Task O4.

The unemployment rate in April 2020 was 14.7%, while in March 2020 was 4.4%. What is your best estimate for the real output growth rate in this period? Assume the US real output was growing at its long rate of 3% until March 2020. Assuming inflation stayed at the Fed's target rate of 2% during this period, how should the Fed react to this according to the Taylor rule? Assume that the equilibrium real interest rate is 2%. Can the nominal interest rate implied by the Taylor be implemented by the Fed? Explain it carefully.

Task 05.

1. (4 pts.) Briefly define each of the components of Y = C + I + G + NX and give an example for each category of expenditure:

(3 pts.) Do economists prefer Nominal GDP or Real GDP as the best measure economic activity? Why?

(3 pts.) Your bank pays you 5% on your savings and the inflation rate is 2%. What is your real interest rate? Does this represent an increase or decrease in the purchasing power of your savings?

(4 pts.) Why is productivity important for determining a country's average income per person?

(3 pts.) What is the primary function the financial system serves in our economy?

(4 pts.) Identify each of the following acts as either saving (S) or investment (I):

a. b.

c. d.

7. (4 pts.)

_____ John uses some of his income to buy government bonds.

_____ google.com uses the funds it generated by selling new shares of stock to build a research and development center.

_____ Jane uses some of her income to buy stock in a major corporation.

_____ Walmart uses the funds it raised by issuing bonds to build a new regional warehouse.

The equation below represents National Saving in a closed economy: S = (Y-C-T) + (T-G)

Define each of the variables; also, give the names of the terms for the two expressions in brackets.

8. (5 pts.) The GDP for a country was $18 trillion in 2020; National Saving was $2.2 trillion; government tax revenue was $3.2 trillion; and Public Saving was $ 0.5 trillion. What was the amount of Private Saving in 2020? What was the amount of government expenditures (G)?

9. (5 pts.) Show on the axes below how the presence of trade unions can impact the structural rate of unemployment in a country:

Wage

(3 pts.) Considering the process of fractional reserve banking, which reserve ratio would allow the smallest ultimate impact on the money supply, 17% or 6%? Why?

(4 pts.) An initial $3 billion increase in the money supply by the Federal Reserve resulted in an overall increase of $18 billion in the money supply.

What is the size of money multiplier?

What is the reserve ratio %?

Quantity of Labor

12.

(3 pts.) What is the method the Fed uses most frequently to change the money supply?

(4 pts.) Describe how this process alters the money supply:

13.

a. (3 pts.) Define each of the variables in the following equation: M V = P Y

b. (4 pts.) Applying the Quantity Equation and assuming that velocity is constant, what will be the rate of inflation if real GDP grows 4.5% in a given year and the money supply only increases 2.2%?

14. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if a new tax increase on dividend income from stocks incentivizes people to save less.

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

15. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if China experienced an unexpectedly large crop of soybean one year and so decided to import less soybean from the United States (ie. US exports of soybean decreased significantly).

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

16.

a. (3 pts.) Draw the Model of Aggregate Demand and Aggregate Supply you would use for

analyzing short and long-run fluctuations in the U.S. economy.

Price

(3 pts.) Use the graph to show the impact of the following event:

A large drop in the stock market causes businesses to become more pessimistic and reduce their level of investment.

(4 pts.) What happens to the price level in the short-run and long-run? (describe what happens in both cases)

(4 pts.) What happens to output in the short-run and long-run? (describe what happens in both cases)

Income, Output (Y)

e. (4 pts.) If the government wished to avoid the negative effects of a recession following the fall in investment, what could it do? How would this impact the AD-AS model? (just describe in words, there is no need to illustrate on the graph)

17. (4 pts.) If the initial impact on Aggregate Demand of a new airport security program amounts to $42 billion and the Marginal Propensity to Consume is 0.75, what would be the total impact on Aggregate Demand if a crowding out effect of $14 billion also occurs?

18.

a. (4 pts.) How does the Theory of Liquidity Preference explain the downward slope of the

AD curve?

b. (4 pts.) How does the Theory of Liquidity Preference explain why the AD curve shifts inward when the Fed decreases the money supply (M)?

19.

a. (3 pts.) Draw a graph showing the long-run and short-run Phillips curves (draw both

curves on the same axes below).

