For each case listed below, first state whether the change results in an increase or a decrease in demand, or in an increase or a decrease in supply. Second, determine the direction of change in both the equilibrium price and the equilibrium quantity.
a. The price of a substitute good increases.
b. There is a large storm that destroys many factories that produce a particular good.
c. The price of a resource used to produce the good falls.
d. A country imposes limits on immigration.
e. The price of a good is expected to decline.
2. 10 points
Use the data in the following table to answer the questions below.
Price
|
$2.00
|
$1.75
|
$1.50
|
$1.25
|
$1.00
|
$0.75
|
$0.50
|
$0.25
|
$0
|
|
Qd
|
2
|
4
|
6
|
8
|
10
|
12
|
14
|
16
|
18
|
|
Qs
|
27
|
24
|
21
|
18
|
15
|
12
|
9
|
6
|
3
|
a. What is the equilibrium price?
b. What is the equilibrium quantity?
c. Will a surplus or a shortage exist at a price of $1.50?
d. How large will the surplus or the shortage of part (c) be?
e. Due to the surplus or shortage that arises at $1.50, what will happen to the price to alleviate the surplus or shortage and move the market towards its equilibrium price?
f. Suppose that the government decrees that the price of this good cannot rise above $0.50 per unit. Describe what results from this policy.
3. 5 points
According to the Current Population Survey (Household Survey), civilian employment increased from 143,305,000 in December 2012 to 143,322,000 in January 2013. Yet, this same survey showed that the unemployment rate rose from 7.8% in December 2012 to 7.9% in January 2013. Briefly explain how this can (and did) occur.
4. 10 points
In a simple economy people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI has 50 units of food and 10 units of clothing.
|
|
food
|
clothing
|
|
2012 price
|
$4
|
$10
|
|
2013 price
|
$6
|
$20
|
a. Calculate the value of the market basket in 2012 and in 2013.
b. Using your answers to part (a) and letting 2012 be the base year, calculate the value of the CPI for 2013.
c. By what percentage did the CPI increase between 2012 and 2013? Notice that neither component of the CPI increased by this percentage. Why not?
5. 25 points
Consider the data in the following table which covers the period 1997 - 2001. Both real GDP values are measured in 2005 dollars and the price level equals 100 in 2005.
|
Year
|
Actual Real GDP
|
Potential Real GDP
|
Price Level
|
|
1997
|
$9846 billion
|
$9850 billion
|
84.6
|
|
1998
|
$10275 billion
|
$10192 billion
|
85.6
|
|
1999
|
$10771 billion
|
$10559 billion
|
86.8
|
|
2000
|
$11216 billion
|
$10945 billion
|
88.7
|
|
2001
|
$11337 billion
|
$11325 billion
|
90.7
|
a. Draw a dynamic aggregate demand and aggregate supply graph to illustrate how the US economy adjusted from 1997 to 1998. Your graph should include the AD, SRAS, and LRAS curves for both 1997 and 1998 and should indicate the short-run macroeconomic equilibrium for each year and the directions in which the curves shifted.
b. Repeat the exercise from part (a) now using 2000 and 2001.
c. Calculate the rate of growth of actual real GDP between 1997 and 1998; 1998 and 1999; 1999 and 2000; and 2000 and 2001. Over what period did real GDP growth the fastest? The slowest?
QUESTION CONTINUES ON NEXT PAGE
d. Using St. Louis Fed's FRED website, find the average annual unemployment rate (coded as UNRATE) and the average annual natural rate of unemployment (coded as NROU) for each year from 1997 to 2001. You will have to change the data frequency to obtain annual data. In which year is the difference between the two series the greatest? The least?
e. In words, explain how the data in the table above can explain the behavior of the unemployment rate over the 1997 - 2001 period. Likewise, explain how the data can explain the changes in the gap between the actual and natural rates of unemployment.
6. 15 points
Using the St. Louis Fed's FRED website, download quarterly data on real GDP (coded GDPC1) and real potential GDP (coded GDPPOT) for 1949-I through 2012-IV. Note that the real GDP series starts in 1947 so be sure to adjust the starting date to 1949-I to exclude those observations.
a. Once you have downloaded your data, compute the ratio of real GDP to real potential GDP for each quarter of each year. Plot the resulting ratio and include it in your answer to this question.
b. In which quarter of which year was the ratio of real GDP to real potential GDP the greatest? What was taking place in the US economy at the time that the ratio reached its maximum? Briefly explain how this would cause the ratio to exceed 1 by as much as it did.
c. In which quarter of which year was the ratio of real GDP to real potential GDP the least? What was taking place in the US economy at the time that the ratio reached its minimum? Briefly explain how this would cause the ratio to fall short of 1 by as much as it did. Were you surprised to find the answer to this question that you did? Were you expecting something different and if so, what?
