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UESTION 10

Consider the monthly data, including the estimates for March 2020, and the information in the articles. Which of the following is the best analysis of and prediction for the money market in the U.S. economy for the next few months?

a.

Shortages are causing panic buying by households, which has increased money demand. Lenders are increasing their lending to keep up with the needs of households and businesses. Money demand is increasing more than money supply.

b.

Shortages are causing panic buying by households, which has increased money demand . Lenders are increasing their lending to keep up with the needs of households and businesses. Money supply is increasing more than money demand.

c.

Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money demand is decreasing more than money supply.

d.

Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money supply is decreasing more than money demand.

3 points

QUESTION 11

Which of the following is the best analysis of and prediction for inflation during the second quarter, April, May and June?

a.

If input shortages and firm closings are the dominant factor, inflation is likely to rise. If falling wages and restrictions on shopping are dominant, inflation is likely to fall.

b.

If input shortages and firm closings are the dominant factor, inflation is likely to fall. If falling wages and restrictions on shopping are dominant, inflation is likely to rise.

2 points

QUESTION 12

Consider the articles and the estimated data for March. What data should we expect for the second quarter, April, May and June?

a.

A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.

b.

A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.

c.

A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.

d.

A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.

3 points

QUESTION 13

Read the Washington Post article from March 23, about the Fed's policy actions. Which of the following is the best analysis of the Fed's policies?

a.

The Fed is buying many kinds of bonds. This will increase the money supply, reduce interest rates, and increase borrowing by businesses.

b.

The Fed is buying many kinds of bonds. This will decrease the money supply, reduce interest rates, and increase borrowing by businesses.

c.

The Fed is buying many kinds of bonds. This will decrease the money supply, raise interest rates, and increase lending by banks.

d.

The Fed is buying many kinds of bonds. This will increase the money supply, raise interest rates, and increase lending by banks.

2 points

QUESTION 14

Consider the articles and the estimated data for March. The Federal Reserve's monetary policy in March (and going forward) is

a.

Expansionary and pro-cyclical.

b.

Expansionary and counter-cyclical.

c.

Contractionary and and pro-cyclical.

d.

Contractionary and counter-cyclical.

2 points

QUESTION 15

Which of the following best uses the consumption function to analyze the effects of the Coronavirus on households?

a.

Closing businesses reduces employment and wages, so autonomous consumption declines. Social isolation prevents shopping, so income declines. Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.

b.

Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so autonomous consumption declines . Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.

c.

Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so the marginal propensity to consume declines. Stock values fall to reduce wealth, so autonomous consumption declines. Overall consumption spending declines.

d.

Closing businesses reduces employment and wages, so the marginal propensity to consume declines. Social isolation prevents shopping, so autonomous consumption declines. Stock values fall to reduce wealth, so incomes decline. Overall consumption spending declines.

2 points

QUESTION 16

Consider the consumption function, and the article about potential Federal fiscal policy. The proposed policy includes a payment of $1,200 per adult and $500 per child. These would be checks sent to taxpayers and other U.S. residents. Which of the following is the best analysis of this policy, using the consumption function?

a.

This policy would be an increase in autonomous consumption (A), intended to increase consumption spending.

b.

This policy would be an increase in the marginal propensity to consume (b), intended to increase consumption spending.

c.

This policy would be an increase in taxes payments (T), intended to decrease consumption spending.

d.

This policy would be an increase in transfer payments (R), intended to increase consumption spending.

2 points

QUESTION 17

Consider the articles and the estimated data for March. The fiscal policies being debated by Congress are

a.

Expansionary and pro-cyclical.

b.

Expansionary and counter-cyclical.

c.

Contractionary and and pro-cyclical.

d.

Contractionary and counter-cyclical.

Question 2

?UESTION 10

Consider the monthly data, including the estimates for March 2020, and the information in the articles. Which of the following is the best analysis of and prediction for the money market in the U.S. economy for the next few months?

a.

Shortages are causing panic buying by households, which has increased money demand. Lenders are increasing their lending to keep up with the needs of households and businesses. Money demand is increasing more than money supply.

b.

