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Course Course Number University or College Professor’s Name Macro3 Module Assignment #1 ( Student Name: ____________________________ Section: __________________________________ points) Please limit your answers to the spaces provided. If necessary, write on the back of the page. Do not attach printout or additional pages. All questions pertain to the Macro3 module in the SimEcon® software package. Make sure that you have read the “Macro3 Manual” and “SimEcon® Operation Instructions.” These materials may be found at the Class Web site prior to beginning the assignment. For many of the assignment’s questions, it will be necessary to refer to those instructions. For many of the assignment’s questions, it will be necessary to refer to your text. Open the Macro3 module. You will see a table entitled, “State of the Macroeconomy.” Select the button entitled “Inflation” and click “Continue.” You will see a table entitled “Initial State of the Economy.” Print out or copy this page for reference. Click “Continue.” In order to combat inflation and with no other policy goals, the government should ____________ (increase, decrease, leave unchanged) government spending, ____________ (increase, decrease, leave unchanged) taxes and ____________ (increase, decrease, leave unchanged) the money supply. First set government spending equal to $820 and leave all other policies unchanged. Click “No Shock.” As a result of this increase in government spending, the inflation rate ____________ (increased, decreased, remained unchanged). State the actual new inflation rate here: ____. Given that the stated policy goal was to combat inflation, was this a wise policy? ___ (Yes, No). Did this policy have a big effect on real GDP? ________________________ . If the government spending multiplier was 1/(1-Marginal Propensity to Spend) what would the multiplier analysis predict for the effect of government spending on real GDP? ____________ ______________________________________________________________________________ ______________________________________________________________________________ ____________. Why was the prediction of the multiplier analysis so different from the actual result? ____________________________________________________________________ __ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ _____________________________________________________________________________ Click “New Policy” and continue to reset the choices. Keep government spending at its original level of $800 and change taxes to $780. Do not change the money supply. Click “No Shock.” Compared to the original state of the economy, inflation has ___________ (increased, decreased, remain unchanged). State the actual new inflation rate here: _____ Note that the absolute value of the change in taxes was equal to the absolute value of the change in government spending in the last example. Were the respective changes in inflation equal to each other? ___ (Yes, No). Why or why not? (Hint: consider the respective multipliers.) __________ __ Course Macro3 Module Exercise #1 Page 2 ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ __________________________________. What is the ratio of the usual spending multiplier to the usual tax multiplier? ____________ . What is the ratio of the impact of government spending on GDP in this module to the impact of taxes? ____________ . Explain why the two ratios are related in this way________________________________________________ ________________________________________________________________________. Click “New Policy,” keep government spending and taxes at their original levels of $800 and increase the money supply to 74. Click “No Shock.” Compared to the original state of the economy, inflation has ____________ (increased, decreased, remained the same). State the actual new inflation rate here: _____ How did this policy affect aggregate demand and what caused this change in inflation? Explain your answer in terms of aggregate demand and supply and distinguish between the short and long run. ____________________________________________________________ _____ ___ ______________________________________________________________________________ ______________________________________________________________________________ ________________. Click “Back” twice and you will again see the “State of the Macroeconomy.” Select “Recession” and click “Continue.” You will see the “Initial State of the Economy.” Print out or copy this table for future reference. What is the initial unemployment rate? _____ Click “Continue.” In order to combat a recession and with no other policy goals, the government should ____________ (increase, decrease, leave unchanged) government spending, ____________ (increase, decrease, leave unchanged) taxes and ____________ (increase, decrease, leave unchanged) the money supply. Set government spending to $525 and leave all other policies unchanged. Click “No Shock.” As a result of this decrease in government spending, the unemployment rate ____________ (increased, decreased, remained unchanged). State the actual unemployment rate here: _____ Given that the stated policy goal was to combat the recession, was this a wise policy? ___ (Yes, No). Click on “New Policy” to reset your choices. Set taxes equal to $765 and click “No Shock.” As a result of the decrease in taxes, what has happened to the unemployment rate? _________ _______________. State the actual unemployment rate here: _____ Given that the stated policy goal was to combat the recession, was this a wise policy? ___ (Yes, No). Click “No Shock Long Run.” What is