Download Macro1 Exercise #3

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Macro1 Exercise #3
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”.
Write down the values for the various parameters below:
Consumption:
Investment:
Government Spending:
GDP:
Taxes:
__________
__________
__________
__________
__________
Unemployment:
Inflation:
Interest Rates:
__________
__________
__________
Click “Continue”. You will see a table called, “Macro Policy Tools”. Given the current
situation that this economy is in, the best policy would be to (increase, decrease, leave
unchanged) __________ government spending, to (increase, decrease, leave unchanged)
__________ interest rates, and to (increase, decrease, leave unchanged) __________ taxes.
Select “Government Spending” and click “Continue”. Change the government spending to
$1,440 and click “Continue”. A table will appear that is entitled “Long Term Results”. Write
down the values that you see on this table:
Real GDP:
Consumption:
Investment:
__________
__________
__________
Unemployment Rate:
Inflation Rate:
__________
__________
In the long run, as a result of these policies, GDP will __________ (increase, decrease, remain
unchanged). As a result of this policy, in the long run, consumption will __________ (increase,
decrease, remain unchanged), and investment will __________ (increase slightly, decrease
slightly, remain unchanged). What is the reason for this? __ ____________________________
______________________________________________________________________
__
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Macro1 Exercise #3
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In addition, in the long run, inflation will ____________ (increase, decrease, remain
unchanged), while unemployment will ____________ (increase, decrease, remain unchanged).
Based on the long run outcome, compared to the initial conditions, how large was the
“government spending multiplier” in this case?
If full employment GDP is $4,500, how much or a change in government spending would there
have to be to reach that level, starting from the initial conditions?
Click, “See Graph”, and draw this graph below:
As a result of this policy, the aggregate expenditure curve has __________ (moved up, moved
down, remained unchanged). This movement of the aggregate expenditure has caused a/an
__________ (increase, decrease, no change) in real GDP. Click the button entitled “AD-AS
Graph”. Draw this graph below:
The AD-AS graph tells us that we are _________________________ (above full employment,
below full employment, at full employment). In this current situation, the best policy would be
to (increase, decrease, leave unchanged) __________ government spending, to (increase,
decrease, leave unchanged) __________ interest rates, and to (increase, decrease, leave
unchanged) __________ taxes.
Is it possible to be above the full employment level of output? __________ (Yes, No)
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Macro1 Exercise #3
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Why or why isn’t it possible to be above the full employment level of output?
______________________________________________________________________________
______________________________________________
_______________
What is meant by the “natural” rate of unemployment? ___________________________
______________________________________________________________________________
____________________________________________________________________________ _
Which line indicates the long run aggregate supply curve? _____________________________ _
____________________________________________________________________________ _
This is because economists think that in the long run the economy naturally gravitates toward
_________________________.
Now click the “Back” button, you will see the table entitled, “Set Government Spending”. Are
we still experiencing inflation? __________ (Yes, No). Click “Reset Policy”. You will see a
table entitled, “Macro Policy Tools”. Select “Government Spending” and click “Continue”.
Change government spending to $1,443.182 and click “Continue”. You will see the table
entitled, “Long Term Results”. Write down the values of this table below:
Real GDP:
Consumption:
Investment:
__________
__________
__________
Unemployment Rate:
Inflation Rate:
__________
__________
Is it necessary to enact policies that further reduce inflation? ________ (Yes, No). Why or why
not? _________________________________________________________________________.
What have we given up at the expense of reduced inflation? First of all, GDP and consumption
are both ____________ (higher, lower, about the same) and unemployment is ____________
(higher, lower, about the same).
Does there seem to be a trade-off between unemployment and inflation? __________ (Yes, No).
What is the nature of this trade-off? _________________________________
______________________________________________________________________________
Click, “See Graph”, and draw this graph below:
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Macro1 Exercise #3
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As a result of this policy, the aggregate expenditure curve has __________ (moved up, moved
down, remained unchanged). This movement of the aggregate expenditure has caused a/an
__________ (increase, decrease, no change) in real GDP. Click the button entitled “AD-AS
Graph”. Draw this graph below:
The AD-AS Graph tells us that we are _________________________ (above full employment,
below full employment, at full employment). In this current situation, the best policy would be
to (increase, decrease, leave unchanged) __________ government spending, to (increase,
decrease, leave unchanged) __________ interest rates, and to (increase, decrease, leave
unchanged) __________ taxes.
Classical economic theory believes that the economy automatically adjusts itself to full
employment within a short time. If you believed in classical economic theory in the extreme,
how much time do you think would be required for the economy to automatically adjust to full
employment? __________. Choose one answer: (3 months, 2 years, practically forever). If you
believed in classical economic theory, would you support government intervention in the
economy? __________ (Yes, No).
If you believed in Keynesian economic theory in the extreme, how much time do you think
would be required for the economy to automatically adjust to full employment? __________
Choose one answer: (6 months, 2 years, practically forever). If you believed in Keynesian
economic theory, would you support government intervention in the economy? __________
(Yes, No).
Liberals often want to __________ (increase, decrease, leave unchanged) government
spending, while conservatives often want to __________ (increase, decrease, leave unchanged)
government spending.