Download Economics 101 Assignment #5 Name

1
Economics 101
Assignment #1
Name__________________
1. Assume that there are only four goods produced. The following represent the prices and
quantities sold in the base year (2000) and the current year (2006):
Price00
Quantity00
Price06
Quantity06
Pizza
$5
10
$10
20
Cola
10
20
30
30
T - Shirts
5
5
10
15
Bus. Equipment 30
10
40
20
What was the Nominal Gross Domestic Product (GDP) in 2006? Show calculations.
What was the Nominal Gross Domestic Product (GDP) in 2000? Show calculations.
What was the Real Gross Domestic Product (Real GDP) in 2006? Show calculations.
2. In the calculation above, by what percent did the Real GDP rise between 2000 and 2006?
3. Assume that Real GDP Per Capita is $10,000 in 2000. If it grows at 2% per year, what will
the Real GDP per capita be in 2072? If it grows at 3% per year, what will the Real GDP Per
Capita be in 2072? Notice how much of a difference a small change in the rate of growth can
make.
4. Click on Nominal GDP and Real GDP on my Web Site
1. What is the Gross Domestic Product for the most recent quarter? What does
this number tell you?
2. What was the Real GDP in the most recent year?
3. In what years did Real GDP decline from the previous year (this is the
definition of a “recession”)?
5. This time, click on The Economic Report of the President
1. What was the American population in the most recent year? Therefore, what
was the Real GDP per capita in the most recent year (you need to calculate
this)?
6. President Bill Clinton took office in 1993. As noted in the text, he was elected largely to solve
the problem of the slow growth of productivity and the resulting slow growth of income. “Surf”
the Economic Report of the President online --- the above site --- (or find other sources) and
answer the following: Was the problem significantly reduced while Bill Clinton was President
(1993 to 2000)? Back up your answer with data on productivity growth from 1993 to 2000, on
income growth from 1993 to 2000, on the percent of Americans officially in poverty from 1993
to 2000, and any other data you can find that would help answer the question.
ETHICS QUESTION:
7. Is economic growth really a good thing? Economic growth refers to the increase in the
standard of living generated by an increase in Per Capita Real GDP. The question is: does a
greater wealth really buy greater happiness? If so, why? If not, why not? (Consider economic
growth starting from the standard of living already experienced by the United States, not the
standard of living experienced today by a very poor country.)
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Economics 101
Assignment #2
Name_______________________
Follow the path:
Click on Unemployment Rate on my Web Site
Most Requested Series
Labor Force Statistics from the Current Population Survey
On the Form:
Click on all that are necessary to answer the questions below
Click on the most recent year
Click Retrieve Data (Click Continue if asked)
1. What is the most recent month? What is the overall unemployment rate in the most recent
month?
2. What is the total civilian labor force? What is the total number of people unemployed?
3. How many of the unemployed have been unemployed 27 weeks or longer? What percent is
this of the total number of unemployed people?
4. Pick a month in 2004, a month in 2001, and a month in 1997. Calculate the percent of
unemployed that have been unemployed 27 weeks or longer as you did in Question 3. What has
been happening to this percent in recent years?
5. What is the current unemployment rate for males age 20 and over? for females age 20 and
over?
6. What is the current unemployment rate for whites overall? for black/African American
overall? for Hispanics/Latinos overall?
7. What is the current unemployment rate for people age 16 to 19?
Go Back to Most Requested Series
Local Area Unemployment Statistics
California
A form appears. Click the box for CA Unemployment Rate and the box for
San Diego, CA MSA Unemployment Rate
Move down the form. Click on the most recent year.
Click on the Retrieve Button (Click on CONTINUE if you get a warning message)
8. What is the most recent month available in each case? What was the California
unemployment rate for this month? What was the San Diego unemployment rate for this
month?
3
Economics 101
Assignment #3
Name____________________
1. Follow the path: Consumer Price Index on my Web Site
Most Requested Series
Consumer Price Index --- All Urban Consumers
Fill-out the Form:
Click on U.S. All Items, 1982 - 1984 = 100
Move Down and Click on All Years in the Box
Click the Retrieve Data Button
(Be sure you are using ALL YEARS and not just the past ten years.)
a. What is the most recent month? What is the CPI in this month?
b. Considering the January figure alone, a market basket that cost $9.80 in 1913 would cost how
much in the most recent month?
c. What was the last year that prices fell from January to January?
What was the last time that prices fell for two + consecutive years from January to January?
d. By approximately what percent did prices rise from January, 1970 to January, 1980?
(You need to calculate this.)
e. How many years did it take for prices to triple from their January, 1913 value? ___________
How many years did it take for prices to triple from their January, 1970 value? ___________
f. In June, 1965, I started working at an accounting firm for $7,200 per year. I was straight out of
college and had no significant work experience. Assume that you begin your work career in the
most recent month noted. What starting salary do you need to have now to have the same
purchasing power as I had in June, 1965?
ETHICS QUESTION:
2. Assume that you are a policy maker for the American government. Assume that, today, the
unemployment rate is 6% and the inflation rate is 5% (both reasonably high numbers). You can
undertake a set of policies that would lower the unemployment rate to 4%. But if you did so, the
inflation rate would rise to 10%. Or you can undertake a set of policies that will lower the
inflation rate to 0%. But if you did so, the unemployment rate would rise to 10%. Consider the
problems to society that result from unemployment (see Chapter 3) and the problems to society
that result from inflation (see Chapter 4). Assume that you must choose one of these two sets of
policies. Which one do you choose? Explain why.
4
Economics 101
Assignment #4
Name_________________________
1. Most people who buy a home pay for it by borrowing money from a bank, savings and loan,
or other such institution. Such a loan is called a mortgage. At present, the interest on a mortgage
is deductible for tax purposes.
