Download Macro1 Exercise #4

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Macro1 Exercise #4
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 Macro1 module in the
SimEcon® software package.
Make sure that you have read the “Macro1 Manual” and SimEcon® Operation Instructions”.
These materials may be found at the Class Web site prior to beginning the exercise. For many of
the exercise’s questions, it will be necessary to refer to those instructions. For many of the
exercise’s questions, it will be necessary to refer to your text.
Open the Macro1 module. You will see a table called “State of the Macroeconomy”. Select
“Inflation” and click “Continue”. You will see a table called “Initial Conditions: “Inflation”.
Print out this table for future reference. Click “Continue”. You will see a table entitled, “Macro
Policy Tools”. Other things being equal, with inflation the only consideration, it would be wise
to ____________
(increase, decrease, leave unchanged) government spending, to
____________ (increase, decrease, leave unchanged) taxes and to ____________ (increase,
decrease, leave unchanged) the interest rate. Select the button entitled, “Taxes” and click
“Continue”. Set taxes equal to $1,600 and click “Continue”. This action will result in a
__________________ (budget deficit, budget surplus). What was the inflation rate before the
change? __________. What is the long run inflation rate after the change? ____________.
What was the unemployment rate before the change? ____________. What is the long run
unemployment rate after the change? ____________. Although this policy succeeded in
controlling
inflation,
what
is
the
major
drawback
to
this
action?
_________________________________________________________.
Click “See Graph” and draw the resulting graph below. Indicate the old and new aggregate
expenditure curves, the aggregate supply curve, and the old and new equilibrium points and label
all axes.
Course
Macro1 Exercise #4
Page 2
As a result of this increase in taxes, the aggregate expenditure curve shifted ____________ (up,
down, no change). What is the significance of the 45-degree line? _____
_
____________________________________________________________________________ _
Now click “AD-AD Graph”. Draw the resulting graph that you see below. Indicate the
aggregate supply curve, the aggregate demand curve, the equilibrium point, the full employment
line and label all axes.
First of all, does this graph present a totally different situation from the first graph, or is it just
another way of presenting the same situation? ________________________________________
_________________________. What is measured on the horizontal axis on both graphs? _____
__________________. What is measured on the vertical axis for the first graph? ____________
_________________. What is measured on the vertical axis for the second graph? ___________
____________________. In the first graph, called the 45-degree diagram, what is assumed
about the price level? _________________________________. Consider the second graph.
Does the equilibrium indicate that the economy is above or below full employment? __________
___________________________.
Click the “Back” button three times. You will arrive at the table entitled, “State of the
Macroeconomy”. This time, select “Recession” and click “Continue”. You will arrive at the
table entitled, “Initial Conditions: Recession”. Print out this table for future reference or write
down the contents. Click “Continue”. You will arrive at the table entitled, “Macro Policy
Tools”. Other things being equal, with the recession being the only consideration, it would be
wise to ____________ (increase, decrease, leave unchanged) government spending, to
____________ (increase, decrease, leave unchanged) taxes and to ____________ (increase,
decrease, leave unchanged) the interest rate. Select the button entitled, “Government Spending”
and click “Continue”. Increase government spending to $1,265 and click “Continue”. This
action will result in a _____________________ (budget deficit, budget surplus). What was the
inflation rate before the change? ____________.
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Macro1 Exercise #4
Page 3
What is the long run inflation rate after the change? __________. What was the unemployment
rate before the change? __________. What is the long run unemployment rate after the change?
__________. Although this policy succeeded in keeping inflation under control, what is the
major drawback to this action? ___________________________________________________.
Click “Reset Policy”. Increase government spending further to $1,310 and click “Continue”.
What is the new long run unemployment rate after this action? __________. Does it appear that
the recession has ended? __________. What is the major drawback to the successful reduction
of the long run unemployment rate? _______________________________________________.
Click “See Graph” and draw the resulting graph below. Indicate the old and new aggregate
expenditure curves, the aggregate supply curve, the old and new equilibrium points and label all
axes.
What happened to the aggregate expenditure curve? __________________. As a result of the
increase in government spending, what happened to output, i.e., the equilibrium amount of real
GDP? _______________. Click “AS-AD Graph”. Draw the resulting graph below.
Course
Macro1 Exercise #4
Page 4
What is meant by a “natural” rate of unemployment? __________________________________
______________________________________________________________________________
____________________________________________________________________________ _
Economists in the United States will refer to unemployment as probably being “natural” as long
as it is below what percent? 5%. Thus, could an economy with a current unemployment rate of
4% be referred to as at “full employment”? __________ (Yes, No). Is it possible for an
economy to be temporarily above full employment? __________ (Yes, No). If yes, how can
this happen? _______________________________________________________________ __
______________________________________________________________________________
____________________________________________________________________________ _
Click the “Back” button once to take you back to the “Long Run Results”. Also, refer back to
your printout of the table, “Initial Conditions: Recession”. What was the indicated GDP and
consumption on the “Initial Conditions: Recession” table? ______________________________
___________________________________. What is the new long run GDP and consumption
after government spending was increased? ______________________________________.
Using this information, you can compute the marginal propensity to consume. Indicate all your
calculations and your final answer on the next page.
Given that the long run inflation rate is now over 27%, and assuming that inflation is now the
only concern, other things being equal, it would be wise to ____________ (increase, decrease,
leave unchanged) government spending, to ____________
(increase, decrease, leave
unchanged) taxes and to ____________ (increase, decrease, leave unchanged) the interest rate.
Click “Reset Policy” and then click the “Back” button once to arrive at the table entitled “Macro
Policy Tools”. One of the tools indicated is to change the interest rate. In the real world, how is
that
best
accomplished,
through
monetary
or
fiscal
policy?
_________________________________________________________.
What is monetary
policy?________________________________________________________________________
_________________________. Select “Interest Rate” and click “Continue”. Increase the
interest rate to 6.6% and click “Continue”. What is the new inflation rate? ____________. What
is the new unemployment rate? ____________. Has this action succeeded in controlling
inflation? __________ (Yes, No). What was the major drawback to this increase in the interest
rate? _____________________________________________________________________ __.
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Macro1 Exercise #4
Page 5
All these examples indicate a relationship between unemployment and inflation. What is that
relationship? __________________________________________________________________
_________________________________________________________. Is it also possible to
have unemployment and inflation at the same time? __________ (Yes, No). Consider the late
1970’s in the United States. Was unemployment high during that time? _________ (Yes, No).
Was inflation high during that time? __________ (Yes, No). What term do economists use to
refer to a situation such as that of the 1970’s? _______________________________________.