Section A.

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.

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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 in your own. 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.

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.

Section B.

1)

Nickel or Gold are examples of which 'Factor of Production'?

Select one:

a. Labour

b. Capital

c. Land

d. Enterprise

2)

What will cause the demand for a normal product to decrease?

Select one:

A. An increase in the price of a substitute product.

B. An increase in the price of a complementary product.

C. An increase in the size of the population.

D. The expectation by consumers that future prices will be higher.

E. An increase in income levels.

3)

How are exports and imports treated when determining GDP?

Select one:

A. Both exports and imports are added.

B. Only exports are considered.

C. Exports are subtracted, but imports are added.

D. Both exports and imports are subtracted.

E. Exports are added, but imports are subtracted.

4)

What can be concluded if depreciation is greater than gross investment?

Select one:

A. That net investment is positive.

B. That real GDP is rising but nominal GDP is remaining the same.

C. That net investment is negative.

D. That nominal GDP is rising but real GDP is remaining the same.

E. That the economy is expanding.

5)

Which of the following is false of frictional unemployment?

Select one:

A. It often involves people seeking "the right job" rather than "just a job."

B. It can be eliminated.

C. It is an inevitable part of a market economy.

D. It is a result of the time needed to match people seeking employment with job vacancies.

6)

Suppose there are 2 million unemployed workers seeking jobs. After a period of time, two hundred thousand of them become discouraged over their job prospects and stop looking for work. What will the effect of this on the unemployment rate?

Select one:

A. It will be unchanged.

B. It will increase.

C. It will fall.

D. It will increase in the short run but would eventually decline.

E. The question cannot be answered from this information.

7)

What does it mean to say that the economy is in a contractionary phase of the business cycle?

Select one:

A. That inflation is declining.

B. That the rate of growth of Real GDP is positive.

C. That the rate of growth of Real GDP is falling.

D. That Real GDP is increasing

E. That Real GDP is declining.

8)

"The aggregate quantity of goods and services produced by all sellers at various prices". Of what is this a definition?

Select one:

A. Potential GDP.

B. Aggregate expenditure.

C. Aggregate supply.

D. Aggregate demand.

9)

Which of the following will cause the aggregate demand curve to shift to the right?

Select one:

A. A decrease in the incomes of our major trading partners.

B. The discovery of new oil fields.

C. An increase in the exchange rate.

D. A decrease in the money supply.

E. A decrease in the interest rate.

10)

What economic term is described as the value of the next-best option that is given up when making a choice?

Select one:

a. Opportunity Cost

b. Scarcity

c. Law of Increasing Costs

d. Production Possibilities

e. Factors of Production

11)

Which of the following best describes a Command Economy (Communism)?

Select one:

a. Families decide to produce the goods and services that they need

b. A small group of leaders decide what the entire economy needs

c. Individuals make independent production decisions

d. A mix of different economic systems are used for production decisions

12)

Which of the following best describes a 'Competition Economy' (Capitalism)?

Select one:

a. Families decide to produce the goods and services that they need

b. A small group of leaders decide what the entire economy needs

c. Individuals make independent production decisions

d. A mix of different economic systems are used for production decisions

13)

Which of the following is NOT a normative statement?

Select one:

a. The taxes on cigarettes are way too high

b. Lowering the tax on cigarettes would decrease the price at stores

c. It is wrong for the government to tax cigarettes

d. The Ford government is trying to mislead people about the taxes on cigarettes.

3..

5. Now suppose that instead of a luxury good, the consumer can chose between a consumption good c, and hours of work w. Here P: = $1, or: = 55D. and the consumer gets paid $2 for every hour of work they \"consume."r Further, assume work takes time and they can only consume at most 24 hours of work. Graph the consumption set with work on the '1" axis. What is the price of work: p\d. If after the tax the consumer consumes 3 units of the luxury good, how will the tax on the luxury good affect government revenue? If after the subsidy the consumer consumes 5 units of the consumption good, how will the subsidy affect government revenue? e. As discussed above, after the tax and subsidy have been implemented our consumer is consuming 3 units of the luxury good and 5 units of the consumption good. Suppose the growing US economy increases the consumer's income by $25. Graph the new budget constraint and write down the new budget constraint formula. Label where the constraint hits the axes. Assume that after the growth of the economy our consumer now consumes 5 units of the luxury good and 6 units of the consumption good. How has the growth in the economy affected government revenue? f. How would the increased income from the growing economy discussed above compare to the change in the budget constraint from an ad valorem sales subsidy of 10%? 5. Go back to the original budget constraint with P. = $1, , = $10, and m = $50. Imagine that the luxury goods did not only require money but also requires time to consume. This would be the case for luxury goods such as ski vacations. a. First assume each unit of a luxury good took 6 hours of time and a consumer only has at most 24 hours of time to spend. Graph the consumption set and label the axes. Graph both the budget constraint and the time constraint and label the points where they hit the X and Y axes. Shade the set of available bundles the consumer has to choose from. b. What if the luxury good took only 1 hour to consume. How would the choice set change from above? If this was the case, what would be an easy simplifying assumption to apply to this model?Objective: To give you experience solving budget constraint problems. To show how the budget constraint can be used to model different questions and applied to policy discussions. Imagine you are an economist working for the US Department of the Treasury. Part of your job is to predict how changes in tax policy affect government revenue and the typical consumer's wellbeing. For this exercise we will assume a hypothetical US consumer choses between two commodities: a general consumption good: c and a luxury good /. The luxury good is symbolic of any high end purchases consumers might buy such as Lamborghinis, yachts, concert tickets, etc.; whereas c represents necessities such as food, shelter, and clothing. 1. Graph the consumption set of a typical US consumer. Put the consumption good on the X axis and the luxury good on the Y axis. Label the axes. 2. Assume the price of a unit of the of the general consumption good is Pr = $1, the price for a unit of luxury good is P, = $10, and the hypothetical consumer's income is m = $50. Write out the equation for the budget constraint. Graph the budget line and the consumption set, labeling where the budget line hits the X and Y axes and the slope of the budget line. Shade the budget set. 3. Assuming the typical consumer spends all of their income, what is the opportunity cost in terms of the consumption good c for getting an additional unit of the luxury good /?6. Use the graphs below to answer the following questions: Graph (a) Graph (b) Graph (c) Y Y Y X B X X 01234 567 8910 01 234 56 7 8 910 01234567 8910 In graph (a), indicate the nature of the slope and the value of the slope at point A. O A. Negative then positive; slope at point A is O) B. Positive then negative; slope at point A is undefined. undefined O C. Positive then negative; slope at point A O D. Negative then positive; slope at point A equals 0. equals 0. In graph (b), indicate the nature of the slope and the value of the slope at point B. O A. Positive then negative; slope at point B O B. Negative then positive; slope at point B equals 0. equals 0. O C. Positive then negative; slope at point B is O) D. Negative then positive; slope at point B is undefined. undefined. In graph (c), the slope is (1) and (2) as X increases. (1) O negative (2) O decreasing positive O increasing