To illustrate how this works, assume that a person is in a tax rate of 25% and has a mortgage
of $200,000 at 6% interest with 25 years left to be paid. The annual interest payment is $12,000
(6% of $200,000). Of this, the taxes are reduced by $3,000 (25% of $12,000). Thus, the actual
cost to the borrower is not $12,000, but $9,000 ($12,000 - $3,000).
Now assume that this tax deduction is completely eliminated in some reform of the tax system.
First, recalculate how much the actual cost to the borrower would now be. Then, show what will
occur in the market to borrow money. Finally, show what will occur in the market for homes
(homes and borrowing money are complements). In each case, explain what will happen to the
equilibrium price (or interest rate) and to the equilibrium quantity.
Interest Rate
Supply
6%
Demand
_____________________________
0
Quantity of Money to Borrow (Lend)
Price of Homes (-000)
Supply of Homes
$500
Demand for Homes
____________________________
0
Quantity of Homes
2. State whether you would favor or oppose the elimination of this tax deduction is you were a
(1) homeowner; (2) owner of a bank; (3) prospective homebuyer who does not now own a home;
(4) renter who intends to continue renting an apartment; (5) someone who intends to borrow from
a bank to buy a new car. WHY?
3. There were given seven factors to explain the demand for a product and five factors to explain
the supply of a product. The demand and supply determine the price. Use as many of these
factors as you can to explain why home prices have risen so much in the past few years in San
Diego County.
5
Economics 101
Assignment #5
Name________________________
The cases discussed in class have analyzed the effects on foreign exchange markets of an increase
in interest rates in the United States and of an increase in inflation in the United States. Do the
same analysis on the following cases. Show using the demand/supply graph for foreign exchange.
1. Incomes rise in the United States and fall in Japan
2. Both Americans and Japanese believe that American goods are of higher quality than before
3. Both Americans and Japanese believe that the American dollar will depreciate in the near
future
4. Laws change in Japan making it easier for Americans to buy or build companies in Japan
5. Interest rates fall in the United States while they rise in Japan
6. Go to the site of Exchange Rates on my web site.
From this site, what is the most recent exchange rate for each of the following foreign monies?
The Canadian Dollar
The European Monetary Union Euro
The Korean Won
The Mexican Peso
The British Pound
7. A six pack of Labatts Beer sold in Windsor Ontario Canada for $6.60 Canadian. The same six
pack of Labatts Beer sold in Detroit Michigan (directly across the river) for $3.50 American.
Using the exchange rate you found in question 1, is the six pack cheaper in Windsor or in
Detroit?
8. Analysis Case:
As of now, countries that buy oil pay for them in American dollars. Countries that hold
international reserves tend to hold them in dollars. But recently, there has been a tendency to
switch to the Euro. Analyze the result for the United States if the world decides to pay for its oil
in Euros instead of dollars and to hold its international reserves in Euros instead of dollars.
.$/Euro
Supply1
P1
E1
Demand1
______________________________
0
Quantity of Euros
As a result, American exports would ______________ and American imports would
_________________. Overall, what would happen to the American economy?
________________________________________________________________
6
Economics 101
Assignment #6
Name______________________
Pick out the stock of a particular company (any company). Find the value of the stock of that
company in the most recent week. You will find this information either in a newspaper or on the
Internet. Then, find the value of that stock one year ago (or as close to that date as you can).
Value Now $_____________
Value Then $_____________
You will need to do some research as to what has been happening concerning this company. Go
to the Company’s site on the Internet or Google the company for recent articles. You know that
the price is affected by the demand for and the supply of that stock. Demanders are those who
wish to buy the stock. Suppliers are those who own the stock and are considering selling. There
are six possible determinants of the demand and four possible determinants of the supply. Based
on your research, explain what might be responsible for the change in the price you have
discovered. Show your reasoning on the graph below.
Price of the Stock
Supply
P1
Demand
0
Quantity of the Stock
2. Ethics Question
The following is excerpted from a quote on the Internet:
“”You should not put money in the stock market. Seek other options that reduce exploitation
and are not based on speculation, such as putting your funds into a local community development
institution where you can actually see them being used. … The stock market is nothing more than
gambling. … A person merely hands over money to someone else whom he or she does not
know and says “make money for me”. It does not matter if someone else’s job was cut in order to
give us our dividends. It does not matter if someone’s human right to health care was cut or if the
environment is being destroyed as long as we get our money. … Dividends come from cutting
costs and putting profits before people. .. Instead, invest in your local community. Your
monetary returns may not always be as high but your spiritual and emotional returns will be. “
Do you agree with this statement or not? If so, explain why. If not, explain why not.
7
Economics 101
Assignment #7
Name____________________________
In Mexico in 1982, prices were rising very rapidly. On the graph, show aggregate demand,
aggregate supply, and the equilibrium Real GDP and GDP Deflator. Show your graph with a
large inflationary gap.
GDP Deflator
0
Real GDP
a. The government of Mexico responded to the problem with a program. First, it significantly
reduced government spending. Second, it raised taxes. And third, it decreased the money
supply. Show the result of these three changes on the graph above. Since all three of these
changes have the same effect, you may show them as only one change. As a result of these
policies, what happened to Real GDP in Mexico? What happened to the GDP Deflator?
b. Another part of the government’s program was to create a large depreciation of the
Mexican peso. On the graph below, draw the original situation again. Then, draw the changes
caused by the depreciation of the peso. There will be both a change in aggregate demand and
also a change in aggregate supply. Draw both. Assume, as actually was the case, that the shift in
aggregate supply was the larger shift. As a result of this depreciation of the peso, what
happened to Real GDP in Mexico? What happened to the GDP Deflator?
