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1 Economics 101 Assignment #1 (20 Points) Name__________________ Part 1: 5 points 1. Assume that there are only four goods produced. The following represent the prices and quantities sold in the base year (2000) and the current year (2008): Price00 Quantity00 Price08 Quantity08 A $5 10 $5 20 B 10 20 30 40 C 8 5 16 10 D 25 10 50 20 What was the Nominal Gross Domestic Product (GDP) in 2000? Show calculations. What was the Nominal Gross Domestic Product (GDP) in 2008? Show calculations. What was the Real Gross Domestic Product (Real GDP) in 2008? Show calculations. 2. In the calculation in question 1, by what percent did the Real GDP rise between 2000 and 2008? 3. Assume that Real GDP Per Capita is $10,000 in 2000. If it grows at 2% per year, what will the Real GDP per capita be in 2072? If it grows at 3% per year, what will the Real GDP Per Capita be in 2072? Notice how much of a difference a small change in the rate of growth can make. (Hint: Use the Rule of 72.) Part 2: 5 points 4. Click on Nominal GDP and Real GDP on my Web Site 1. What is the Gross Domestic Product for the most recent quarter? What does this number tell you? 2. What was the Real GDP in the most recent year? 3. In what years did Real GDP decline for two consecutive quarters (this is the definition of a “recession”)? 5. This time, click on The Economic Report of the President on my web site What was the American population in the most recent year? Therefore, what was the Real GDP per capita in the most recent year (you need to calculate this)? Continued on Page 2 2 6. Choose any country other than the United States. It may be a country that you family descends from. Or it may be a country in which you have an interest. You will use this country throughout this assignment. Do a search on Google (or something similar) to find information on the economy of this country. What is the most recent Nominal GDP of this country in U.S. dollars? _______________ What is the most recent Nominal GDP per capita in U.S. dollars? ___________________ Over the past few years, how fast has GDP been growing? ________________________ (Give the dates for your data.) Part 3: 5 points Follow the path: Click on Unemployment Rate on my Web Site Most Requested Series Labor Force Statistics from the Current Population Survey On the Form: Click on all that are necessary to answer the questions below Click on the most recent year Click Retrieve Data (Click Continue if asked) 1. What is the overall unemployment rate in the most recent month? 2. What is the total civilian labor force? __________________ What is the total number of people unemployed? __________________________________ 3. How many of the unemployed have been unemployed 27 weeks or longer? ______________ What percent is this of the total number of unemployed people? (You need to calculate this.) _______________________________ 4. Pick a month in 2001, a month in 1999, and a month in 1997. Calculate the percent of unemployed that have been unemployed 27 weeks or longer as you did in Question 3. What has been happening to this percent in recent years? ___________________________ 5. What is the current unemployment rate for males age 20 and over? ____________ for females age 20 and over? _______________ 6. What is the current unemployment rate for whites overall? _________________ for AfricanAmericans overall? __________________For Latinos/Hispanics overall? ___________________ 7. What is the current unemployment rate for people age 16 to 19? Continued on Page 3 3 8. Go back to the data for the country you have chosen. What is the most recent unemployment rate? _______________________ Over the past few years, has unemployment in this country been greater or lower than the unemployment in the United States? ___________________________________ Part 4: 5 points Follow the path: Consumer Price Index on my Web Site Most Requested Series Consumer Price Index --- All Urban Consumers Fill-out the Form: Click on U.S. All Items, 1982 - 1984 = 100 Move Down and Click on All Years in the Box Click the Retrieve Data Button 9. What is the CPI in the most recent month? ___________________ What does this mean? __________________________________________________________________________ 10. What was the last year that prices fell from January to January? What was the last time that prices fell for two + consecutive years from January to January? 11. By approximately what percent did prices rise from January, 1970 to January, 1980? (You need to calculate this.) 12. How many years did it take for prices to triple from their January, 1913 value? How many years did it take for prices to triple from their January, 1970 value? 13. In June, 1965, I started working at an accounting firm for $7,200 per year ($600 per month). I was straight out of college and had no significant work experience. Assume that you begin your work career in the most recent month noted. What starting salary do you need to have now to have the same purchasing power as I had in June, 1965? 