Set 1 - Winter 2017 Macro Due 12/13/2017. Upload via ELMS. 1. Use the FRED macro database (http://research.stlouisfed.org/fred2) to download GDP, Consumption, Investment, and the Unemployment rate. FRED series codes for the series are GDPC96 (GDP), PCECC96 (Consumption), GPDIC96 (Investment), and UNRATE (Unemployment). Download the latest vintage of data, and keep only the time series from 1949q4 to 2015q4. For everything except unemployment, find the annualized growth rate using the following formula (in Excel or whatever else you prefer): = 1 4 1 or 4 [ln( ) ln(1 )] Note you will only be able to compute growth rates from 1950q1 onwards. Since this is quarterly data, the exponent \"4\" annualizes the growth rate, telling us what growth would be if this quarter's growth was repeated for a whole year (4 times). For the unemployment rate, download the data at a quarterly frequency by taking average of months in the quarter. You can do this on your own or by clicking on the orange \"Edit Graph\" button at the top right and using the \"Modify Frequency\" and \"Aggregation method\" drop-down options. Once you've done all that, answer the following questions: a. What is the average growth rate of GDP, PCE, and Investment over this sample period? What is the standard deviation? Which series is the most volatile? b. What is the average unemployment rate over this period? What is the standard deviation? c. Compare average GDP, PCE, and Investment growth from 2010 to 2015 to average GDP growth from 2001 to 2007 and describe if growth in these variables appears to have recovered to pre-recession growth rates. d. Now take a look at a graph of the level of GDP, PCE, and Investment over the full sample period back to 1950 and consider the trend line you would have drawn in 2005 (you do not actually have to compute a trend, just do this qualitatively). Describe whether it appears the level of each variable has recovered to the level you imagine it would have been at based on your trend line. In one sentence, evaluate what GDP (and PCE/Investment) tells us about whether the economy is at, below, or above its potential. e. Now compare the level of the unemployment rate at the end of 2015 to what it was before the recession began. In one sentence, evaluate what the unemployment rate tells us about whether the economy is at, below, or above its natural unemployment rate. 2. For this question, you will have to use information from the Employment Situation Report from the BLS. (Note, the November report will be released on 12/8 and will include November data along with revisions to October and September estimates. In this question, I will ask you to analyze data from earlier this year that is no longer subject to revision. You can find historical employment data, either through BLS's data tools page, FRED, or another data aggregator. a. What were total nonfarm payroll gains in August 2017? Which survey does this statistic come from (household survey/CPS or establishment survey/CES)? b. What was the unemployment rate and labor force participation rate in August 2017? Compared to the beginning of 2017, how have these two variables moved? What do these moves tell us about the health of the labor market? c. Another useful statistic is the employment to population ratio (sometimes referred to as the \"e-pop ratio\"), which is defined as the number of \"employed\" people divided by the total population of the country (not the labor force). Using the definitions of the unemployment rate and labor force participation rate from class, show how the e-pop ratio can be written as a function of only the unemployment rate and LFPR. Check that your equation relating these variables holds for the August 2017 employment data. d. What is one additional statistic (other than the U3 unemployment rate, LFPR, and e-pop ratio) that is published by BLS using data from the Household Survey? What does this statistic measure (find the definition)? What does it tell you about the health of the labor market right now? You may find it useful to check out one of the official press releases to answer this question: https://www.bls.gov/bls/news-release/empsit.htm#2017 3. What is the effect on GDP in 2015 of the following? What component(s) of expenditures is (are) affected? a. A house in DC is renting for $2200/month from January to March. On April 1, the house is sold by the landlord to the tenant for $700k (ignore mortgage, brokerage fees, etc). The former tenant continues to occupy the house from April through December. Assume the going rate of rent does not change over the year. b. Ford imports $4k of parts from a parts manufacturer in Canada to build $100k worth of F150 trucks. Of those, $70k are sold to domestic consumers, $20k are exported to Canada, and $10k remain unsold at the end of the year at a local Ford dealer. c. The government pays $5 billion in Social Security. d. The government pays $10 billion to repair highways across the country. e. I find the recipe to my favorite dish at a local restaurant online. I purchase the ingredients and cook the dish for me and some friends. The dinner would have cost $200 for all of us if we had gone out, but we enjoy it for only $40 worth of groceries I purchase at Safeway. 4. A production function is a mathematical relation between a firm or country's inputs (capital and labor) and outputs. We will use the Cobb-Douglas Production Function = 1 Where is output (GDP or national income), is capital, and is labor (number of workers). a. Show the production function can be written as ln() = ln() + (1 )ln(). [Use properties of logs discussed in Lecture 1] b. Use your answer for part a and the relationship between logs and growth rates discussed in Lecture 1 to show that find the growth rate of if = 0.3, grows at 2%, and grows at 1%. c. Find the marginal product of capital and labor by taking the derivative of with respect to and . d. Check that = + . This will be handy when we talk about firm optimization behavior. 5. Consider a consumer utility function over consumption and leisure: (, ) = 1+ 1 + where is consumption, = is labor supply, and is leisure time. Notice that the utility function is written in terms of and . a. Write down the budget constraint using the amount of time available , the wage , consumption and labor supply . Do not write it in terms of leisure! b. Write down the 3 variables the consumer gets to choose. Some of these are determined by others. Your choices are: , , , , , and . c. Solve for labor supply. [Hint: Eliminate consumption from the utility function and then take the derivative with respect to labor supply, ]. d. What values of are consistent with a larger substitution effect than income effect? [Hint: What would the slope of labor supply be if the substitution effect dominated?]