Q1.

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. 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.

Q2

Suppose a representative consumer has preferenee mmr consumption {e} and leisure (1]. Her indif ference curve is described by the following function: u= 2e+ where u is the utility level. Note that leisure and consumption goods are perfect substitutes under this preference. Her endowment over time is given by h =1. Her wage rate is 2 in terms ofoonsurnption goods. Suppose he has 2 units of dividend brooms from rm and 1 unit of lump tea: from the gmemment. (1} Write down the budget constraint for this consumer. [It] points} [2} Graph the budget constraint with leisure on the xaxis and consumption on the :raxis. Label the x and 3r intersections. What's the slope of the budget constraint? What's the economic meaning of this slope? [15 points) (3} Plot three indierenoe curves when the utility level is u = 1, 2.3 respectively. [Put them on the same graph of the budget constraint}. What are the slopw of these three indilferenoe curves\"? What's the economic meaning of these slopes? [15 points} (4] 1il'li'hat's the consumer's optimal choice over consumption and leisure? [15 points] [5] Under this preference, is more preferred to 1%? Does this preference satisfy the diminishing rate of substitution property? [15 points) Suppose a representative consumer has preference over consumption {c} and leisure {l}. Her indifference curve is described by the following function: LI = 2c + l where u is the utility level. Note that leisure and consumption goods are perfect substitutes under this preference