14. Follow the path: Economic Report of the President on my Web Site Statistical Tables in Spreadsheet Format 2007 Tables B-3 and B-60 What was the GDP Deflator (called the Implicit Price Deflator) for 2007? _________ By what percent did the GDP Deflator rise in 2007? _______________ What was the CPI for 2007? ________________ By what percent did the CPI rise in 2007? ________________ How do you account for the differences in the number and in the rise in prices between these two measures of inflation? End of Assignment 1 4 Economics 101 Assignment #2 on Chapters 5 and 6 (10 points for the entire assignment) Name_________________ 1. In San Diego County, the price of homes has been falling greatly. The median price of a home fell from over $500,000 in 2006 to about $400,000 today. Explain why this has happened. Consider all of the factors that affect demand and all of the factors that affect supply that would seem relevant to explain this fall in home prices. 2. We all know that the price of gasoline has risen greatly. Gasoline that once sold for less than $2 per gallon has sold for as much as $4.50 per gallon. Explain why this has happened. Consider all of the factors that affect demand and all of the factors that affect supply that would seem relevant to explain this rise in gasoline prices. 3. Most people who buy a home pay for it by borrowing money from a bank, savings and loan, or other such institution. Such a loan is called a mortgage. At present, the interest on a mortgage is deductible for tax purposes. To illustrate how this works, assume that a person is in a tax rate of 25% and has a mortgage of $200,000 at 6% interest. The annual interest payment is $12,000 (6% of $200,000). Of this, the taxes are reduced by $3,000 (25% of $12,000). Thus, the actual cost to the borrower is not $12,000, but $9,000 ($12,000 - $3,000). Some people have proposed that the mortgage interest would no longer be tax deductible. Therefore the actual cost to the borrower would now be the full $12,000. There would be no offsetting savings of the $3,000. a. First, show what will occur in the market to borrow money. Explain what will happen to the equilibrium price (or interest rate) and to the equilibrium quantity. Interest Rate Supply Demand _____________________________ 0 Quantity of Money to Borrow (Lend) Continued on Page 5 5 b. Second, show what will occur in the market for homes (homes and borrowing money are complements). Again, explain what will happen to the equilibrium price (or interest rate) and to the equilibrium quantity. Price of Homes Supply of Homes Demand for Homes ____________________________ 0 Quantity of Homes c. Finally, state whether you would favor or oppose this proposal to eliminate the tax deduction for mortgage interest if you were a (1) homeowner; (2) owner of a bank; (3) prospective homebuyer who does not now own a home; (4) someone who intends to borrow from a bank to buy a new car. In each case, explain why. End of Assignment 2 6 Economics 101 Assignment #3 (20 Points) Name________________________ Part 1: (5 points) The cases discussed in class have analyzed the effects on foreign exchange markets of an increase in interest rates in the United States and of an increase in inflation in the United States. Do the same analysis for each of the following cases. Show using the demand and supply graph for Japanese yen. Which money appreciates and which money depreciates? (Show the graphs on the back of the page.) 1. Incomes rise in the United States and fall in Japan 2. Both Americans and Japanese believe that American goods are of higher quality than before 3. Both Americans and Japanese believe that the Japanese yen will depreciate in the near future 4. Laws change in Japan making it easier for Americans to buy or build companies in Japan Part 2: (5 points) 1. Go to the site of the Federal Reserve Bank of New York. This is linked as “Foreign Exchange Rates” on my web site. Or go to http://www.ny.frb.org/pihome/statistics/forex12.shtml From this site, what is the most recent exchange rate for each of the following foreign monies? The Canadian Dollar __________________ The European Monetary Union Euro __________________ The Japanese Yen __________________ The Mexican Peso __________________ The British Pound __________________ The Chinese Renminbi __________________ 2. Assume a Days Inn Hotel Room in Ireland costs 80 Euros a night. The same hotel room in San Diego costs $100 American. Using the exchange rate you found in question 1, is the hotel room cheaper in Ireland or in San Diego? Part 3: (5 points) In 1998, two factors happened regarding Russia. First, prices in Russia were rising at a very rapid rate (hyperinflation) while prices in the