EC 202, Winter 2020 University of Oregon Problem Set 3 5. (2 points) Assume that when aggregate income (i.e., aggregate output, or Y) increases by $50 million in the country of Intrometida aggregate consumption (C) there increases by $10 million. a . Using the pieces of information just given, find the marginal propensity to consume (MPC) for the economy of Intrometida? What is the marginal propensity to save (MPS)? Show your work. Express your answers as either fractions or the appropriate decimals. MPC om MPS no1 b. What is the numerical value of the government spending multiplier for the economy of Intrometida? Show your work. Express your answer as either a fraction or a decimal. im government-spending multiplier c. Intrometida finds itself in a recession and the government has decided to intervene to raise aggregate output (GDP, or Y) from its current level of $1,800 billion. The government of Intrometida would like to raise GDP (i.e., )) to $2,000 billion. Using the answer for the multiplier calculated in part (b), what change in government spending (AG) will be required to lift Intrometida's GDP from $1,800 billion to $2,000 billion? Show your work. Hint: First, solve for the change in output (AY) the government is looking for using the GDP numbers given. Then use the government-spending multiplier found in part (b) to solve for the required AG.] change in government spending (AG) needed 6. (1.5 points) Watch "What's all the Yellen About? Monetary Policy and the Federal Reserve", episode 10 of Crash Course Economics: bit.ly/32RWa2b. [There is also a link in the Canvas module "Problem Set 3 links".] Note that this video came out in 2015. Janet Yellen is no longer Chair of the Federal Reserve. Jerome Powell has been the Fed Chair since February 2018. a . The Federal Reserve cannot simply tell commercial banks what interest rates to charge borrowers. Instead, how does the Federal Reserve indirectly manipulate interest rates? Page 5 of 6EC 202, Winter 2020 Problem Set 3 University of Oregon 4. (4 points) Use the aggregate-demand, aggregate-supply model to predict changes to the macroeconomy of the United States. For each situation, (1 draw the necessary shift (or shifts) of a curve (or curves) on the graph, 2 drawing any appropriate arrows and (3) labeling any newly drawn curves. Also, in the table at the right, 4 indicate whether the level of output (Y) and the overall price level (P) will increase (1), decrease (4), stay the same (-), or change in an ambiguous way (?) in both the short run and the long run. a. Falling output in foreign economies reduces demand for U.S.-made goods and services. At the same time, there are dramatic improvements in the overall infrastructure of the United States. Price level | (P) in the in the short run long run Y (real GDP) P (overall price level) Real GDP (Y) b. The outbreak of COVID-19 temporarily disrupts transportation and supply chains, and at the same time consumers stay at home and reduce their overall spending. Price level | (P) p* K. in the in the short run long run Y (real GDP) P (overall price level) Real GDP (Y) u = u' Page + of 6EC 202, Winter 2020 University of Oregon deficit = spending - revenue Problem Set 3 3. (3 points) Consider the government of the country of Yed, which ended 2014 with a debt of $600 billion. Over the following five years, Yed's government has expenditures and revenues as given in the following table. government government tax revenues annual running total year expenditures deficit of debt GDP of Yed debt (billions of billions of (billions of dollars) (billions of dollars) billions of as a % dollars) dollars) dollars) of Yed's GDP 2015 310 320 - 10 1,200 2016 320 335 -15 1,250 2017 380 290 90 1,230 % 2018 360 300 60 1,240 % 2019 350 330 26 1,300 a. Fill out the "amount of deficit" column in the table above for each of the four years given. Enter deficits as positive numbers and surpluses (if any) as negative numbers. This usage of positive and negative signs may seem counterintuitive, but it will make the next part simpler. Show your work below. (Yes, the math is trivial. Show it anyway.) 360 - 300 = 60 310-370 =-10 350-330= 20 320- 335 =-15 380 - 290 = 90 b . Fill out the "running total of debt" column in the table above for each of the five years based on what the previous year's debt was and how the new year's deficit or surplus changes it. Remember that Yed ended 2014 with a debt of $600 billion and that all numbers in the table are in billions of dollars. Now the assignment of positive and negative signs becomes more useful: deficits add to an existing pile of debt, and any surpluses cause the debt to decrease by that amount. Show your work below. (Again, the math is simple. Still, write it out. It'll help you remember how to do it.) c. Fill out the "debt as a % of Yed's GDP" column for each of the five years based on the level of debt and the value of Yed's GDP for each year in question. Round each percentage to one decimal place [ex: 12.3%]. Show your work below. Page 3 of 6