Shortages are causing panic buying by households, which has increased money demand . Lenders are increasing their lending to keep up with the needs of households and businesses. Money supply is increasing more than money demand.

c.

Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money demand is decreasing more than money supply.

d.

Falling incomes and restrictions on shopping have decreased money demand. But people and businesses are withdrawing money from bank accounts, and lenders are uncertain or pessimistic about the risks of lending. Money supply is decreasing more than money demand.

3 points

QUESTION 11

Which of the following is the best analysis of and prediction for inflation during the second quarter, April, May and June?

a.

If input shortages and firm closings are the dominant factor, inflation is likely to rise. If falling wages and restrictions on shopping are dominant, inflation is likely to fall.

b.

If input shortages and firm closings are the dominant factor, inflation is likely to fall. If falling wages and restrictions on shopping are dominant, inflation is likely to rise.

2 points

QUESTION 12

Consider the articles and the estimated data for March. What data should we expect for the second quarter, April, May and June?

a.

A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.

b.

A large negative real GDP growth rate, a much higher unemployment rate, a higher interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.

c.

A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a more negative Federal budget balance, and a near zero federal funds rate.

d.

A small positive real GDP growth rate, a near constant unemployment rate, a lower interest rate spread, a less negative Federal budget balance, and a federal funds rate rising towards 1%.

3 points

QUESTION 13

Read the Washington Post article from March 23, about the Fed's policy actions. Which of the following is the best analysis of the Fed's policies?

a.

The Fed is buying many kinds of bonds. This will increase the money supply, reduce interest rates, and increase borrowing by businesses.

b.

The Fed is buying many kinds of bonds. This will decrease the money supply, reduce interest rates, and increase borrowing by businesses.

c.

The Fed is buying many kinds of bonds. This will decrease the money supply, raise interest rates, and increase lending by banks.

d.

The Fed is buying many kinds of bonds. This will increase the money supply, raise interest rates, and increase lending by banks.

2 points

QUESTION 14

Consider the articles and the estimated data for March. The Federal Reserve's monetary policy in March (and going forward) is

a.

Expansionary and pro-cyclical.

b.

Expansionary and counter-cyclical.

c.

Contractionary and and pro-cyclical.

d.

Contractionary and counter-cyclical.

2 points

QUESTION 15

Which of the following best uses the consumption function to analyze the effects of the Coronavirus on households?

a.

Closing businesses reduces employment and wages, so autonomous consumption declines. Social isolation prevents shopping, so income declines. Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.

b.

Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so autonomous consumption declines . Stock values fall to reduce wealth, so the marginal propensity to consume declines. Overall consumption spending declines.

c.

Closing businesses reduces employment and wages, so income declines. Social isolation prevents shopping, so the marginal propensity to consume declines. Stock values fall to reduce wealth, so autonomous consumption declines. Overall consumption spending declines.

d.

Closing businesses reduces employment and wages, so the marginal propensity to consume declines. Social isolation prevents shopping, so autonomous consumption declines. Stock values fall to reduce wealth, so incomes decline. Overall consumption spending declines.

2 points

QUESTION 16

Consider the consumption function, and the article about potential Federal fiscal policy. The proposed policy includes a payment of $1,200 per adult and $500 per child. These would be checks sent to taxpayers and other U.S. residents. Which of the following is the best analysis of this policy, using the consumption function?

a.

This policy would be an increase in autonomous consumption (A), intended to increase consumption spending.

b.

This policy would be an increase in the marginal propensity to consume (b), intended to increase consumption spending.

c.

This policy would be an increase in taxes payments (T), intended to decrease consumption spending.

d.

This policy would be an increase in transfer payments (R), intended to increase consumption spending.

2 points

QUESTION 17

Consider the articles and the estimated data for March. The fiscal policies being debated by Congress are

a.

Expansionary and pro-cyclical.

b.

Expansionary and counter-cyclical.

c.

Contractionary and and pro-cyclical.

d.

Contractionary and counter-cyclical.

