Problems 1. Given the following hypothetical budget data for "Budgetland," fill in the "total spending" column (which, for the time being, is just military and civilian spending). Then calculate the surplus/deficit for each year and, based on this calculation, the existing debt at the start of the next year. Comment. Tax Military Civilian Total Surplus or Existing Year Revenue Spending Spending Spending Deficit Debt 2015 7.0 4.0 4.0 100.0 2016 7.2 4.0 4.1 2017 7.2 4.2 4.3 2018 7.3 4.0 4.5 2019 7.0 3.7 4.7 2020 7.1 3.5 4.9 2021 6.8 3.6 5.1 2022 7.0 3.7 5.3 2023 7.2 3.8 5.5 2024 7.3 3.9 5.7 2025 7.4 4.0 5.9 2. Now expand this problem by adding a column that includes Budgetland's interest payments (another component of total spending). For now, assume a constant interest rate of 2 percent, so that interest payment for the first year equals .02 times the existing debt of 100.0. (Interest payments for subsequent years will be based on updated debt numbers). Notice that the debt numbers will themselves change now since the interest payments will add to the annual deficit. Comment on what you observe. 3. Now let's compare Budgetland's debt to its GDP. Add two columns-GDP, and "debt- GDP ratio." Let GDP in the year 2015 equal 200.0, and assume that it grows by 3 percent annually. Then calculate the debt-GDP ratio for each year. What trend do you notice? 4. Finally, redo the entire exercise assuming an interest rate of 5 percent instead of 2 percent. Then try it assuming an interest rate of 10 percent. What differences do you notice? Prepare a graph that shows the Budgetland's debt-GDP ratio under each of the three interest rate assumptions over the period.21. Why is the AD curve downward sloping? 22. What variables would cause a shift in the AD curve? 23. What are the five regions of the aggregate supply curve diagram? 24. Why is the AS curve gently rising in the full employment range? 25. Why is the AS curve flat, rather than upward sloping, in the recession range? 26. Why is there no immediate response in the AS curve to an increase in inflation? 27. What factors would cause a shift in the AS curve (and in some cases, the maximum output)? 28. What is the classical school's rationale for the slope of the AS curve? Chapter 13 - Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together 3 29. One of the simplifying assumptions in the macroeconomic AD/AS model is that only the level of spending is important, not its composition. What does the "composition of spending" entail? 30. (In appendix) Is the difference between the classical school and the Keynesians only a matter of time (i.e. the time of the adjustment to the long run full employment equilibrium) or is there a more fundamental difference in world view between the two approaches? Problems 1. Fill in the missing labels on the graph below: B H E D F H:Problems 1. Identify whether each of the following represents an inflow or an outflow from either the current account or the financial account: a. A Mexican banker purchases a United States government bond. b. A U.S. corporation invests in a Chinese facility. c. A U.S. corporation collects profits earned in Mexico and sends the money back to United States. d. An exporter in the U.S. receives payment for goods shipped to France. e. The U.S. government pays interest to bondholders in China 2. Exchange rates a. Suppose under a flexible exchange system, there is a drop in the demand for the U.S. dollar, as investors find higher returns in countries that use the Euro. Use a graph of the foreign exchange market, with the price of dollars expressed as "Euros per dollar" to illustrate the impact on the value of the dollar. b. Suppose that under a fixed (or managed) exchange system, China strives to keep the value of its Yuan artificially low. Illustrate with a graph of the foreign exchange market, how China's Central Bank can do this.2. Suppose the Fed conducts an expansionary monetary policy. (Assume an economy with low inflation and a stable banking system). Illustrate graphically the effects of this expansionary monetary policy on: a) The market for federal funds b) Intended investment spending c) Aggregate Expenditure and output d) Suppose now that firms become pessimistic as they expect a fall in GDP and a fall in sales, such that the expansionary policy leaves no effect on aggregate expenditure and output. Illustrate graphically by re-doing the graphs in a-c above.1. When an economy has experienced increases in aggregate levels of production and income, and its real GDP has risen by some percentage from one year to the next, it has experienced economic 2. When an economy has moved people from a situation of poverty to material plenty through investments in productive capacity and changes in the organization of work, it has experienced economic 3. The approach defines development in terms of the opportunities that people have to pursue important aspects of well-being, such as being healthy and having access to education. 4. The process of social and economic change that began in 18" century England and resulted in a huge increase in output per worker is called the 5. The theory that under-development in developing countries is caused by unequal trade relations between developing and developed countries is called 6. Self-reinforcing patterns of high savings, investment, productivity growth, and economic expansion, such as experienced by Japan and other "Asian tigers," are called 7. The idea that poor countries are on a path to "catch up" with the rich countries due to underlying economic forces, is called 8. Aid or loans given by the government of a rich country like the U.S. to a poor country like Ethiopia is called development assistance. 9. Aid or loans given by international institutions such as the World Bank, IMF, or United Nations Development Program (UNDP) is called development assistance. Chapter 17 - How Economies Grow and Develop 2 10. Suppose a U.S. company builds a factory in China to produce electronic goods. When such a private company acquires or creates assets for their own business operations in a foreign country, it is engaging in investment. True or False 11. Economic growth will always lead to inflation. 12. The income threshold below which members of a population are classified as poor is called poverty line. 13. Additions to a nation's capital stock will automatically lead to economic growth. 14. History shows that having plentiful resources of arable land, energy, and/or minerals is a requirement for a country to have strong economic growth and development. 15. A system of private property rights is essential for economic growth. 16. Economic growth is a necessary condition for human development. 17. The system of administrative capitalism is characterized by private corporate ownership and a substantial reliance on public administration as a mode of coordination.18. Explain the difference between economic growth and economic development. 19. Given data on growth of real GDP and the growth of population, how can growth in real GDP per capita be calculated? 20. List seven factors that can promote economic growth and development. Are these factors requirements for achieving economic growth? 21. Explain the idea of convergence. 22. Explain how inflow of remittances has affected development prospects for migrant- sending countries. 23. What kinds of institutions are beneficial for promoting economic growth and development? 24. Why have the net official flows from multilateral agencies turned negative in recent years? 25. Is China more "developed" than India? Explain. Chapter 17 -How Economies Grow and Develop 4 Problems 1. Suppose the following data for the fictitious country Growland: 2016 2017 Real GDP (in 2009 U.S. dollars) 286.9 billion 301.3 billion Population 220.5 million 223.0 million a Calculate the growth in real GDP between 2016 and 2017. b. Calculate the GDP per capita for 2016 and 2017. (Note that GDP is measured in billions, while population is measured in millions. c. Calculate the population growth rate between 2016 and 2017. d. Calculate the growth rate of GDP per capita