Solve the following questions
3. Exchange rates are expressed in per Euro terms. (15 points) a. (8) Based on the data in the table below, calculate the trade weighted exchange rate for the Eurozone countries for 2011 based on a 2000 year base of 100. How much has it changed since 2000? b. (7) Assuming that the price index for Europe in 2000 was 90.2 and that it presently stands at 111.5, how much has the real exchange rate between the USA and Europe changed between 2000 and 2011. Country Share of Exchange Rate | Exchange Rate | Price Index Price Index Trade 2000 2011 2000 2011 China 25% 7.94 9.44 NA NA Japan 25% 102 56 121.95 NA NA USA 50% 0.96 1.44 171.3 221.3 4. Model 1 (The Neoclassical Model) seems to provide a view of money that contradicts that posed at the top of this exam. Furthermore, many economists and policy makers argue that money has powerful effects on output and employment Explain why these views contradict the predictions of Model 1. Briefly discuss why it is difficult to predict the effects of expansionary monetary policy on the real economy. 5. On Friday, April 131, 2011, the Bureau of Labor Statistics reported that the unemployment rate had dropped to 8.8%, that the change in non-farm payroll employment was 216,000, that the labor force participation rate was 64.2%, and that the employment ratio was 58.5%. If you were a journalist asked to explain what this information says about the labor market, how would you do so? Be sure to put these indicators in historical context. 6. What role do interest rates play in Model 1? Be sure to distinguish between real and nominal interest rates as well as how they are determined. Explain the connection between interest rates and crowding out.1 . Use the following version of Model 1 to address parts a -e. Show your work W/P = d0 -d1*L + d2*K + d3*RM (1) Endogenous Exogenous Ls = so + $1*(W/P) - $2*T (2) W. P. L, LS, Y K, RM, T L = LS (3) AD, C, I M, K. G Y = 100*L 7K3 (4) AD = k*M/P (5) AD = C +1+G (6) C =.8* (Y-T) Y = AD (8) a. (6) Determine the reduced form equation for employment b. (4) Determine the reduced form equation for output (income). C. (4) Identify the Aggregate Supply curve. d. (8) In this model, how would an earthquake that destroyed a major nuclear power plant affect employment, output, real wages, and the price level? e. (8) In this model, determine how a fall in taxes (T) would affect employment, output, real wages, and the price level. Year Cell Phones Computers Cars Price Quantity Price Quantity Price Quantity 1 100 100 1000 50 5000 10 2 80 150 600 100 8000 12 2 Use the data in the table below to answer parts a - c. (15 points) a. Use a CPI type index (Laspeyres) to determine how much prices have changed from year 1 to year 2. b. Use a GDP current weight deflator index (Paasche) to determine how much prices have changed from year 1 to year 2 c. Use a chain weighted index to determine how much prices have changed from year 1 to year 2.3. The data in the table below describe key features of the trade relations between lCl'tirta and three of its major trading partners. Use these data to answer parts a. and b. Exchange rates are expressed in Chinese Yuan or Renminbi terms. Country Share of ExchangeRate Exchange Rate Price Index Price Index Trade 2005 2012 2005 {CPI} 2012 {CPI} m 10.15 RME'Em 3-26 RMBfEum 12-9YBIL'RMB 12-3 YBIU'RMB 3-28 RMB 6-30 RMBISS ms- a. Calculate the trade weighted exchange rate for China for 2012, assuming that the toes rate equals 100. How much has it changed since 2005'! [Be carqii to use appropriate units in your micuintiom-J 1:. Assume that China's price index in 2005 was 100 and that for 2012. it stands at 130. How has the real exchange rate between the [LS & China changed between 2005 and 2012'? c. Explain why the real exchange rate represents terms of trade. 4. (in a number of occasions, LLS. Senators have proposed levying a tariff on Chinese imports. Assume that the 1.1.5. is a large open economy. Carefully illustrate and discuss the potential effects of such a policy on the real exchange rate. net exports. and domestic investment. How would the results change if the [1.5. were a small open economy? 1. Use the following version of Model I to address parts a -e. W/P = d0 -dl*L + d2*K + d3*RM (1) Endogenous Exogenous L' = so + $1*(W/P) + $2*EITC (2) W, P, L, L', Y K.RM,EITC L = L (3) AD, C, I, T M, K. G Y = 100*L-7K-3 (4) AD = k*M/P (5) EITC=earned income tax credit AD =C+I+G (6) C=.8* (Y-T) (7) T=.25*Y (8) Y = AD (9) a. Determine the reduced form equation for employment. b. Determine the reduced form equation for output (income). c. Identify the Aggregate Supply curve. d. Use the results from a, b, and c to determine how an increase in the earned income tax credit (EITC-subsidies to low income workers) would affect employment, output, real wages, and the price level. e. Use the results from a, b, and c to determine how a rise in governmental purchases (G) would affect employment, output, real wages, and the price level. 2. Use the data in the table below to represent a household's consumption and income for each given year. a. Use a fixed weight index (Laspeyres) to determine how much income has changed for this household from year 1 to year 2. b. Use a current weight index (Paasche) to determine how much income has changed from year 1 to year 2. c. Use a chain weighted index to determine how much income has changed between the two years. Year Steak (pounds) Eggs (dozen) Beer (pints) Price Quantity Price Quantity Price Quantity $10 100 $1.30 500 $3.00 100 2 $20 80 $1.50 1000 $5.00 120