7. 20 points
a. In January 2013, total checkable deposits equaled $1367.3 billion while required reserves equaled $111.6 billion. What do these data imply for the effective value of the required reserve ratio? Given that the required reserve ratio on checkable deposits is a weighted average of 0 and 10%, is your answer consistent with this? What does this imply for the predicted value of the "deposit expansion multiplier," 1/RR?
b. What two key assumptions underlie finding a deposit expansion multiplier equal to 1/RR?
c. The M1 money multiplier equals the ratio of M1 (currency in circulation + checkable deposits) to the monetary base (currency in circulation + total reserves). Given that total reserves equaled $1547.0 billion in January 2013, does this imply that the M1 multiplier is greater than, equal to, or less than one? Why?
d. What constitutes the difference between required and total reserves? How large is this component of total reserves? Is this typically what we see? Why or why not?
8. 5 points
Over the past decade, Zimbabwe experienced the world's highest rates of inflation (more than 2.2 million percent in 2008 alone). During this time Zimbabwe's money growth rate was even higher than was its inflation rate. Given that Zimbabwe's economy grew very little over the past decade, what implications does the above information have for the behavior of the velocity of money in Zimbabwe? Was it constant? Falling? Rising? Use the quantity theory to support your answer.
9. 10 points
The hypothetical information in the following table shows what the economic situation will be in 2015 if the Fed does not use monetary policy:
|
Year
|
Potential GDP
|
Real GDP
|
Price Level
|
|
2014
|
$15.2 trillion
|
$15.2 trillion
|
110.0
|
|
2015
|
$15.6 trillion
|
$15.8 trillion
|
115.5
|
a. If the Fed wants to keep real GDP at its potential level in 2015, should it use expansionary policy or contractionary policy? Should its trading desk be buying T-bills or selling them?
b. If the Fed's policy is successful in keeping real GDP at its potential level in 2015, state whether each of following will be higher, lower, or the same as it would have been if the Fed had taken no action: (i) real GDP; (ii) potential real GDP; (iii) the inflation rate; (iv) the unemployment rate.
10. 10 points
The hypothetical information in the following table shows what the economic situation will be in 2015 if the Congress and the president do not use fiscal policy:
|
Year
|
Potential GDP
|
Real GDP
|
Price Level
|
|
2014
|
$15.2 trillion
|
$15.2 trillion
|
110.0
|
|
2015
|
$15.6 trillion
|
$15.2 trillion
|
115.5
|
a. If Congress and the president want to keep real GDP at its potential level in 2015, should it use expansionary of contractionary policy? Would this require increasing or decreasing government expenditures and/or increasing or decreasingaxes?
b. If Congress and the president are successful in keeping real GDP at its potential level in 2015, state whether each of the following will be higher, lower, or the same as it would have been if Congress and the president had taken no action: (i) real GDP; (ii) potential real GDP; (iii) the inflation rate; (iv) the unemployment rate.
The following graphs shows the ratio of the actual federal budget surplus/deficit to potential real GDP and the cyclically-adjusted federal budget surplus/deficit to potential real GDP for each year between 1980 and 2018 where the figures for 2011 through 2018 are forecasts.According to the Congressional Budget Office who publishes this data, the cyclically-adjusted budget surplus/deficit is found by subtracting the value of automatic stabilizers from the actual budget surplus/deficit.
a. What are automatic stabilizers and how should we expect them to behave during economic downturns and during economic upturns? Why?
b. What does this definition imply about the relationship between the actual and cyclically-adjusted budget surplus/deficits during a recession? During an expansion?
c. According to the NBER Business Cycle Dating Committee, the US economy was in an expansion phase during each of the following periods (data specified by year:quarter):
1961-I -1969-IV 1970-IV - 1973-IV 1975-I - 1980-I
1980-III - 1981-III 1982-IV - 1990-III 1991-I - 2001-I
2001-IV - 2007-IV 2009-II - present
Given these periods of expansion (and the periods in between which were recessions), when are the data generally consistent with the relationship you described in part (b) and when are they not?
12. 10 points
Suppose that at the same time that Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run?