GDP Deflator
0
Real GDP
c. Yet a final part of the government’s program was to reduce wages. In the graph on
the next page, again draw the original situation. Then, show the results of reducing wages.
There will be changes in both aggregate demand and also in aggregate supply. Draw both.
Assume, as actually happened, that the shift in aggregate demand was the larger shift in
this case. What happened to the Mexican Real GDP from this policy of decreasing wages?
What happened to the GDP Deflator?
8
Economics 101
Assignment #7 -- Page 2
GDP Deflator
0
Real GDP
d. Write a very brief conclusion: from these policies, what can you conclude would happen to
the Mexican economy?
9
Economics 101
Assignment #8
Name________________________
This assignment will be skipped if Chapter 10 is skipped.
1. Assume that, there is only one product produced, which we will call a "widget". If there
were full-employment, production would equal 1,000 widgets to sell at $100 per widget.
Therefore production in the United States is valued at $100,000. National income also
must equal $100,000. This income involves 10 workers being paid $10,000 per year.
(Ignore profits for now.) Each worker produces 100 widgets.
Of their $100,000 of income, the workers pay $20,000 in taxes, save $5,000, spend
$75,000 on consumer goods, of which $70,000 were produced in the United States and
$5,000 were imported. (You need to read all of Chapter 10 to bring in imports and exports.)
Businesses wish to spend $5,000 on private business investment spending, that is, on capital
goods produced in the United States.
Foreigners are spending $10,000 on American exports.
If the government spent the same amount that it raised in taxes ($20,000), what would
happen to production in this economy (inflation, recession, or neither?)? Why?
In order to avoid any problem of unemployment or inflation, how much should the
government spend? Why?
If it did so, the government would have a (budget deficit or surplus?) equal to
$_________________.
If your answer is a deficit, where would the government get the money to pay for this deficit?
If your answer is a surplus, what would be done with the surplus?
2. Go my web site for the Economic Report of the President. Go to the Statistical Tables.
1. Click on Table B-1. What is the Nominal Gross Domestic Product for the most recent year (or
quarter)?
2. What was the Consumer Spending for the most recent year (or quarter)? How much of this
was for Durable Goods? How much of this was for Non-Durable Goods? How much of this was
for Services?
3. What was the Business Investment Spending for the most recent year (or quarter)?
4. Go back to the Main Menu. Click on Table B-20. What was the total Government Spending
for the current year (or quarter)? How much of this was done by the federal government and how
much was done by state and local government? How much government spending qualifies as
consumption and how much qualifies as investment?
10
Economics 101
Assignment #8 – Page 2
5. Go back to the Main Menu. Click on Table B-31. What was the Disposable Income in the
most recent year (or quarter)? How much (and what percent) did households spend on
consumption?
6. Go back to the Main Menu. Click on Table B-32. What was Gross Private Saving in the most
current year (or quarter)? How much of this saving was done by persons and how much was
done by businesses?
7. Go back to the Main Menu. Click on Table B-42. What was the unemployment rate in the
most current year (or quarter)? If we assume that the natural rate of unemployment is 4%, is the
American economy experiencing a GDP Gap or not? If so, which kind?
8. Go back to the Main Menu. Click on Table B-84. What are the government’s tax revenues in
the most current year (or quarter)? What was the government spending equal to in the most
current year (or quarter)? Did the government have a budget deficit or a budget surplus (of how
much?)?
9. Go back to the Main Menu. Click on Table B-103. In the most current year (or quarter), what
were American exports of goods equal to? What were American imports of goods equal to? Did
America have a trade deficit or surplus on goods?
10. Put the numbers from these 9 questions into the circular flow framework of this chapter.
Using these numbers, analyze the state of the American economy in the most current year (or
quarter). From these numbers, would you expect America to be experiencing recession, inflation,
or neither? Why? Is your expectation confirmed?
11
Economics 101
Name__________________________
Assignment #9 – Part I
In the graph below, draw the aggregate demand curve, the aggregate supply curve, and
the Long-run Aggregate Supply (Potential Real GDP) so that there is an Inflationary
Gap.
GDP Deflator
_________________________________________
0
Real GDP
According to those who believe that an economy is self-correcting, what will happen to
eliminate the inflationary gap? Name the changes that will occur and show their effect
on the graph.
1.
2.
3.
In this example, actual real GDP is greater than potential real GDP and the actual rate of
unemployment is below the natural rate of unemployment. How can this occur?
12
Economics 101
Name_____________________
Assignment #9 – Part II
The graph below shows the aggregate demand curve and the long-run aggregate supply
curve as the classical economists would draw them.
Now assume that there is an increase in the money supply for some reason. Show the
results on the graph. Then, explain what will occur and why.
Aggregate
Price Level
Aggregate Supply
P1
Aggregate Demand1 = M x V
0
Explanation:
Qpot
Real GDP
13
Economics 101
Assignment #10
Name______________________
CASE ON THE GREAT DEPRESSION
Write your answer on the back. Use the data from the chapter to answer the questions.
1. A Depression is a period of time during which Real GDP is falling. From 1929 to
1941, during what years was there a Depression (or recession)? How much (or by what
percent) did Real GDP fall?
2. During periods of Depression, the Classical Economists predicted that both wages
prices would fall. Was this prediction valid for the Depression Decade of 1929 to 1941?
Explain with data.
3. During periods of Depression, the Classical Economists predicted that interest rates
would fall. As a result of the fall in interest rates, they predicted that business investment
spending would rise. This was to end the Depression. Did real interest rates fall
between 1929 and 1941? Remember that the real interest rate is the nominal interest rate
minus the rate of inflation (or in this case, plus the rate of deflation). You need to
calculate the rate of deflation. Did business investment spending rise in this period?