United States were hardly rising at all. Second, for a variety of reasons, those who had made portfolio investments in Russia decided to take their money elsewhere. This means that they demanded that the loans they had made in Russia be paid off. When the loans were repaid, the money would be loaned to people in a different country. On the graph on the next page, show the demand for and the supply of Rubles as of 1997. Then, show the results of these two events in 1998. Make the appropriate shifts in either demand or in supply or in both. State what would happen to the Russian Ruble as a result of the 2 changes. Finally, state what would happen to the Russian economy as a result of this change in the exchange rate. Continued on Page 7 7 .$/Ruble Supply1 P1 E1 Demand1 ______________________________ Quantity of Rubles The Russian Ruble would _______________________________. The effect of this on the Russian economy would be __________________________________________________ Part 4: (5 points) Pick out the stock of a particular company (any company). Find the value of the stock of that company in the most recent week. You will find this information either in a newspaper or on the Internet. Then, find the value of that stock one year ago (or as close to that date as you can). The company I chose is _____________________________ Value Now $_____________ Value Then $_____________ You will need to do some research as to what has been happening concerning this company. You know that the price is affected by the demand for and the supply of that stock. Demanders are those who wish to buy the stock. Suppliers are those who own the stock and are considering selling. There are six possible determinants of the demand and four possible determinants of the supply. Based on your research, explain what might be responsible for the change in the price you have discovered. Show your reasoning on the graph below. Price of the Stock Supply1 P1 E1 Demand1 ______________________________ 0 Quantity of Shares of the Stock I shifted demand to the (right, left, or neither?) __________________ because _________________________________________________________________________ I shifted supply to the (right, left, or neither?) __________________ because _________________________________________________________________________ End of Assignment 3 8 Economics 101 Assignment #4 (15 Points Total) Name____________________________ 1. In Mexico in 1982, prices were rising very rapidly. On the graph, show aggregate demand, aggregate supply, and the equilibrium Real GDP and GDP Deflator. Show your graph with a large inflationary gap. GDP Deflator 0 Real GDP a. The government of Mexico responded to the problem with a program. First, it significantly reduced government spending. Second, it raised taxes. And third, it decreased the money supply. Show the result of these three changes on the graph above. Since all three of these changes have the same effect, you may show them as only one change. As a result of these policies, what happened to Real GDP in Mexico? What happened to the GDP Deflator? b. Another part of the government’s program was to create a large depreciation of the Mexican peso. On the graph below, draw the original situation again. Then, draw the changes caused by the depreciation of the peso. There will be both a change in aggregate demand and also a change in aggregate supply. Draw both. Assume, as actually was the case, that the shift in aggregate supply was the larger shift. As a result of this depreciation of the peso, what happened to Real GDP in Mexico? What happened to the GDP Deflator? GDP Deflator 0 1 Continued on Page 9 Real GDP 9 Yet a final part of the government’s program was to reduce wages. In the graph below, again draw the original situation. Then, show the results of reducing wages. There will be changes in both aggregate demand and also in aggregate supply. Draw both. Assume, as actually happened, that the shift in aggregate demand was the larger shift in this case. What happened to the Mexican Real GDP from this policy of decreasing wages? What happened to the GDP Deflator? c. GDP Deflator 0 Real GDP d. Write a very brief conclusion: from these policies, what can you conclude would happen to the Mexican economy? 2. In the graph below, draw the aggregate demand curve, the aggregate supply curve, and the Potential Real GDP so that there is an Inflationary Gap. GDP Deflator _________________________________________ 0 Real GDP Continued on Page 10 10 According to those who believe that an economy is self-correcting, what will happen to eliminate the inflationary gap? Name the changes that will occur and show their effect on the graph on Page 9. 1. 2. 