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Transcript
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% Course Macro2 Exercise #2 Page 2 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? ________________________________________. Course Macro2 Exercise #2 Page 3 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? Course Macro2 Exercise #2 Page 4 ______ 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. Course Macro2 Exercise #2 Page 5 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? ________________________________________.