Explain with data.
4. As we will see, Keynes argued that the aggregate supply is horizontal. This would
mean that any change in aggregate demand would cause only a change in Real GDP
(with no change in prices). As discussed in Class #12, the Classical economists
believed that the long-run aggregate supply is vertical. Plot the data for the aggregate
price level and the Real GDP for the period 1930 to 1941 on the graph below. What
shape does the Aggregate Supply curve seem to have – closer to horizontal or vertical?
Price Level
________________________________________________________
0
Real GDP
14
Economics 101
Assignment #11
Name_________________________
(1) Fill in the following consumption function:
Disposable Income
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
23,000
24,000
25,000
Consumption
1000
1900
2800
3700
Savings
- 900
- 800
- 600
5500
- 400
7300
- 200
9100
0
10,900
11,800
300
13,600
500
15,400
16,300
800
18,100
1000
19,900
20,800
21,700
22,600
1500
(2) Calculate the marginal propensity to consume. ________________
Calculate the marginal propensity to save. _____________________
(3) If disposable income is 10,000, what is the average propensity to consume?
_________________
If disposable income is 20,000, what is the average propensity to consume?
_________________
Therefore, as disposable income rises from 10,000 to 20,000, consumption _______
And the average propensity to consume _____________ (answer “rises” or “falls”).
4. The consumption function is repeated on the following page. Business Investment Spending of
200 is added in. Calculate the Equilibrium Real GDP.
15
Real GDP (=Income)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
23,000
24,000
Consumption
1000
1900
2800
3700
4600
5500
6400
7300
8200
9100
10,000
10,900
11,800
12,700
13,600
14,500
15,400
16,300
17,200
18,100
19,000
19,900
20,800
21,700
22,600
Business Investment Spending
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
5. Explain why $1000 cannot be the Equilibrium Real GDP.
6. Explain why $25,000 also cannot be the Equilibrium Real GDP.
16
7. Now assume that the government spends $1000 and also taxes $1000. There are no transfers.
What is the new Equilibrium Real GDP?
Real GDP Taxes
Disposable Income Consumption Investment Government Aggregate Demand
1000
1000
0
1000
200
1000
2000
1000
1000
1900
200
1000
3000
1000
2000
2800
200
1000
4000
1000
3000
3700
200
1000
5000
1000
4000
4600
200
1000
6000
1000
5000
5500
200
1000
7000
1000
6000
6400
200
1000
8000
1000
7000
7300
200
1000
9000
1000
8000
8200
200
1000
10,000
1000
9000
9100
200
1000
11,000
1000
10,000
10,000
200
1000
12,000
1000
11,000
10,900
200
1000
13,000
1000
12,000
11,800
200
1000
14,000
1000
13,000
12,700
200
1000
15,000
1000
14,000
13,600
200
1000
16,000
1000
15,000
14,500
200
1000
17,000
1000
16,000
15,400
200
1000
18,000
1000
17,000
16,300
200
1000
19,000
1000
18,000
17,20
200
1000
20,000
1000
19,000
18,100
200
1000
8. Now assume that exports equal $1000 and also that imports equal $1000. What is the new
Equilibrium Real GDP?
Taxes
Disposable Consumption Investment Government Exports Imports
Aggregate
Income
Demand
Real GDP
1000
2000
3000
4000
5000
6000
7000
8000
9000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
21,000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
1000
1900
2800
3700
4600
5500
6400
7300
8200
9100
10,000
10,900
11,800
12,700
13,600
14,500
15,400
16,300
17,200
18,100
19,000
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
17
9. Assume now that the Potential Real GDP is equal to $20,000. How large is the gap? What
kind of gap is it?
10. Go back to the table above. Now assume that the government increases its purchases from
$1000 to $2000. There is no change in any other variable, including taxes. Use the multiplier
formula to calculate the new Equilibrium Real GDP. Now calculate the new gap (Potential
Real GDP is still $10,000). What kind of a gap is it?
11. If the government had desired to eliminate all recessionary and all inflationary gaps, what
should its purchases be equal to? Again show using the multiplier formula.
18
Economics 101
Assignment #12
Name_____________________
1. Go to the Interest Rates link on my web site. Click on “federal funds rate”, “6 month
Certificate of Deposit”, “6 month Treasury Bill rate”, and “30 year Conventional Mortgage Rate”.
Based on these four sets of data, what has been happening to interest rates over the most recent
months? Are all of these measures changing in the same direction at the same time? Given what
has been happening to interest rates, what do you predict will happen to consumer spending in the
coming months? Why?
2. Go to the Consumer Confidence link on my web site. Click on Latest CCI Release. Briefly
describe the current state of consumer confidence in America. Based on this, what prediction can
you make as to the direction of consumer spending in the near future? Why?
3. Go to the Economic Report of the President on my web site. Click on Economic Report of the
President current year statistical tables. The click on Consumer Credit Outstanding in the Money
Stock, Credit, and Finance section. (Do not include debt for home ownership.) Record the data
for the most recent year – by month where possible. Then go back to the menu. Click on Total
Disposable Income in the National Income or Expenditure Section. Record the data for the same
time period. Then, divide to arrive at the ratio of consumer debt to disposable income. What
has been happening to it over this time? Based on this, what prediction can you make about
consumer spending in the near future? Why?
4. Go to the Economic Report of the President on my web site. Click on Economic Report of the
President current year statistical tables. The click on Common Stock Prices in the Corporate
Profits and Finance section. Use the NYSE index. Assume you took $10,000 and bought the
stock included in this index in 1990. How much would they have been worth in September of
2000? What effect would this increase have had on consumer spending? Why? How much
would they be worth in the most recent month (for this, you need to go to any newspaper and find
the most recent NYSE Index)? What effect would this have on consumer spending? Why?
