Download Problem Set #1

Prof. Janis Kapler
Department of Economics
Public Policy 622, Part II
Spring 2006
ECONOMICS FOR POLICY ANALYSIS: MACROECONOMICS
Problem Set #1
INSTRUCTIONS: The assignment is due March 27. For work with
equations, please show your work, meaning the equations you use
and what values you plug into them. Please keep a copy of the
assignment when you hand in the original, so we may discuss them
in class as necessary. Where explanations are required, they
should be brief and addressed to a non-economist policy maker.
1. Multiplier model:
C=500+.5Yd
T=600
(a)
(b)
(c)
(d)
I=300
G=2000
Solve for equilibrium GDP and graph the solution.
Demonstrate mathematically that total national
saving equals total national investment at your
solution for (a).
How much of an increase in I would be needed to
increase equilibrium GDP by $1000? Graph the
solution.
Start with the original equilibrium. The government
wants to increase spending for hurricane clean-up,
but does not want the budget deficit to get worse.
Government decides to increase government purchases
AND taxes by $200 each. What will happen to
equilibrium GDP?
2. Multiplier model: Assume the simple economy (and world) of
chapter 3, in which there is no inflation and little worry
about budget deficits. Graph and explain the likely effects
of a decline in consumer confidence. What positive role is
there here for fiscal policy? Explain what could be done,
why, and how it would likely affect the economy. Demonstrate
your fiscal solution on your graph.
3. Nominal and real values: Download Tables B47 and B60 from
The Economic Report of the President 2006 to help you answer
the following questions.
(a) Using the Consumer Price Index (CPI), calculate the
real (1982 dollars) hourly manufacturing wage in the US
in 1973, 1994, 1999 and 2005.
(b) How much (%) did medical care prices and food prices
rise between 1973 and 2005? How much did the nominal
hourly manufacturing wage rise? How much did overall
consumer prices rise (CPI)?
(c) Briefly explain the meaning of your results above to a
person who is not familiar with the real/nominal values
issue.
Problem Set #2
INSTRUCTIONS: The assignment is due April 24. For work with
equations, please show your work, meaning the equations you use
and what values you plug into them. Please keep a copy of the
assignment when you hand in the original, so we may discuss them
in class as necessary. When explaining your IS-LM graphs, please
use prose instead of the symbols I used in class.
1. On pp. 85-87 of the textbook, complete problems numbered
2,3,4 and 11.
2. On pp. 111-12 of the text, complete problems numbered 4,
7,8, and 9a,b,c.
3. From the 2003 comprehensive exam: Analyze the economic
impacts of the following scenario [include an IS-LM graph
and analysis]:
a) What would be the effect on the economy of large cuts in
Medicaid spending at the federal level? In order to keep the
analysis focused on federal fiscal effects, without the
complications of state budget effects, assume here that the
state portion of Medicaid spending is unchanged, that is,
states spend the same amount of state dollars, so total
Medicaid spending falls by the amount of the federal cuts.
Also assume no other changes in federal spending or taxes.
[Skip the next part until we’ve done AS-AD.] Does it matter
if the economy is in recession, as it is now? How would the
impacts differ if the economy was not in recession, but
instead was operating above the natural rate of output?
INSTRUCTIONS: The assignment is due May 15 no later than 5 pm.
When explaining your graphs, please use prose instead of the
symbols I used in class.
4. From the 2003 comprehensive exam: Analyze the economic
impacts of the following scenario [include an AS-AD graph
P
and analysis]:
b) What would be the effect on the economy of large cuts in
Medicaid spending at the federal level? In order to keep the
analysis focused on federal fiscal effects, without the
complications of state budget effects, assume here that the
state portion of Medicaid spending is unchanged, that is,
states spend the same amount of state dollars, so total
Medicaid spending falls by the amount of the federal cuts.
Also assume no other changes in federal spending or taxes.
Does it matter if the economy is in recession, as it is now?
How would the impacts differ if the economy was not in
recession, but instead was operating above the natural rate
of output?
2. From the 2004 comprehensive exam: Individuals and society
have much at stake in education. Proponents of charter
schools (and school choice generally) argue that they will
improve the quality of education. What role does education
play in economic growth and what macroeconomic impacts might
charter schools have if advocates are correct?
3. Do problems 7 and 8 on p. 162.
4. (a) AS-AD PROBLEM: Explain and show a recession with Y less
than the natural level, and the medium run adjustment
assuming no policy changes.
(b) AS-AD PROBLEM: Explain and show a recession with Y less
than the natural level, and the medium run adjustment due to
an immediate monetary expansion designed to combat the
recession.
(c) Explain the different outcomes.