3. In this example, actual real GDP is greater than potential real GDP and the actual rate of unemployment is below the natural rate of unemployment. How can this occur? End of Assignment 4 11 Economics 101 Assignment #5 (20 Points) Name_____________________ Part 1: 5 points The graph below shows the aggregate demand curve and the long-run aggregate supply curve as the classical economists would draw them. Now assume that there is an increase in the money supply for some reason. Show the results on the graph. Then, explain what will occur and why. Aggregate Price Level Aggregate Supply P1 Aggregate Demand1 = M x V 0 Qpot Real GDP Explanation: Part 2: 5 Points Assume that there are the two countries: Britain and the United States. The graph is drawn for the foreign exchange market so that the exchange rate is $5 for one pound. Now assume that the United States has a deflation. Analyze what would result. $/Pound Supply $5 Demand _______________________________________ Pounds Continued on Page 12 12 Gold would move from which country to which country? ___________________________________________________________________________ Explain why the gold would move. ___________________________________________________________________________ How would the American problem of deflation be solved? ___________________________ __________________________________________________________________________ What would happen to Britain? ________________________________________________ __________________________________________________________________________ Part 3: 5 Points Case on the Great Depression Chapter 12. For these questions, you are to use the data found in 1. A Depression is a period of time during which Real GDP is falling. From 1929 to 1941, during what years was there a Depression (or recession)? How much (or by what percent) did Real GDP fall? _____________________________________ __________________________________________________________________ 2. During periods of Depression, the Classical Economists predicted that both wages and prices would fall. Was this prediction valid for the Depression Decade of 1929 to 1941? Explain with data. ____________________________________________________ ___________________________________________________________________ 3. During periods of Depression, the Classical Economists predicted that interest rates would fall. As a result of the fall in interest rates, they predicted that business investment spending would rise. This was to end the Depression. Did interest rates fall between 1929 and 1941? Did business investment spending rise in this period? Explain with data. ________________________________________________________ _______________________________________________________________________ Continued on Page 13 13 Part 4: 5 points (1) Fill in the following consumption function: Disposable Income 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000 Consumption 1000 1900 2800 3700 Savings - 900 - 800 - 600 5500 - 400 7300 - 200 9100 0 10,900 11,800 300 13,600 500 15,400 16,300 800 18,100 1000 19,900 20,800 21,700 22,600 1500 (2) Calculate the marginal propensity to consume. ________________ Calculate the marginal propensity to save. _____________________ (3) If disposable income is 10,000, what is the average propensity to consume? _________________ If disposable income is 20,000, what is the average propensity to consume? _________________ Therefore, as disposable income rises from 10,000 to 20,000, consumption _______ And the average propensity to consume _____________ (answer “rises” or “falls”). 2. The consumption function is repeated on the following page. Business Investment Spending of 200 is added in. Continued on Page 14 14 Real GDP (=Income) 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 Consumption 1000 1900 2800 3700 4600 5500 6400 7300 8200 9100 10,000 10,900 11,800 12,700 13,600 14,500 15,400 16,300 17,200 18,100 19,000 19,900 20,800 21,700 22,600 Business Investment Spending 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 Calculate the Equilibrium Real GDP. ____________________________________ $1000 cannot be the Equilibrium Real GDP because ______________________________ ________________________________________________________________________ $25,000 also cannot be the Equilibrium Real GDP because _________________________ ___________________________________________________________________ Continued on Page 15 15 3. Now assume that the government spends $1000 and also taxes $1000. There are no transfers. What is the new Equilibrium Real GDP? _____________________ Real GDP Taxes Disposable Income Consumption Investment Government Aggregate Demand 1000 1000 0 1000 200 1000 2000 1000 1000 1900 200 1000 3000 1000 2000 2800 200 1000 4000 1000 3000 3700 200 1000 5000 1000 4000 4600 200 1000 6000 1000 5000 5500 200 1000 7000 1000 6000 6400 200 1000 8000 1000 7000 7300 200 1000 9000 1000 8000 8200 200 1000 10,000 1000 9000 9100 200 1000 11,000 1000 10,000 10,000 200 1000 12,000 1000 11,000 10,900 200 1000 13,000 1000 12,000 11,800 200 1000 