5. Go to the following site: http://www.bea.doc.gov/bea/pubs.htm Go to the most recent month.
Click on Selected NIPA Table. Then, click on Quantity and Price Indexes. What has been
happening to the Implicit Price Deflator (that is, the GDP Deflator) over the period shown? What
effect should this have on consumer spending? Explain why. (If you cannot do this, go to
Nominal GDP and Real GDP on my web site. Divide the Nominal GDP by the Real GDP to get
the GDP Deflator.)
6. Based on your answers to questions 1 to 5, what prediction would you make concerning
consumer spending in the near future. Explain why you make this prediction.
7. Americans save a low portion of their incomes and spend a high portion of their incomes. The
portion saved is low in comparison to that of past years and is low compared to other countries.
From the points made in Chapter 14, what reasons can you give for the low portion of income
saved (and the high portion of income spent) by American consumers? Name at least three
reasons.
19
Economics 101
Assignment #13
Private Investment Spending
Year
on Structures and Equipment
1959
46.5
1960
49.4
1961
48.8
1962
53.1
1963
56.1
1964
63.1
1965
74.8
1966
85.4
1967
86.4
1968
93.4
1969
104.7
1970
109.1
1971
114.1
1972
128.8
1973
153.3
1974
169.5
1975
173.7
1976
192.4
1977
228.7
1978
278.6
1979
331.6
1980
360.9
1981
418.4
1982
425.3
1983
417.4
1984
490.3
1985
527.6
1986
522.5
1987
526.7
1988
568.4
1989
613.4
1990
630.3
1991
608.9
1992
626.1
1993
682.2
1994
748.6
1995
825.2
1996
899.4
1997
999.4
1998
1017.5
1999
1203.1
2000
1232.1
2001
1176.8
2002
1066.3
2003
1082.4
2004
1198.8
In Billions of Current Dollars
Name_____________________________
Depreciation
40.2
41.8
42.8
44.3
46
48.4
51.7
56.3
61.4
67.4
74.5
81.8
89.8
99.4
109.1
126.9
149.1
164.5
184.4
210.7
244.9
282.6
323.9
357.5
372.7
393.5
422.5
450.8
478.2
512.4
554
579.5
608.1
642.2
660.1
714.6
743.6
781.9
832.4
889.4
961.4
990.8
1075.5
1080.3
1112.8
1206.2
Net Investment Spending
on Structures and Equipment
6.3
7.6
6
8.8
10.1
14.7
23.1
29.1
25
26
30.2
27.3
24.3
29.4
44.2
42.6
24.6
27.9
44.3
67.9
81.7
78.3
94.5
67.8
44.7
96.8
105.1
71.7
48.5
56
59.4
50.8
0.8
-16.1
22.1
34
81.6
117.5
167
128.1
241.7
241.3
1.3
-14.0
-30.4
-7.6
% of GDP
1.2
1.4
1.1
1.5
1.6
2.2
3.2
3.7
3
2.9
3.1
2.6
2.2
2.4
3.2
2.8
1.5
1.5
2.2
2.9
3.2
2.8
3
2.1
1.3
2.5
2.5
1.6
1
1.1
1.1
0.8
0
0
0.3
0.5
1.1
1.5
2
1.5
2.6
3.4
0
20
1. Examine the table on the previous page. Briefly describe the overall performance of the
American economy in terms of Net Investment Spending (especially as a percent of GDP). In
which years was the performance good and in which years was it poor?
2. Examine the table below. How much of the “investment boom” of the 1990s can be attributed
to Information Processing Equipment and Software?
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Private Investment Spending
on Structures and Equipment
360.9
418.4
425.3
417.4
490.3
527.6
522.5
526.7
568.4
613.4
630.3
608.9
626.1
682.2
748.6
825.2
899.4
999.4
1017.5
1203.1
1390.6
Information Processing Equipment
and Software
69.6
82.4
88.9
100.8
121.7
130.8
137.6
141.9
155.9
173.1
176.1
181.4
197.5
215.1
233.7
262.1
287.3
325.2
367.4
433.1
548.6
Examine the data below and answer the following questions:
3. How well does the trend in after-tax profits explain the trend in business investment spending
shown? That is, when after-tax profits are rising (falling), is business investment spending also
rising (falling), as predicted?
4. How well does the change in stock market prices explain the trend in business investment
spending? That is, when stock market prices are rising (falling), is business investment spending
also rising (falling), as predicted?
21
Year
Corporate Profits
1970
81.6
1971
95.1
1972
109.8
1973
123.9
1974
114.5
1975
133.1
1976
160.6
1977
190.9
1978
217.2
1979
222.5
1980
198.5
1981
219.1
1982
201.2
1983
254.1
1984
309.8
1985
322.4
1986
300.7
1987
346.6
1988
405.1
1989
395.7
1990
408.6
1991
431.2
1992
453.1
1993
510.5
1994
573.2
1995
668.8
1996
754.1
1997
833.8
1998
815.1
1999
856.1
2000
817.9
2001
767.3
2002
886.3
2003
1031.8
2004
1161.5
*NYSE Index 1965 = 50
Profits Tax Dividends Retained Earnings
34.4
37.7
41.9
49.3
51.8
50.9
64.2
73.1
83.5
88.1
84.8
81.1
63.1
77.2
94.1
96.5
106.5
127.1
137.2
141.5
140.6
133.6
143.1
165.4
186.7
211.1
223.6
237.2
244.6
255.9
265.2
204.1
192.6
232.1
271.1
24.3
25.1
26.8
29.9
33.2
33
39
44.8
50.8
57.5
64.1
73.8
76.2
83.6
91
97.7
106.3
112.2
129.6
155
165.6
178.4
185.5
203.1
234.9
254.2
297.7
335.2
351.5
370.7
377.9
370.9
399.2
423.2
493.0
23
34.3
41.1
44.8
29.5
49.1
57.3
73.1
82.9
77
49.6
64.1
61.9
93.2
124.7
128.3
88
107.3
138.3
99.2
102.4
119.2
124.4
142
151.6
203.6
232.7
261.3
218.9
229.4
174.8
192.3
294.5
376.5
397.4
Stock
Prices*
720.15
782.62
728.84
979.52
977.33
1142.97
1438.02
1709.79
1585.14
1903.36
1939.47
2181.72
2421.51
2638.96
3078.56
3787.20
4827.35
5818.26
6546.81
6905.89
6397.85
5578.89
5447.46
6612.62
5. Examine the data on from the first table. If the expected duration of capital goods has
become shorter, one would expect that depreciation would represent a higher percent of gross
private business investment spending. Has this been happening?