the long run unemployment rate? ___ Some economists consider a 5% unemployment rate to be the “natural” rate of unemployment in the United States. What is meant by the “natural” rate of unemployment? __________ __ Course Macro3 Module Exercise #1 Page 3 ______________________________________________________________________________ ________________________________________. Should society be satisfied with the long run unemployment rate indicated above? ___ (Yes, No). Why or why not? ____________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ __________________ Click “See Graph” and draw this graph of the long run situation on the next page. Is this economy close to full employment? ___ (Yes, No). Using the graph above, what are your reasons for your answer? ________________________________________________ ____ ______________________________________________________________________________ __________________________ Click “New Policy” and this time increase government spending to $1050, decrease taxes to 765, and increase the money supply to $72. Will these changes have an expansionary effect on the economy or a contractionary effect? ________________________. Click “No Shock.” What has happened to the unemployment rate? ____________ . What is the new unemployment rate? ____ What has happened to the inflation rate? ____________ . What is the new inflation rate? ______ Which groups would be more inclined to support these policies in the last example, people on “fixed incomes,” the wealthy, or unskilled low-wage workers and homeless people? _______ _____ ______________________________________________. What are your reasons for your answer? _________________________________ ____________________ ___________ ____ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Course Macro 3 Module Assignment #1 Page 4 What is the Phillips Curve, and what does the concept of a Phillips Curve say about these results? ____________________________________________________________ _________ ______________________________________________________________________________ ______________________________________________________________________________ ________________. Click “No Shock-Long Run.” What is the long run rate of unemployment? ___ Does this represent the full employment level of output? ___ (Yes, No). Why is the long run unemployment rate for this example the same as the long run unemployment rate in the last example? ____________________________________________________________ ______ _ ________________________________________________________. Click “Back” twice and this time go back to “Inflation” as the current state of the macroeconomy. When you get to the table entitled, “Initial State of the Economy” click “Continue.” Decrease government spending to $780, increase taxes to $805 and decrease the money supply to $71. Is the government now experiencing a budget deficit, a budget surplus or a balanced budget? ____________. What will be the combined effect of these policies on the economy? _______ _____ (contractionary effect, expansionary effect, no effect). Will these policies work in tandem, or will they contradict each other? ________________________. Click “No Shock.” What has happened to the inflation rate as a result of these policies? ___________ _. What has happened to unemployment as a result of these policies? ___________ _. If the stated goal was to reduce inflation while eliminating all unemployment, do you think that this government has totally and completely succeeded in its goals? No (Yes, No). Why or why not? ___________________ __________ ______ __ ______________________________________________________________________________ ________________ ______________________. Is this stated goal realistic? ___ (Yes, No). If you considered 5% unemployment to the inevitable equilibrium “natural” rate of unemployment, how would your answers change? _____________________ ___________ _ ______________________________________________________________________________ ________________________________ Click “Back” twice this time choose “Recession” as the current state of the macroeconomy. Increase government spending to $570, increase taxes to $950, and increase the money supply to $72. Assuming that the stated policy goal is to combat the recession and nothing else, are these policies working in tandem or are they contradicting each other? ____________ _______ _ _ _ _ _. What are your reasons for your answer? ____________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ____________. Given the stated policy goal, before going further, do you think that these policies taken together are the wisest choice possible? ___ (Yes, No). Now click “No Shock.” What has happened to the unemployment rate as a result of these policies? ________________________. What has happened to the inflation rate as a result of Course Macro 3 Module Assignment #1 Page 5 these policies? ________________________. Given a new overall policy goal of ending the recession and controlling inflation, and given the relative magnitude of the indicated changes, is this set of policies successful in achieving the new stated goals? ___ (Yes, No). In the real world, are there times when a government enacts policies that contradict each other? ____ (Yes, No). Why or why not? ________________________________________________ ______________________________________________________________________________ __________________________________________________________________ . What bearing would the concept of a Phillips Curve have on this discussion? ____________ ________________________________________________________________________.