14,000 1000 13,000 12,700 200 1000 15,000 1000 14,000 13,600 200 1000 16,000 1000 15,000 14,500 200 1000 17,000 1000 16,000 15,400 200 1000 18,000 1000 17,000 16,300 200 1000 19,000 1000 18,000 17,20 200 1000 20,000 1000 19,000 18,100 200 1000 4. Now assume that exports equal $1000 and also that imports equal $1000. What is the new Equilibrium Real GDP? _____________________________________ Taxes Disposable Consumption Investment Government Exports Imports Aggregate Income Demand Real GDP 1000 2000 3000 4000 5000 6000 7000 8000 9000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 1000 1900 2800 3700 4600 5500 6400 7300 8200 9100 10,000 10,900 11,800 12,700 13,600 14,500 15,400 16,300 17,200 18,100 19,000 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 16 5. Assume now that the Potential Real GDP is equal to $10,000. How large is the gap? ____________________________ What kind of gap is it? _________________________ 6. Go back to the table above. Now assume that the government decreases its purchases from $1000 to $500. There is no change in any other variable, including taxes. Use the multiplier formula to calculate the new Equilibrium Real GDP. _____________________________________________________________________ Now calculate the new gap (Potential Real GDP is still $10,000). __________________ What kind of a gap is it? __________________________________________ 7. If the government had desired to eliminate all recessionary and all inflationary gaps, what should its purchases be equal to? Again show using the multiplier formula. End of Assignment #5 17 Economics 101 Assignment #6 (20 Points) Name____________________________ Part 1: 5 points 1. Look up the most recent data you can find on interest rates, consumer confidence, consumer debt, disposable income, common stock prices, the GDP Deflator. You can find some of these linked on my web site. Others you can find by starting with Google. Use all of these data to make a prediction consumer spending in the near future. Explain why you make this prediction, giving reference to all of these data. Part 2: 5 points 2. Americans save a very low portion of their incomes and spend a high portion of their incomes. The portion saved is low in comparison to that of past years and is low compared to other countries. From the points made in Chapter 14, what reasons can you give for the low portion of income saved (and the high portion of income spent) by American consumers? Name at least three reasons. Continued on Page 18 18 Part 3: 5 points (Pages 18 – 21) Private Investment Spending on Structures and Equipment 1959 46.5 1960 49.4 1961 48.8 1962 53.1 1963 56.1 1964 63.1 1965 74.8 1966 85.4 1967 86.4 1968 93.4 1969 104.7 1970 109.1 1971 114.1 1972 128.8 1973 153.3 1974 169.5 1975 173.7 1976 192.4 1977 228.7 1978 278.6 1979 331.6 1980 360.9 1981 418.4 1982 425.3 1983 417.4 1984 490.3 1985 527.6 1986 522.5 1987 526.7 1988 568.4 1989 613.4 1990 622.4 1991 598.2 1992 612.1 1993 666.6 1994 731.4 1995 810.0 1996 875.4 1997 968.7 1998 1052.6 1999 1133.9 2000 1232.1 2001 1176.8 2002 1066.3 2003 1082.4 2004 1198.8 2005 1328.3 In Billions of Current Dollars Year Depreciation 40.2 41.8 42.8 44.3 46 48.4 51.7 56.3 61.4 67.4 74.5 81.8 89.8 99.4 109.1 126.9 149.1 164.5 184.4 210.7 244.9 282.6 323.9 357.5 372.7 393.5 422.5 450.8 478.2 512.4 554 551.6 586.9 607.3 624.7 675.1 713.4 748.8 800.3 851.2 914.3 990.8 1075.5 1080.3 1112.8 1206.2 1327.2 Net Investment Spending on Structures and Equipment 6.3 7.6 6 8.8 10.1 14.7 23.1 29.1 25 26 30.2 27.3 24.3 29.4 44.2 42.6 24.6 27.9 44.3 67.9 81.7 78.3 94.5 67.8 44.7 96.8 105.1 71.7 48.5 56 59.4 50.8 0.8 -16.1 22.1 34 81.6 117.5 167 128.1 241.7 241.3 101.3 -14 -30.4 -7.4 1.1 % of GDP 1.2 1.4 1.1 1.5 1.6 2.2 3.2 3.7 3 2.9 3.1 2.6 2.2 2.4 3.2 2.8 1.5 1.5 2.2 2.9 3.2 2.8 3 2.1 1.3 2.5 2.5 1.6 1 1.1 1.1 0.8 0 0 0.3 0.5 1.1 1.5 2 1.5 2.6 2.5 1.0 0 0 0 0 19 3. Examine the table on the previous page. Briefly describe the overall performance of the American economy in terms of Net Investment Spending (especially as a percent of GDP). In which years was the performance good and in which years was it poor? 4. Examine the data below and answer the following questions: How well does the trend in after-tax profits explain the trend in business investment spending shown on Page 18 above? How well does the change in stock market prices explain the trend in business investment spending shown on Page 18 above? Year Corporate Profits 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 81.6 95.1 109.8 123.9 114.5 133.1 160.6 190.9 217.2 222.5 198.5 219.1 201.2 254.1 309.8 322.4 300.7 346.6 405.1 395.7 408.6 431.2 453.1 510.5 573.2 668.8 754.1 833.8 815.1 Profits Tax Dividends Retained Earnings 34.4 37.7 41.9 49.3 51.8 50.9 64.2 73.1 83.5 88.1 84.8 81.1 63.1 77.2 94.1 96.5 106.5 127.1 137.2 141.5 140.6 133.6 143.1 165.4 186.7 211.1 223.6 237.2 244.6 24.3 25.1 26.8 