6. The table on the next page gives the data for Capacity Utilization in Manufacturing.
Examine the years for which the investment performance was poor. Was Capacity Utilization
falling and particularly low in those years.
22
Year
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Capacity Utilization in Manufacturing (%)
87.2
87.1
86.8
79.4
77.9
83.4
87.7
83.4
72.9
78.2
82.6
85.2
85.3
79.5
78.3
71.8
74.4
79.8
78.8
78.7
81.3
83.8
83.6
81.4
77.9
79.4
80.4
82.5
82.5
81.6
82.7
81.3
80.5
81.8
76.3
75.1
75.7
78.6
80.0
7. On the next page, there is a table of data concerning raw materials’ prices and unit labor
costs. Raw materials’ prices and unit labor costs should be rising slowly (if at all) during the
years of good investment performance and should be rising greatly in the years of poor
investment performance. Does the data support this hypothesis? Explain.
23
Year
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Nov-00
Raw Materials Prices
52.5
58
60.9
64.9
69.5
78.4
90.3
98.6
100
100.6
103.1
102.7
99.1
101.5
107.1
112
114.5
114.4
114.7
116.2
118.5
124.9
125.7
125.6
123
123.2
130.5
1982 = 100
Unit Labor Costs
43.2
46.1
48.4
51.4
55.3
60.7
67.4
72.4
78.2
78.6
79.8
82.1
83.9
86.7
89.8
91.3
95.3
98.7
100
101.9
102.6
104.1
104.5
105.3
107.9
109.9
110.8
1992=100
8. Question 1 asked you to characterize the overall investment performance of the United States -- stating in which years that performance was good and in which years it was bad. Other
questions have asked you to relate these periods to other data. Now, it is time to summarize.
Write a short paragraph on the following question: when the investment performance of the
American economy was poor, what factors can explain this poor performance? And when
the investment performance of the American economy was good, what factors can explain
this good performance?
24
Economics 101
Assignment #14
Name______________________
1. Using the tax table in the text, in 1980, in what tax bracket would you be in if your adjusted
gross income were $20,000? $40,000? $100,000? What tax bracket would you be in as of 2005?
2. Use the principle concerning the sales tax to explain why each of the following taxes is
regressive:
1. the gasoline tax 2. the cigarette tax
3. Assume a person has a taxable income of $10,000. How much tax would the person have had
to pay in 1980? Now recalculate the tax that would have to be paid by the person in 1985 if his or
her income had risen as much as the inflation rate rose (30.6% inflation from 1980 to 1985 to
$13,600 of income). How much would this person have saved from the 1981 tax law?
Now, recalculate the tax that would have to be paid in 1992 by the same person if his or her
income had risen as much as the inflation rate rose (70.3% inflation from 1980 to 1992 to
$17,030). How much would this person’s taxes have changed because of the 1986 tax law?
Finally, recalculate the tax that would have to be paid by the same person in 2000 if his or her
income had risen as much as the inflation rate rose (111.3% inflation from 1980 to 2000 to
$21,113). How much would this person’s taxes have changed as of 2000 compared to 1980?
4. Assume that you had a capital gain of $10,000. Also assume that you are in the highest
possible tax bracket (even before the capital gain is counted as part of your income). In 1980,
how much would you have paid in capital gains tax? (Remember that 60% of the gain was taxfree in 1980.) In 1986, how much would you have paid in capital gains tax? (Now, all of the
gain is taxable.) In 1992, how much would you have paid in capital gains tax? In 2005, how
much would you have paid in capital gains tax (capital gains are now taxed at a maximum of
15%)?
5. Go over this chapter. Evaluate each of the following taxes as “good” or “bad” according to the
three criteria.
Equity
Ease of Administration Incentive Effects
Personal Income Tax
Corporate Profits Tax
Social Security (FICA) Tax
Sales Tax
Property Tax
Ethics Question
6. Is the American tax system fair? If so, explain why. If not, explain why not. Would it be
fairer (or better for other reasons) to have a national sales tax replace the income tax? Why or
why not. Would it be fairer to have “Green Taxes” (taxes on behaviors that pollute or otherwise
destroy the environment) replace part of the income tax? Why or why not? Would it be fairer to
have fewer deductions available under the income tax? Why or why not?
25
Economics 101
Assignment #15
Name__________________________
1. Assume that Equilibrium Real GDP equals $100. Potential Real GDP equals $200. The
marginal propensity to consume equals 0.9. According to Keynesians, government purchases
should __________ (increase or decrease?) by $___________. Or taxes should ____________
(increase or decrease?) by $_____________. Or transfers should ____________ (increase or
decrease?) by $_____________. Show calculations.
