spending.  The multiplier occurs in a series of steps or rounds.  Calculate the change in GDP in the second and third rounds of the multiplier process resulting from the $40 change in planned investment in part g.

i.  What effect does the marginal propensity to consume have on the multiplier and why?

j.  Suppose that taxes increased from 200 to 240, while all other components of autonomous spending remained constant.  What would be the change in equilibrium GDP?  (Use the formula for the tax multiplier).

k.  Under what conditions will the tax multiplier equal zero?

4.  Use the following values to answer question 4.

C = 200 + .6(Y-T)

T = 200

G = 200

Assume that planned investment (IPlanned) varies with the interest rate (r) as follows:

r               IPlanned

15           40

10         120

5          200

a.  Explain why planned  investment is inversely related to the interest rate.

b.  Calculate equilibrium GDP for interest rates of 15, 10 and 5 percent.

c.  Plot the IS curve.  (This should be a separate graph from the graph in question 3)

d.  Suppose G increases from 200 to 240.  Plot the new IS curve in this case, in the same graph as part c.  Label this curve IS’.

e.  What variables are held constant along the IS curve?

f.  Bonus.  What determines the slope of the IS curve?

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