29.9 33.2 33 39 44.8 50.8 57.5 64.1 73.8 76.2 83.6 91 97.7 106.3 112.2 129.6 155 165.6 178.4 185.5 203.1 234.9 254.2 297.7 335.2 351.5 23 34.3 41.1 44.8 29.5 49.1 57.3 73.1 82.9 77 49.6 64.1 61.9 93.2 124.7 128.3 88 107.3 138.3 99.2 102.4 119.2 124.4 142 151.6 203.6 232.7 261.3 218.9 Stock Prices* 45.72 54.22 60.29 57.42 43.84 45.73 54.46 53.69 53.7 58.32 68.1 74.02 68.93 92.63 92.46 108.09 136 161.7 149.91 180.02 183.46 206.33 229.01 249.58 254.12 291.15 358.17 456.54 550.26 20 1999 856.1 2000 817.9 2001 767.3 2002 886.3 2003 1031.8 2004 1161.5 *NYSE Index 1965 = 50 255.9 265.2 204.1 192.6 232.1 271.1 370.7 377.9 370.9 399.2 423.2 493.0 229.4 174.8 192.3 294.5 376.5 397.3 619.16 5. Examine the data on from the first table. If the expected duration of capital goods has become shorter, one would expect that depreciation would represent a higher percent of gross private business investment spending. Has this been happening? Was depreciation a higher percent of gross private business investment spending in the years when the investment performance was especially poor? 6. The table below gives the data for Capacity Utilization in Manufacturing. Examine the years for which the investment performance was poor. Was Capacity Utilization falling and particularly low in those years. Year 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Capacity Utilization in Manufacturing (%) 87.2 87.1 86.8 79.4 77.9 83.4 87.7 83.4 72.9 78.2 82.6 85.2 85.3 79.5 78.3 71.8 74.4 79.8 78.8 78.7 81.3 83.8 83.6 81.4 77.9 79.4 80.4 83.6 21 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 83.9 83.0 83.9 82.7 81.9 81.8 76.3 75.1 75.7 78.6 80.0 7. Below, there is a table of data concerning raw materials’ prices and unit labor costs. Raw materials’ prices and unit labor costs should be rising slowly (if at all) during the years of good investment performance and should be rising greatly in the years of poor investment performance. Does the data support this hypothesis? Explain. Year 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Nov-00 Raw Materials Prices 52.5 58 60.9 64.9 69.5 78.4 90.3 98.6 100 100.6 103.1 102.7 99.1 101.5 107.1 112 114.5 114.4 114.7 116.2 118.5 124.9 125.7 125.6 123 123.2 130.5 1982 = 100 Continued on Page 22 Unit Labor Costs 43.2 46.1 48.4 51.4 55.3 60.7 67.4 72.4 78.2 78.6 79.8 82.1 83.9 86.7 89.8 91.3 95.3 98.7 100 101.9 102.6 104.1 104.5 105.3 107.9 109.9 110.8 1992=100 22 Part 4: 5 Points 8. Question 3 asked you to characterize the overall investment performance of the United States -- stating in which years that performance was good and in which years it was bad. Other questions have asked you to relate these periods to other data. Now, it is time to summarize. Write a short paragraph on the following question: when the investment performance of the American economy was poor, what factors can explain this poor performance? And when the investment performance of the American economy was good, what factors can explain this good performance? End of Assignment #6 23 Economics 101 Assignment #7 (15 Points) Name____________________________ Part 1: 5 Points 1. Using the tax table in the text, in 1980, in what tax bracket would you be in if your adjusted gross income were $20,000? $40,000? $100,000? What tax bracket would you be in as of 2006? 1980 2006 $20,000 $40,000 $100,000 2. Use the principle concerning the sales tax to explain why each of the following taxes is regressive: 1. the gasoline tax 2. the cigarette tax 3. Assume that you had a capital gain of $10,000. Also assume that you are in the highest possible tax bracket (even before the capital gain is counted as part of your income). In 1980, how much would you have paid in capital gains tax? (Remember that 60% of the gain was taxfree in 1980.) In 1986, how much would you have paid in capital gains tax? (Now, all of the gain is taxable and you pay at the highest rate.) In 1992, how much would you have paid in capital gains tax? In 2006, how much would you have paid in capital gains tax? 1980 1986 1992 2006 4. Go over this chapter. Rank these taxes (1) being “best” and (5) being worst according to the three criteria. Equity Ease of Administration Incentive Effects Personal Income Tax Corporate Profits Tax Social Security (FICA) Tax Sales Tax Property Tax Continued on Page 24 24 Part 2: 5 Points 1. Assume that Equilibrium Real GDP equals $110. Potential Real GDP equals $200. The marginal propensity to consume equals 0.9. According to Keynesians, government purchases should __________ (increase or decrease?) by $___________. Or taxes should ____________ (increase or decrease?) by $_____________. Or transfers should ____________ (increase or decrease?) by $_____________. Show calculations. 