2. The changes to the tax system initiated by President Reagan in 1981 and again in 1986 were
discussed earlier. Review these changes. It is estimated that the income tax provides only half
the amount of automatic stabilization as it did in 1980. Explain why the changes that were
made in 1981 and in 1986 reduced the extent of automatic stabilization of the income tax.
3.Year (Fiscal) Deficit (Billions) Unemployment Rate Structural Budget Deficit
1965
1.4
4.5%
1966
3.7
3.8%
1967
8.6
3.8%
1968
25.2
3.6%
1969
–3.2
3.5%
1970
2.8
4.9%
1971
23.0
5.9%
1972
23.4
5.6%
1973
14.9
4.9%
1974
6.1
5.6%
1975
53.2
8.5%
1976
73.7
7.7%
1977
53.7
7.1%
1978
59.2
6.1%
1979
40.7
5.8%
1980
73.8
7.1%
1981
79.0
7.6%
1982
128.0
9.7%
1983
207.8
9.6%
1984
185.4
7.5%
1985
212.3
7.2%
1986
221.2
7.0%
1987
149.8
6.2%
1988
155.2
5.5%
1989
152.5
5.3%
- = surplus
rate taken in December
1. Based on the structural budget deficit, in what years was fiscal policy expansionary and in
what years was it contractionary? Although this is not likely to be correct, calculate the
structural budget deficit by assuming that full employment was 4% throughout the entire
period and that each rise in the unemployment rate increases the budget deficit by $30 billion.
2. Examine the data. In the years that fiscal policy was expansionary, did unemployment fall in
the following years? And in the years that fiscal policy was contractionary, did
unemployment rise in the following years?
26
Economics 101 Assignment #16
Name________________________
1. From 2001 through 2003, the economy of the state of California experienced a serious
recession. Tax revenues fell for the state. As a result, the state of California experienced a
budget deficit of over $35 billion. By its Constitution, the state of California is not allowed to
have a budget deficit. Go on the Internet or to any major newspaper. You can visit that site for
the state of California if you wish. What actions were taken by the state government to eliminate
the budget deficit? That is, what was done to California government spending? What was done
to taxes in California? Considering that California is a very large state, what are the likely effects
of these policies?
2. The marginal tax rates for 1980 were given in Chapter 17 and are repeated in Chapter 19. The
marginal tax rates for 2000 also are repeated. Assume you have a family income of $25,000 in
1980. Between 1980 and 2000, prices approximately doubled. So if you have a family income of
$50,000 in 2000, you would have about the same purchasing power as the income of $25,000 had
in 1980.
1. Now assume that the family income from working would rise by $1,000 because of some
decision. How much of this extra income would have gone to the federal government in taxes in
1980?
2. How much of the extra $1,000 of income would go to the federal government in taxes in
2000?
3. Did the marginal tax rates of 2000 provide a greater incentive to work than the marginal tax
rates of 1980? Explain why or why not.
3. From 1998 to 2001, the government had a budget surplus. During the 2000 Presidential
election, the projection was that this surplus would continue to exist at least through 2010. Both
Presidential candidates proposed that at least part of this surplus be used to pay off the net
national debt. President Bush’s original proposal assumed that the net national debt would be
paid off by around 2012. What advantages can you see in using the budget surplus to pay off the
net national debt?
27
Economics 101
Assignment #17
Name_____________________
Click on Money Supply Data on my web site.
1. What are the components of M-1?
2. What is the total value of M-1 for the most recent period? _________________
3. What are the additional components of M-2?
4. What is the total value of M-2 in the most recent period? ___________________
5. Go to the site: www.bankofamerica.com
Then go to the most recent Annual Report
What is the value of the Total Assets of Bank of America?
What are the main assets of Bank of America?
What are the main liabilities of Bank of America?
What percent of the assets of Bank of America were provided by owners? (Calculate the
stockholders’ equity as a percent of the total assets)
28
Economics 101
Assignment #18
Name________________________
1. The reserve requirement on checkable deposits is 10%. The reserve requirement on savings
deposits is zero. What would happen to the money supply if Bill took the $1,000 he found on the
“tree” out of his checking account and put it in his savings account?
2. We assumed that the financial institutions choose to hold no excess reserves. Suppose that
they become afraid that if they make loans, the loans will not be repaid. So they do indeed hold
on to the excess reserves, rather than lend them. What happens to the money supply (M-1)?
Why?
3. If you draw a Supply of Money curve, it looks like any other supply curve: it is upward
sloping. This means that as interest rates rise, the money supply also rises. Explain why this
is so. (If you have trouble with this, review the chapter.)
4. Explain in your own words why a decrease in the reserve requirement, say from 10% to 9%,
would cause the money supply to increase.
5. Explain in your own words why a decrease in the discount rate from 3% to 2% would cause
the money supply to increase.
6. Explain in your own words why the Federal Reserve selling Treasury securities to a dealer in
the open market would cause the money supply to decrease. (Hint: if the Federal Reserve sells
Treasury securities, what does the dealer get? What does the Federal Reserve get? What then
happens to the money supply?)
7. Explain in your own words why an increase in the money supply would cause interest rates to
fall.
8. Explain in your own words why a decrease in the price of a security is the same as an
increase in the interest rate on that security.
29
Economics 101
Assignment #19
Name_________________________
1. Assume that every time the Federal Reserve increases the supply of money by $20 billion,
interest rates will fall by 2 percentage points (for example, from 8% to 6%). Also assume that
every time interest rates fall by 2 percentage points, business investment spending rises by $10
billion. Equilibrium Real GDP is equal to $400 billion. Potential Real GDP is equal to $500
billion. The marginal propensity to consume (MPC) is equal to 9/10 (0.9). The interest rate is
8%. Business investment spending is $20 billion. And the supply of money is $120 billion. In
order to eliminate the recessionary gap, by how much and in what direction should the Federal
Reserve change the supply of money?
