One.

Your friend's birthday is tomorrow. She does not own a watch, yet you know that she would enjoy having one.

(a) Draw a budget constraint / indifference curve graph for your friend, with Quantity of All Other Goods on the vertical axis and Quantity of Watches on the horizontal axis. Show what her indifference curves must look like for her to choose not to buy a watch even though she puts some value on having one.

(b) Now, suppose that you buy a $100 watch and give it to your friend for her birthday. On your graph from part (a), show what your friend's budget constraint looks like after you give her the watch. Does this move her to a higher utility level? Briefly explain.

(c) Your friend is appreciative, but you sense that she would rather have had a gift certificate that is redeemable at a wide variety of places. On your graph from parts (a) and (b), show what your friend's budget constraint would look like if you gave her a $100 gift certificate instead of the watch. Does this move her to a higher utility level? Briefly explain.

(d) Which of the two potential gifts increases your friend's utility by more? Briefly explain.

Two.

1) The Economy cannot be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and explain your answer in a paragraph. What is the current actual u-rate for the US economy as of February Data for 2021?Is this unemployment rate below or above or equal to u-rate at full employment (usually called natural rate of unemployment or NAIRU)? What state of the economy do you consider from this u-rate for Feb 2021 (recession, depression or inflation?) and its sources?

2) A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate (NAIRU) and remained at that low level for a year or longer? Explain your answer in a few sentences.

.

B) Draw an AS/AD diagram illustrating your answer to part (A) and refer to the current state of the economy of the US to compare in this context. Be sure to label all lines and axes in your diagram clearly.

3) Suppose between Q1, 2020 and Q4, 2020 measured Output in the non- farm business sector increased by 3.6%. During this time period the unemployment rate fell from 4.6% to 3.7% and total hours worked in the nonfarm business sector increased by 3.8%.

What was the % rate of change in labor productivity over this period (Q1 2020 to Q4 2020)? Explain your answer briefly. (Hint: Labor productivity = Y/Labor hours; RGDP growth rate = Labor productivity growth plus and Labor Force Growth rate. No need to use u-rate changes for this question)

4. a. The Federal Government under Biden Administration is about to pass $1.9 Trillion Covid-19 Stimulus Relief Fund to rescue American and plans to distribute by Mar 15, 2021. Under this relief fund, almost 90% all households will receive $1,400 for all individuals filing and $2,800 for all households filing jointly. As part of the package also includes child support allowances for households, small businesses relief fund, covid-19 testing and vaccination roll outs. What would be the overall impact on AD of this third stimulus relief fund to recover the economy from severe recession caused by COVID-19 public health crisis and its effect on change in real GDP? Assume that the Marginal Propensity to Consume (MPC) for all American consumers is 0.8 in February 2021. Estimate the maximum potential increase in real GDP in numerical values based on your knowledge on Keynesian economic model and policy effect, Explain your answer briefly as well . Make sure you use your understanding of the concept of expenditure multiplier in estimating this problem.

4.b. Suppose instead of giving this $1.9 trillion package directly to individuals and small businesses, the legislative branch and the executive branch have decided to provide a tax break of the same amount for all federal tax filers for tax year 2020 that has to be filed by April 15, 2021. In another words, using the same criterion of distribution of $1.9 trillion package described in 4.a above, the government decides to give tax refund during tax filing for year 2020. Given this option, and assuming the same MPC of 0.80, estimate the maximum potential increase in GDP with this option and explain the comparison of your results you have come up with in Q4a above. Hint: Expenditure multiplier versus tax multiplier need to be understood to answer these two questions.

5. Use the macroeconomic data in the table below for the US economy for 2017 and 2018 to answer the questions followed.

Year

NGDP

in '000"

RGDP

In '000'

In 2009 prices

RGDP Growth Rate %

GDPD

Inflation Rate %

u-Rate

%

CPI

Inflation Rate %

2017

19,390.6

17,096.2

-

?

-

4.4

245.12

-

2018*

19,956.8

17,379.7

?

?

?

3.9

250.5

?

* Estimated data from 2017 data, but very close. Sources: www.bea.gov and www.bls.gov

5a. Estimate the values and fill out the boxes with Questions marks.

