Problem 1: The following excerpts are taken from President Obama's "Remarks by the President in the State of the Union Address" from February 2013.* The chosen excerpts are also a State of U6301 up to this point. "But we gather here knowing that there are millions of Americans whose hard work and dedication have not yet been rewarded. Our economy is adding jobs - but too many people still can't find full-time employment. Corporate profits have skyrocketed to all- time highs - but for more than a decade, wages and incomes have barely budged." a) Using the income approach to measuring economic activity, can wages and incomes stay constant if all corporate profits increase? Explain. (Hint: What does it imply about the distribution of profits across firms?) "Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion - mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances." b) Explain why spending cuts and tax increases reduce the deficit. c) Does President Obama refer to the government deficit or the current account deficit? Could a tax increase cause the deficit to increase? Explain. "Yes, the biggest driver of our long-term debt is the rising cost of health care for an aging population. And those of us who care deeply about programs like Medicare must embrace the need for modest reforms - otherwise, our retirement programs will crowd out the investments we need for our children, and jeopardize the promise of a secure retirement for future generations." d) Explain why an increase in government spending on retirement programs may crowd out the investment for future generations.e) f) g) 11) Discuss the effects of global warming on GDP, consumption, saving, investment and the current account balance under the assumptions that i) the U.S. is a small open economy running a current account decit and ii) global warming is a permanent negative productivity shock. Now assume now that the U.S. is a large open economy and that all countries together are negatively affected. Can you clearly predict the effects on the international real interest rate and the current account balances? \"We 'll give new tax credits to businesses that hire and invest.\" Discuss the effects of tax credits on businesses that hire on employment, the wage rms pay, w, and the wage that workers receive, ww, using the labor market diagram. (Hint: Note that the cut in taxes on rms has the the same economic effects of a cut in taxes on the income of workers. Recall from last semester that the economic incidence of a tax is not related to the legal/statutory incidence of the tax.) \"Let's also make sure that a high school diploma puts our kids on a path to a good job. Right now, countries like Germany focus on graduating their high school students with the equivalent of a technical degree from one of our community colleges. So those German kids, they 're ready for a job when they graduate high school. They've been trained for the jobs that are there. Now at schools like PTech in Brooklyn, a collab- oration between New York Public Schools and City University of New York and IBM, students will graduate with a high school diploma and an associate 's degree in computers or engineering. We need to give every American student opportunities like this.\" Discuss the effects of introducing these training programs using the graph that illustrates the relative demand for skilled workers and the relative supply of skilled workers. Could this policy also benet those who do not achieve a technical degree? Explain. \"Through tact credits, grants and better loans, we've made college more affordable for millions of students and families over the last few years. But taapayers can't keep on subsidizing higher and higher and higher costs for higher education. Colleges must do their part to keep costs down, and it's our job to make sure that they do.\" i) What is the effect of government education subsidies on the elasticity of the relative supply of skilled workers? j) Discuss the effects of facilitating immigration of the skilled using the graph that illustrates the relative demand for skilled workers and the relative supply of skilled workers. Could this policy also benet the unskilled? Explain. \"America's energy sector is just one part of an aging infrastructure badly in need of repair. Ask any CEO where they'd rather locate and hire a country with deteriorating roads and bridges, or one with high-speed rail and Internet; high- tech schools, self-healing power grids. The CEO of Siemens America a company that brought hundreds of new jobs to North Carolina said that if we upgrade our infrastructure, they'll bring even more jobs. And that's the attitude of a lot of companies all around the world. And I know you want these job-creating projects in your district. I 'ue seen all those ribbon- cuttings.\" k) Does President Obama imply that the increase in infrastructure would cause an increase or a decrease in the cost of doing business? 1) Could a scally conservative economist argue that the greater government spending would increase rather than reduce the cost of doing business in the U.S.? Explain. (Hint: Consider the government's IBC and the eects of spending on national saving and the real interest rate assuming that the U.S. is a large open economy.)