Real-Time Data Analysis Exercise* Inflation rate (percent per year) 1.07 *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. In June 2015, the most recent month for which we have data, the Bureau of Labor Statistics reported an unemployment rate of 5.3 percent and an inflation rate of 0.2 percent. The graph to the right shows this information. The Congressional Budget Office says that the natural unemployment rate in June 2015 was 5.4 percent. 1. Draw the long-run Phillips curve and label it. 0.2 2. Draw a short-run Phillips curve that is consistent with the data provided and label it. 5.3 0.0- 3. Draw a point at the natural unemployment rate and expected inflation 3.0 4.0 5.0 6.0 7.0 8.0 rate and label it A. Unemployment rate (percentage of labor force) > > > Draw only the objects specified in the question.Question 4 We were all pretty relieved that Ali from our first prelim got such a simple consumption problem. Yet, we also realized that putting him into the Cobb-Douglas straightjacket missed some features of the story. Since the overall theme of the second prelim should be "We can do better!", let's also improve Ali's consumption model. As before, write Ia, It, I, 2 0 for the amounts of his consumption of almonds, toothpicks, and gifts, respectively. We assume for simplicity that these goods are infinitesimally divisible. Let I = (Ta, It, Ty). Instead of assuming a utility function of the Cobb-Douglas form, we assume now that his utility function is given by u(Ia, It, ly) = al(I. - b.) + 0In(x, - b.) + (1 - a -0) In(1, - b,) with a, 0, b; > 0, a + 0 0 for i E {a, t, g}. As before, his income or wealth is denoted by w > 0. Finally, we denote by Pa, Pt, P, > 0 the prices of almonds, toothpicks, and gifts, respectively, and let p = (Pa, Pt, Ps). a. Use the Kuhn-Tucker approach to derive step-by-step the Walrasian demand func- tion x(p, w). Verify also second-order conditions. b. Verify that the demand function is homogenous of degree zero and satisfies Walras' Law. c. Provide a verbal interpretation of this demand system. (It will be helpful to consider the demand system in its "expenditure form" by multiplying both sides of each demand equation by its respective price.) d. You would expect that the more almonds Ali eats, the more they get stuck in his teeth and the more toothpicks he purchases. In light of such considerations, does it make sense to assume Ali has the utility function above? (Consider changes in the demand for almonds and toothpicks caused by changes in the price of almonds and changes in the parameters b, and o, respectively.) e. Consider now a utility function given by i(I., It, I,) = (1. - ba)" (re - b;)(1, - by)'-are with a, 0, b; > 0, a + 0 0 for all i E {a, t, g}. How is this utility function related to the one given at the beginning of Question 4? f. Remember that when Professor Schipper interviewed Ali about how exactly he arrives at his optimal consumption bundle, Ali expressed ignorance about maxi- mizing utility subject to his budget constraint. Instead, he seemed to minimize his expenditure on consumption such that he reaches a certain level of utility. A smart undergraduate student walked by and claimed that this is clear evidence against the assumption of utility maximization in economics. Since Professor Schipper Page 5 of 6 likes Linear Expenditure Systems as much as Cobb-Douglas utility functions, he conveniently sent the student to you so that you can show him how expenditure minimization works. Again, use the Kuhn-Tucker approach to derive the Hicksian demand function but use the utility function in part e instead. Simplification: Let's not write our fingers to the bone. Assume from now on (for all parts g to () that Ali got rid of his girlfriend. Sure you must be sad about it but there is clearly a tradeoff between having a girlfriend and completing successfully and on time a prelim exam. Most important to Ali: No more gifts! Thus, we can consider now the case of two goods, almonds and toothpicks, only. Set 0 = 1 - a to economize on parameters. g. Derive the expenditure function. h. Show that the expenditure function is homogeneous of degree 1 in prices, strictly increasing in a as well as nondecreasing and concave in the price of each good taken separately. i. Derive Ali's indirect utility function using the expenditure function just derived. j. Verify that Ali satisfies Roy's identity with respect to almonds. k. Verify the (own price) Slutsky equation for the example of almonds