Inflation Rate

(3 pts.) Show a point on the short-run Phillips curve and indicate what would happen to that point in the short run if the Federal Government significantly increased its expenditures in an effort to stimulate the economy.

(4 pts.) If a newly invented mathematical algorithm was widely rolled out which can match unemployed people to their ideal job much more quickly, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(3 pts.) How would the situation described in question 19c above affect the long-run aggregate supply curve?

Unemployment Rate

(4 pts.) If oil prices fell causing a positive supply shock, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(4 pts.) In the AS-AD Model, would the situation described in question 19e above shift the SRAS, the LRAS or the AD curve? In which direct would the curve shift?

(3 pts.) Would the situation described in question 19e above cause 'stagflation'?

20. (5 pts.) Provide two examples of events that could shift the LRAS curve. Say in which direction the curve would shift, and also how the event would affect the long-run Phillips curve.

21. (5 pts.) What are three key lessons you will remember from taking ECON 204 Principles of Macroeconomics?

Part ii.

Explain the following questions.

Consider a twoperiod small open economy populated by a large number of households with preferences described by the lifetime utility function Inwfbf") + 111(ch 03' ) where C? and ng , for t : 1, 2, denote consumption of tradable and nontradable goods in period t, respectively. Households are endowed with if : 1 and Q; = 2 units of tradables and Q? : Q? : 1 units of nontrad- ables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. 1. Calculate the equilibrium levels of the current account and the rel ative price of nontradables in terms of tradables in period 1, denoted CA1 and 391, respectively. 2. Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers 100 Cumulative Porcontage of Money Income 20 20 40 60 80 100 Cumulative Percentage of Households 1) Refer to the above figure. For which Lorenz curve does the richest 40 percent make 50 the nation's money income? A)A B) B CC DJ D 2) Suppose a college increases the wages paid to student employees. Which of the follow options is the best description of the most likely effect of the increase in wage earning demand curve for school sweatshirts in the bookstore? A) The demand curve shifts to the left. B) a rightward movement along the demand curve C) The demand curve shifts to the right. D) a leftward movement along the demand curve 3) In general, who will benefit as the result of a tariff? 1. Domestic producers II. Domestic consumers III. The domestic government A) I only B) II only C) both I and III D) both II and III E) All of the above are correct.) The interest-rate-based monetary policy transmission med ism argues that an increase in the money supply 67) A) has no effect on aggregate demand but increases short-run aggregate supply. B) causes interest rates to fall, which causes an increase in planned investment, and an increase in aggregate demand. C) causes the Inflation rate to decline, which causes an increase in household consumption spending and an increase in aggregate demand. D) has no effect on aggregate demand but reduces long-run aggregate supply. 64) An asset is liquid if 68) A) it is backed by a government guarantee. B) it can be exchanged for other items of value without high transaction costs. CJ it earns interest. D) All of the above are correct. 69) Suppose the economy currently has an inflationary gap. The Fed engages in contractionary (69) monetary policy. The impact of contractionary monetary policy will be to A) increase short-run aggregate supply, decrease prices and increase real GDP. BJ increase short-run aggregate supply, decrease in prices and decrease in real GDP. C) decrease aggregate demand, decrease prices, and decrease real GDP. D') decrease aggregate demand, decrease prices, and increase real GDP. 70) The crowding-out effect refers to the tendency of expansionary fiscal policy to 70) A) replace low-skilled labor with higher-skilled labor. B) cause firms to produce beyond capacity. C) cause decreases in planned investment or planned consumption. D) cause households to save less. 71) The primary purpose of the FDIC is to reduce the potential for 71) A) bank runs. B) excessive interest rates. C) reserve cheating. D) government regulations. 72) Which of the following will cause a reduction in the amount of money individuals wish to hold? 72) A) an increase in income B) an increase in the price level C) an increase in the interest rate D) all of the above 73) United States coins and currency are backed by 73) A) reserves of foreign currencies. B) confidence that they will retain their value. C) gold. D) silver. 74) ) Suppose a college increases the wages paid to student employees. Which of the following options is the best description of the most likely effect of the increase in wage earnings on the demand curve for school sweatshirts in the bookstore? A) a leftward movement along the demand curve B) The demand curve shifts to the right. C) a rightward movement along the demand curve D) The demand curve shifts to the left