Download Macro2 Exercise #2

Course
Course Number
University or College
Professor’s Name
Macro2 Exercise #2 (
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 Macro2 module in the
SimEcon® software package.
Make sure that you have read the “Macro2 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 Macro2 module. You will see a table entitled, “State of the Macroeconomy.” Select
the button entitled, “Recession” and click to make inflationary expectations constant. After that,
click “Continue.” You will see a table entitled, “Initial Conditions: Recession.” Print out this
table for future reference. Click “Continue.” You will see a table entitled, “Policy Decisions.”
You are stuck with the original values of G = 600, T = 600 and MS = 60 set by the previous
administration, so just click “Calculate.” This will give you the initial conditions again. Other
things being equal, and if the recession was the only concern, it would be wise to __________
(increase, decrease, leave unchanged) government spending, __________ (increase, decrease,
leave unchanged) taxes and __________ (increase, decrease, leave unchanged) the money
supply. Now, click “Next Year.” Enter the following amounts: G = 580, T = 620 and MS = 59.
Click “Calculate.” Is this administration running a budget deficit, a budget surplus or neither?
________________________________________.
What has happened to real GDP? __________
. What has happened to the unemployment
rate? _____ _____ . What has happened to inflation? __________
. What has happened
to the real interest rate? ___________________. What is the difference between the real and the
nominal interest rate? __________________________________________________ _____ ___
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
__________________________. If the recession was the major concern of the government, do
you think that this was a wise policy? ____ (Yes, No). Why or why not? __________ ____
____________________________________________________________________________.
Click “Next Year.” This time, enter the following amounts: G = 660, T = 570, MS = 65. Click
“Calculate.” Is this administration running a budget deficit, a budget surplus or neither? ____
__________________________________________Fill in the amounts in the table below:
Real GDP: $2,366.67
Unemployment Rate: 2.90%
Inflation Rate: 9.26%
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Macro2 Exercise #2
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Compared to the last example, what has happened to real GDP? __________
. Likewise,
what has happened to the unemployment rate? ____________________. Likewise, what has
happened to inflation? ____________________. Given that the economy was in a recession,
did this seem like a wise policy? ___ (Yes, No). Would everyone agree that inflation at an
acceptable level?
_________________________________________________ (Yes, No).
Explain why this would or would not be considered an acceptable inflation rate. __________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
__________________. Click “AS + AD Graph.” Draw the resulting graph below:
Click “AD + AS Graph.” Draw the resulting graph below. Indicate the aggregate supply curve,
the aggregate demand curve, and the full employment output and label all axes.
Is this economy at full employment, below full employment or above full employment? ___
____________________ _______How can you answer this question using the above graph?
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________________________. Is it
possible for an economy to be above full employment? ___ (Yes, No). If so, how is this
possible? _______________________________________ __________________________ _
______________________________________________________________________________
______________________________________________________________________________
Click the “Back” button once. If this society was dissatisfied with an unemployment rate of
even 2.90% the government should ________ (increase, decrease, leave unchanged) government
spending, _________ (increase, decrease, leave unchanged) taxes and __________ (increase,
decrease, leave unchanged) the money supply. Click “Next Year.” Enter the following amounts:
G = 680, T = 550 and MS = 67. Click “Calculate.” Is this administration running a budget
deficit, a surplus or neither? ________________________________________.
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Macro2 Exercise #2
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Fill in the amounts in the table below.
Real GDP: __________
Unemployment Rate:
________
Inflation Rate: ________
Has this society virtually succeeded in eliminating unemployment? ___ (Yes, No). Has real
GDP increased above the last example? ___ (Yes, No). What was the major cost of this
policy? ________________________________________
What are the problems with such a high inflation rate in terms of inflationary expectations? ___
______________________________________________________________________________
___________
__________________ . What are the potential problems of such a high
inflation rate in terms of people on fixed incomes, and how does this relate to the indexing of
benefits? _______________________________ ______________________ ______________
______________________________________________________________________________
______________________________________________________________________________
_____________. How can such a high inflation rate potentially cause a redistribution of income
in terms of creditors versus debtors and how does this question relate to the indexing of loans? _
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______. Other than redistribution and other matters than can be “fixed” by indexation, are there
reasons to avoid inflation? ___ (Yes, No). Explain why or why not? __________
______________________________________________________________________________
______________________________________________________________________________
______________ All in all, did this last example provide an example of sound economic policy?
___ (Yes, No). Why or why not? ____________ ___________ ___________ ___________
_____________________________________________.
Click “New Term in Office.” This time, select “Inflation” as the state of the macroeconomy
and click below that button to make inflationary expectations constant. Click “Continue.” You
will see the table titled, “Initial Conditions: Inflation.” Click “Continue.” You will see “Policy
Decisions.” Click “Calculate.” This will give the same results as “Initial Conditions: Inflation.”
Other things being equal, if inflation was the only concern, it would be wise to __________
(increase, decrease, leave unchanged) government spending, __________ (increase, decrease,
leave unchanged) taxes and ________ (increase, decrease, leave unchanged) the money supply.
Now, click “Next Year.” Enter the following amounts: G = 750, T = 540 and MS = 63. Click
“Calculate.” Is this administration running a budget deficit, a budget surplus or neither? ___
_____________________________________A message appears. What does the message say?
______________________________________________________________________________
________________________________ In this example, what inflation rate did we start with?
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Macro2 Exercise #2
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______ What caused this hyperinflation? ________________________________________
______________________________________________________________________________
______________________________________________________________________________
____________________________________________ . What levels of inflation have South
American nations such as Brazil and Argentine experienced at various times during the last
several decades? ________________________________________
Click “OK.” You will arrive back at the the “State of the Macroeconomy.” Select inflation as
the state of the economy and click to make inflationary expectations constant. Click “Continue”
and on the “Policy Decisions” screen click “Calculate.” This will give the same results as
“Initial Conditions: Inflation.” Fill in the amounts in below.
Real GDP:
__________
Unemployment Rate:
_____
Inflation Rate:
______
Click “Next Year.” This time, enter the following amounts: G = 680, T = 700 and MS = 58. Is
this administration running a budget deficit, a budget surplus or neither?
___ _______
____________________. Click “Calculate.” Fill in the amounts in the table below:
Real GDP:
__________
Unemployment Rate:
_____
Inflation Rate:
______
Has this policy succeeded in reducing inflation? ___ (Yes, No). What are some of the
disadvantages of this policy? __________ __________ __________ __________ __________
_______.
What is the relationship between inflation and unemployment?
__________
__________ ____________________. If a government pursues a policy to reduce inflation,
what is likely to happen to unemployment? ____________________. Likewise, if the
government pursues a policy to reduce unemployment, what is likely to happen to inflation?
____________________.
Click “AS + AD Graph” and draw the resulting graph below. Indicate the aggregate supply
curve, the aggregate demand curve, the full employment output and label all axes.
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Macro2 Exercise #2
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Is this economy above, below or at full employment? ______________________________
__________. Do a significant number of economists consider an unemployment rate that is at or
below 4% to be “acceptable”? ___ (Yes, No).
Starting from a balanced budget, if the administration wants to control inflation, should the
government move toward run a budget surplus or a budget deficit? _________ _____ __
______________. Likewise, should the government increase or decrease the money supply?
________________________________________.