Now assume that the reserve requirement is 1/10 (0.1). In order to eliminate the recessionary
gap, by how much and in what direction should the Federal Reserve change the monetary base?
2. Notice in both charts in the text that velocity has been trending upward, especially since the
end of the recession of the early 1990s. If velocity is trending upward, then the demand for
money must have been trending downward. This means that people have been holding less
money as part of their wealth. Based on what you have learned about the demand for money,
what reasons can you suggest for this change?
3. The natural rate of unemployment is estimated to be about 4% today. In the 1980s, it was
estimated to be about 6%. By any estimation, it has fallen. Each of the following has been given
as explanations for the decline. Explain why each of the following might have contributed to the
decline in the natural rate of unemployment:
1. the rise in the use of temporary employment agencies
2. the decline in the number of people age 16 to 22
3. the fact that married women are more experienced workers now than they were in the 1980s
30
Economics 101
Assignment #20
Name_____________________
This class had discussed the monetarist explanation of what occurs following an increase in the
money supply. Now assume that inflation has been very high.
The Fed decreases the money supply, causing aggregate demand to __________________.
Inventories in stores ________________. Orders from manufacturers _________________.
Production by manufacturers ___________. The number of people employed ____________.
Wages should _______________ and prices should ________________. (Answer "rise" or
"fall")
Describe what will occur in the short-run if expectations are adaptive. Explain why. In your
answer, be sure to define "short-run" and "adaptive expectations".
Describe what will occur in the long-run. Explain why. In your answer, be sure to define “longrun”.
On the graphs below, draw aggregate demand and aggregate supply (on the left) and the Phillips
Curve (on the right). Then, show the changes you have described above --- first for the short-run
and then for the long run. Also, draw the long-run aggregate supply curve and the long-run
Phillips Curve.
Price Level
Inflation Rate
_______________________
0
Real GDP
_________________________________
0
Unemployment Rate
31
Economics 101
Assignment #21
Name______________________
In each case below, show the foreign exchange market between dollars and Japanese Yen in
equilibrium. Then, assume that there is an inflation in the United States but not in Japan.
1. Show the effects in the foreign exchange market assuming that there are freely floating
exchange rates. Explain why you made the changes that you did.
$/Y
____________________________Yen
What would be the effects on the American economy of this change?
2. Show the effects in the foreign exchange market assuming that the world is on the classical
gold standard. Explain why you made these changes.
$/Y
___________________________________Yen
What would be the effects on the American economy of this adjustment?
3. Show the effects in the foreign exchange market assuming that the world is on the Bretton
Woods system. Explain why you made the changes that you made.
$/Y
____________________________Yen
What would be the effects on the American economy of this adjustment?
32
Economics 101
Assignment #22
Name__________________________
1. You may choose any one of A through G:
A. Go to the site of the AFL-CIO. http://www.aflcio.org/ . There, you can examine the
position of the AFL-CIO concerning free trade. You may read any of their position
statements that relate to trade policy. Explain the position of the organization as regards free
trade.
B. Go to the site of the United States Chamber of Commerce. First, explain whom this
organization represents. Then, explain the position of the organization as regards
international trade. The site is: http://www.uschamber.org/policy/index.html
C. Go to the site of the Business Roundtable. First, explain whom this organization represents.
Then, explain the position of the organization as regards international trade. The site is:
http://www.brtable.org/issue.cfm/9
D. Go to the site of the Sierra Club. First, explain whom this organization represents. Then,
explain the position of the organization as regards international trade. The site is:
http://www.sierraclub.org/trade/
E. Read the Chapter on International Trade (Part V) in The Economy of Japan on my web site
http://daphne.palomar.edu/llee. Write a brief summary on the trade disputes between the United
States and Japan. What was the American position in this dispute? What was the Japanese
position?
F. Read the Chapter on International Trade (Part V) in The Economy of China on my web site
http://daphne.palomar.edu/llee. Write a brief summary on the trade disputes between the United
States and China. What was the American position in this dispute? What was the Chinese
position? Why has China desired so strongly to enter the World Trade Organization (WTO)?
G. Read the section on the North American Free Trade Agreement (NAFTA) in Chapter 28 of
the Microeconomics textbook on my web site (http://daphne.palomar.edu/llee) or in the section
on Trade in my The Economy of Mexico. What were the arguments made by those in favor of
NAFTA? What were the arguments made by those against NAFTA?
2. Go to the site of the Economic Report of the President on my web site – Statistical Tables in
Spreadsheet Format. From Table B-1, (Gross Domestic Product), what is the Current Account
Balance of the United States equal to in the most recent year? From Table B-32, what is the
Gross Private Saving of the United States equal to in the most recent year? What is the Gross
Government Savings of the United States equal to in the most recent year? (This is the budget
deficit or surplus of the government, considering all levels of government.) And finally, what is
Gross Private Investment in the United States in the most recent year? Add this to the Gross
Government Investment. Plug these numbers into the equation noted in the chapter (there may be
a statistical discrepancy). How much of the current account deficit is being used to finance the
excess of private investment spending over private savings? And how much of the current
account deficit is being used to finance the budget deficits of the governments?
33
Economics 101
Assignment #23
Name___________________________
Read Chapter 27. Then, in your own words, briefly explain why the Asian Financial Crisis of
1997 occurred.
Second, explain why the Asian Financial Crisis spread to other countries, such as Russia and
Argentina.
Third, explain what brought the financial crises of the late 1990s to an end.