2. The changes to the tax system initiated by President Reagan in 1981 and again in 1986 and the changes made by President George W. Bush in 2001 and 2003 were discussed in the chapter. Review these changes. It is estimated that the income tax now provides only half the amount of automatic stabilization as it did in 1980. Explain why the changes that were made reduced the extent of automatic stabilization of the income tax. 3.Year (Fiscal) Deficit (Billions) Unemployment Rate Structural Budget Deficit 1966 3.7 3.8% 1967 8.6 3.8% 1968 25.2 3.6% 1969 –3.2 (Surplus) 3.5% 1970 2.8 4.9% 1971 23.0 5.9% 1972 23.4 5.6% 1973 14.9 4.9% 1974 6.1 5.6% 1975 53.2 8.5% 1976 73.7 7.7% 1977 53.7 7.1% 1978 59.2 6.1% 1979 40.7 5.8% 1980 73.8 7.1% 1981 79.0 7.6% 1982 128.0 9.7% 1983 207.8 9.6% 1984 185.4 7.5% 1985 212.3 7.2% 1986 221.2 7.0% 1987 149.8 6.2% 1988 155.2 5.5% 1. Based on the structural budget deficit, in which of these years was fiscal policy expansionary and in which years was it contractionary? Although this is not likely to be correct, calculate the structural budget deficit by assuming that full employment was 4% throughout the entire period and that each rise in the unemployment rate increases the budget deficit by $30 billion. 2. Examine the data. In the years that fiscal policy was expansionary, did unemployment fall in the following years? And in the years that fiscal policy was contractionary, did unemployment rise in the following years? Provide evidence from the numbers. Continued on Page 25 25 Part 3: 5 Points 1. From 2007 through 2008, the economy of the state of California has experienced a serious recession. Tax revenues fell for the state. As a result, the state of California experienced a budget deficit. By its Constitution, the state of California is not allowed to have a budget deficit. Go on the Internet or to any major newspaper. You can visit that site for the state of California if you wish. What actions have been taken by the state government to eliminate the budget deficit? That is, what was done to California government spending and to taxes? Considering that California is a very large state, what are the likely effects of these policies? 2. The marginal tax rates for 1980 and for 2000 were given in Chapter 17. Assume you have a family income of $25,000 in 1980. Between 1980 and 2000, prices approximately doubled. So an income of $50,000 in 2000 would represent about the same purchasing power as the income of $25,000 did in 1980. a. Now assume that the family income from working would rise by $1,000 (from $25,000 to $26,000 in 1980). How much of this extra income would have gone to the federal government in taxes in 1980? b. How much of the extra $1,000 of income (from $50,000 to $51,000) would go to the federal government in taxes in 2000? c. Did the marginal tax rates of 2000 provide a greater incentive to work than the marginal tax rates of 1980? Explain why or why not. End of Assignment #7 26 Economics 101 Assignment #8 (10 Points) Name______________________ Part 1: 5 Points 1. Click on Money Supply Data on my web site. a. What are the components of M-1? What is the total amount of each? b. What is the total value of M-1 for the most recent period? _________________ c. What are the additional components of M-2? What is the total value of each? d. What is the total value of M-2 in the most recent period? ___________________ Part 2: 5 Points 1. The reserve requirement on checkable deposits is 10%. The reserve requirement on savings deposits is zero. What would happen to the money supply if a person took the $1,000 he or she found on the “tree” out of his checking account and put it in his savings account? Explain. 2. We assumed that the financial institutions choose to hold no excess reserves. Suppose that they become afraid that if they make loans, the loans will not be repaid. So they do indeed hold on to the excess reserves, rather than lend them. What happens to the money supply (M-1)? Why? 3. If you draw a Supply of Money curve, it looks like any other supply curve: it is upward sloping. This means that as interest rates rise, the money supply also rises. Explain why this is so. (If you have trouble with this, review the chapter.) End of Assignment #8 27 Economics 101 Assignment #9 (20 Points) Name______________________ Part 1: 5 Points 1. Assume that Bank A has $10,000 in checkable deposits, $2000 in reserves, and $8,000 in loans when the reserve requirement is 20%. If the reserve requirement (ratio) is lowered to 10%, Bank A's excess reserves increase by $_____________________ the money supply will ultimately ___________(increase or decrease?) by $______________________. The money multiplier increases from _________ to ______________. 2. Assume that the discount rate is lowered from 6% to 4%. As a result, Bank A borrows $1,000 from the Fed. The monetary base ____________(increases or decreases?) by $_________________ Bank A's excess reserves ________(increase or decrease?) by $_________________ With a reserve ratio of 10%, the money supply will ______________(increase or decrease?) by $______________________. 