5b. Based on your estimated values from Q5a, briefly analyze the state of the US economy from year 2017 to 2018 and make a quick forecast for 2019 and 2020.

6. Use the following macroeconomic model structure to answer the questions followed from 6.1 to 6.8. Please note that you must show your work of estimations for these numerical multiple-choice questions for gradable credit. Without showing your works of estimation, your answers won't be credible for take-home exam.

C = 300 + 0.8Yd; C = consumption function; Yd (Y-T) = disposable income

I = 200; I = Investment

G = 400; G = Government expenditure

T = 200; T = Tax revenue

Also assume that Yf = Full employment GDP (Potential GDP) = 5,000

6.1. The equilibrium GDP level (income) is _________. Hint: Ye = C+I+G

a. 2,850

b. 3,700

c. 3,145

d. 3,800

6.2. At the equilibrium level of output, the aggregate consumption level is:

a. 3,100

b. 3,250

c. 3,400

d. 3,625

6.3. At the equilibrium level of output, the aggregate saving level is:

a. 550

b. 450

c. 400

d. 350

6.4. The MPC and MPS for the economy is respectively:

a. 0.9 and 0.1

b. 0.85 and 0.15

c. 0.75 and 0.25

d. 0.80 and 0.20

6.5. The expenditure multiplier for the economy is:

a. 10

b. 8

c. 5

d. 4

6.6. The tax multiplier for the economy is:

a. -3

b. -4

c. 4

d. 5

6.7. Given the value of full employment level of GDP above, the GDP gap is ______

a. 1,200

b.1,300

c. 1,400

d. 1,500

Hint: GDP gap is the difference between full employment (potential GDP) and existing equilibrium GDP)

6.8. The government spending needed to bridge the GDP gap you found in statement 8.7 above would be _____________

Hint: It is also called recessionary or inflationary gap depending on whether the economy is in state of recession or inflation.

a. 400

b. 350

c. 260

d. 250

7. Suppose the Payroll tax reduction for middle-income households has been extended in the amount of $500 billion for the remainder of 2021 to recover from COVID-19 crisis. Assuming the MPC for that income group of households is 0.8 and also assuming that other things stay the same, the increase in GDP under this proposed extension of tax break is expected to increase by (?Y) _______

a. $2,500 billion

b. $2,000 billion

c. $1,000 billion

d. $1,500 billion

Hint: Need to use tax multiplier and keep it mind it is a negative tax.

Three.

(30 points) Problem 4 Consider a consumer with preferences represented by the utility function U (x, y) = 2x'4y0'5. She has a wealth of w and faces the market prices of x and y, Px and P3,, respectively. (a) Derive the consumer's Marshallian (uncompensated) demand functions. (b) What is the consumer's Engel curve for good y? (Hint: This can be obtained directly from the Marshallian demand function for good y.) Is y a normal good or an inferior good? (c) Derive the consumer's expenditure function, E (Px, Py, [7). ((1) Now suppose Px = $2, 1\Suppose that you own a 25 year old movie theater in Ashaka. It has 6 screens and a concession stand. Across town there is a 7 year old movie theater with 4 IMAX screens and 20 more regular screens. Your competitor's movie theater also has stadium seating for all screens and two concessions stands. Remember this is a small to mid-sized city with a small to moderate sized customer base. IMPORTANT: Make sure you answer all parts of each question! Please begin each question on a new paragraph or new page, and number your answers. 1. For each of the characteristics listed below (and detailed in Table 12.1 on page 392), evaluate the market for movies in Ashaka. You should clearly state your answer and provide a short statement to support your answer. a. Number of firms b. Product C. Barriers to entry 2. Now that you have looked at these characteristics in question 1, which market structure do you think best fits this example? Remember, none of the market structures will fit perfectly in this example. Which characteristics from your answer in #1 fit this market structure well? Which characteristics do not fit this market structure well? 3. Briefly describe the pricing strategies that perfectly competitive firms and monopolies use. What are the profit expectations for perfectly competitive and monopoly firms in the short-run and the long-run? 4. Do you think that your firm (the small theater) will have substantial pricing power based on the market structure selected in #2 and the characteristics that you described in #1? What are your short-run and long-run profit expectations based on your answer in #1 and #2