Showyourwork.

Answer the questions.

In 2016, a country's GDP is $214.8 billion. If the economy experiences 4% economic growth over each of the next two years, what will the be the value of the country's real GDP?

You have been hired by a country's government to evaluate the long-run impact of the following. Describe the impact of each and include any relevant diagrams to illustrate your answers.

A proposal to exempt savings from all taxes. How will this affect the equilibrium in the loanable funds market?

An increase in income taxes. How will this affect the equilibrium in the labor market and the value of real GDP?

The Fed buys $100,000 in bonds from Warren Buffett. Warren takes the cash he receives from the Fed and deposits it in the First National Bank of Omaha. Assume that the reserve ratio is 20% and that no one holds cash. (Give numerical answers.)

What is the value of the money multiplier?

Show the effect of this transaction on the balance sheet of the First National Bank of Omaha. Assume the bank has had

time to make any desired adjustments to its balance sheet after receiving the deposit.

What will be the change in the M1 money supply that will eventually result from the Fed's open market purchase.

Suppose that the consumption function is given by

C = 200 + 0.75(Y-T).

The investment function is I = 200 - 25r.

Government purchases and taxes are both 100.

The money demand function is (M/P)d = Y - 100r.

The money supply is 1,000 and the price level P is.(a)Derive the equation for the IS curve.

(b)Derive the equation for the LM curve

(c)Find the equilibrium interest rate r and the equilibrium level of income Y.

1.Show the effect of the following on the rate of interest and output using the IS-LM model:

i)A decrease in government spending

ii)An increase in taxes

iii)A decrease in money supply

2.Consider the following shocks. Show the effect of each on the rate of interest and output using the following steps.

(a)Does the shock shift the IS curve or the LM curve?

(b)In which direction does the curve shift?

(c)As a consequence, how does the rate of interest change? How does output level change? Use a graph to illustrate this in each case.

i)A stock market crash lowers households' wealth.

ii)Businesses become more pessimistic about future earnings.

iii)Consumer confidence in the state of the economy falls.

iv)A wave of credit card fraud increases demand for money.

v)More ATMs reduce money demand.

vi)The Internet reduces money demand.

vii) There is a large cut in defense expenditure.

viii)Oil prices rise dramatically.

ix)The Fed increases money supply.

x)A new bestseller convinces people to save more.

3.Suppose Congress wishes to reduce the budget deficit by reducing government spending.Use the IS-LM model to analyze its impact on output and interest rates. How can the Fed keep the economy from falling into a recession? (Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, and the terminal equilibrium values.)

4.Suppose that the government wants to increase output while keeping the interest rate constant. What combination of fiscal and monetary policy should it pursue? Use IS-LM graphs to illustrate your answer.

5.Consider the impact of each of the following on the AD-curve. Using the AD-AS analysis, show the resulting effect on P and Y in either of the two cases: (a) SRAS is horizontal (b) SRAS is upward-sloping.

i)An increase in government purchases (G).

ii)An increase in transfer payments (TR).

iii)An increase in taxes (TA).

iv)An increase in money supply (Ms)

The Federal Reserve Bank of St Louis provides an online tool called FRED GRAPH (http://research.stlouisfed.org/fred2/fredgraph) that prepares customized graphs for hundreds of interesting economic data series. You can search for a data series by using the "Add Series" box on the page, or clicking on "Browse Series". Once you have added a series to the graph, you can customize it by clicking "Edit Graph" - using this feature, you can change many aspects of the series you have selected including the date range and units displayed.

Using FRED GRAPH, plot the data for 5 of the following economic variables from January 1970 to the present day:

1.GDP

2.Unemployment rate

3.Nonfarm payroll employment

4.Building permits

5.Labor force participation rate by gender - on the same graph.

6.GDP deflator

7.Per capita personal income

8.Average Weekly Hours of Production and Nonsupervisory Employees: Manufacturing

You can plot these indicators on the same graph or different graphs. If you plot them together, make sure you choose the units so that all the graphs are readable.

FRED GRAPH should automatically show shaded areas representing the recessions from 1970 to the present.

NOTE:

1.Please do not ask for assistance in finding the data series or using FRED GRAPH, as the purpose of the exercise is to cultivate skills in identifying data series and graphing.

2.You can use data at the state or national level for these indicators. Pick whichever level you find interesting (but note that you may not find many data series at the state level).

1.For a certain economy in 2005, GDP was $2,000; investment was $400; government purchases were $300;and net exports were $70. Calculate consumption.

2.Suppose in a giver year that:

GDP = $5,000

C = $3,000.

G = I and IM > EX = $200.

Calculate government purchases (G)

3.Suppose the value of imports is 80% of the value of exports.

Consumption, investment, and government purchases add up to $5,000.

The market value of all final goods and services produced within the economy is $5,500.

How much does the economy export?

4.Suppose government purchases (G) exceed investment by $2,000; and investment is 1/6 of GDP. Consumption equals 1/2 of GDP; and the economy's imports exceed its exports by $500. Calculate GDP.

5. a). Consider an investor who must decide how much of his initial wealth w to put into a risky asset. The asset has a rate of return drawn from a finite set, r, / 1.../, occurring with probability p, respectively. Let B be the amount of wealth invested in the asset. Assume initial wealth w is "large" (so that the optimal value of B is less than w). Let the utility of wealth be v(m) and note final wealth in state / is mew+br. Show that a risk-averse individual will invest some amount in the risky asset. b). Show that if an investor has decreasing absolute risk aversion, he will buy more of the good as his wealth increases.Problem 2. Investor A has a square root utility function (i.e., U(W) = VW), whereas Investor B has a logarithmic utility function (i.e., U(W) = In W). Both investors have initial wealth Wo = $1, 000 and must decide how much how much to invest in a bond and how much to invest in a stock. The current (t = 0) prices of the bond and stock are Bo and So respectively. Both investors expect to receive income from selling these securities at their t = 1 prices, which are B, for the bond and S, for the stock. Since the bond is riskless, its t = 1 price is known with certainty to be B1 = Bo(1+r), where r is the riskless rate of interest. The price of the stock at t = 1 can be high or low; i.e., it will be So(1+s) with probability .6 and it will be So(1-s) with probability .4. Furthermore, assume that r = .02 and s = .12. A. How much (in dollars and percentages) of Investor A's initial wealth should be invested in the stock and in the bond? B. How much (in dollars and percentages) of Investor B's initial wealth should be invested in the stock and in the bond? C. Who is more risk averse - Investor A or Investor B? Explain why