3. Now, assume that the Fed buys $1,000 worth of Treasury Bills from Bank A. The monetary base ______________(increases or decreases?) by $________________ Bank A's excess reserves ____________(increase or decrease?) by $_______________ With a reserve ratio of 10%, the money supply will ______________(increase or decrease?) by $__________________. 4. Explain in your own words why an increase in the money supply would cause real interest rates to fall. 5. Explain in your own words why a decrease in the price of a security is the same as an increase in the interest rate on that security. Part 2: 5 Points 1. Assume that every time the Federal Reserve increases the supply of money by $20 billion, interest rates will fall by 2 percentage points (for example, from 8% to 6%). Also assume that every time interest rates fall by 2 percentage points, business investment spending rises by $10 billion. Equilibrium Real GDP is equal to $400 billion. Potential Real GDP is equal to $500 billion. The marginal propensity to consume (MPC) is equal to 9/10 (0.9). The interest rate is 8%. Business investment spending is $20 billion. And the supply of money is $120 billion. In order to eliminate the recessionary gap, by how much and in what direction should the Federal Reserve change the supply of money? Continued on Page 28 28 2. Now, from Question 1, assume that the reserve requirement is 1/10 (0.1). In order to eliminate the recessionary gap, by how much and in what direction should the Federal Reserve change the monetary base? 3. Notice in the charts in the text that velocity has been trending upward, especially since the end of the recession of the early 1990s. If velocity is trending upward, then the demand for money must have been trending downward. This means that people have been holding less money as part of their wealth. Based on what you have learned about the demand for money, what reasons can you suggest for this change? Part 3: 5 Points 1. On the demand for money curve, state whether there is a movement along the line, a shift to the right, or a shift to the left for each of the following cases: a. prices, as measured by the GDP Deflator, rise (inflation) _____________________ b. quantity produced, as measured by the Real GDP falls (a recession) ______________ c. real interest rise from 4% to 5% ______________________________ d. people expect greater rates of inflation in the near future ____________________ 2. Let us explore the Keynesian view that velocity is not constant. Remember that velocity and the demand for money are inversely related. When the government increases its spending and correspondingly increases its borrowing, interest rates rise. As we explored earlier, when interest rates rise, the demand for money ____________(answer “rises” or “falls”). This change in the demand for money is the same as velocity __________(answer “rising” or “falling”). 3. The natural rate of unemployment is estimated to be about 4% today. In the 1980s, it was estimated to be about 6%. By any estimation, it has fallen. Each of the following has been given as explanations for the decline. Explain why each of the following might have contributed to the decline in the natural rate of unemployment: a. the rise in the use of temporary employment agencies b. the decline in the number of people age 16 to 22 c. the fact that married women are more experienced workers now than they were in the 1980s Continued on Page 29 29 Part 4: 5 Points 4. Chapters 23 provided the monetarist explanation of what occurs following an increase in the money supply. Now assume that inflation has been very high. The Fed now decreases the money supply, causing aggregate demand to ________________. Inventories in stores ________________. Orders from manufacturers_________________. Production by manufacturers___________. The number of people employed____________. Wages should _______________ and prices should ________________. (Answer "rise" or "fall") a. Describe what will occur in the short-run if expectations are adaptive. Explain why. In your answer, be sure to define "short-run" and "adaptive expectations". b. Describe what will occur in the long-run. Explain why. Be sure to define “long-run”. c. On the graphs, aggregate demand - aggregate supply graph, the reservation wage – wage offers graph, and the Phillips Curve are drawn. Show the changes you have described above --first for the short-run and then for the long run. Also, draw the long-run aggregate supply curve and the long-run Phillips Curve. Inflation Rate 3% A 0 4% 4% is the Natural Rate of Unemployment Short-run Phillips Curve Continued on Page 30 Unemployment Rate 30 GDP Deflator Short-run Aggregate Supply1 100 A Aggregate Demand1 = M1 x V 0 $1,000 Real GDP ($1,000 is Potential Real GDP) $ Wage Offers1 A Reservation Wage1 3 End of Assignment 9 Time (Months)