Download Economics 101 Assignment #3 (20 Points) Name

1
Economics 101
Assignment #1 (20 Points)
Name__________________
Part 1: 5 points
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 (2007):
Price00
Quantity00
Price07
Quantity07
A
$5
10
$5
20
B
10
20
30
40
C
8
5
16
10
D
25
10
50
20
What was the Nominal Gross Domestic Product (GDP) in 2000? Show calculations.
What was the Nominal Gross Domestic Product (GDP) in 2007? Show calculations.
What was the Real Gross Domestic Product (Real GDP) in 2007? Show calculations.
2. In the calculation in question 1, by what percent did the Real GDP rise between 2000 and
2007?
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. (Hint: Use the Rule of 72.)
Part 2: 5 points
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 on my web site
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)?
Continued on Page 2
2
6. Choose any country other than the United States. It may be a country that you family
descends from. Or it may be a country in which you have an interest. You will use this country
throughout this assignment. Do a search on Google (or something similar) to find information on
the economy of this country.
What is the most recent Nominal GDP of this country in U.S. dollars? _______________
What is the most recent Nominal GDP per capita in U.S. dollars? ___________________
Over the past few years, how fast has GDP been growing? ________________________
(Give the dates for your data.)
Part 3: 5 points
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 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? (You need to calculate this.)
_______________________________
4. Pick a month in 2001, a month in 1999, 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 AfricanAmericans overall? __________________For Latinos/Hispanics overall? ___________________
7. What is the current unemployment rate for people age 16 to 19?
Continued on Page 3
3
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 was the California unemployment rate for the most recent month? _____________
What was the San Diego unemployment rate for the most recent month? ________________
9. Go back to the data for the country you have chosen. What is the most recent unemployment
rate? _______________________ Over the past few years, has unemployment in this country
been greater or lower than the unemployment in the United States?
___________________________________
Part 4: 5 points
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
10. What is the CPI in the most recent month? ___________________ What does this mean?
__________________________________________________________________________
11. 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?
12. By approximately what percent did prices rise from January, 1970 to January, 1980?
(You need to calculate this.)
13. 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?
14. In June, 1965, I started working at an accounting firm for $7,200 per year ($600 per month).
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?
Continued on Page 4
4
15. Follow the path: Economic Report of the President on my Web Site
Statistical Tables in Spreadsheet Format
2006
Tables B-3 and B-60
What was the GDP Deflator (called the Implicit Price Deflator) for 2006? _________
By what percent did the GDP Deflator rise in 2006? _______________
What was the CPI for 2006? ________________
By what percent did the CPI rise in 2006? ________________
How do you account for the differences in the number and in the rise in prices between these
two measures of inflation?
16. Go back to the data for the country you have chosen. What is the most recent inflation rate?
_______________________ Over the past few years, has inflation in this country been greater
or lower than the inflation in the United States? ___________________________________
End of Assignment 1
5
Economics 101
Assignment #2 on Chapters 5 and 6
(10 points for the entire assignment)
Name_________________
1. In San Diego County, the price of homes rose greatly. The median price of a home rose from
about $250,000 in 2000 to about $500,000 today. Explain why this has happened. Consider all
of the factors that affect demand and all of the factors that affect supply that would seem relevant
to explain this rise in home prices.
2. We all know that the price of gasoline has risen greatly. Gasoline that once sold for less than
$2 per gallon has sold for as much as $3.50 per gallon. Explain why this has happened. Consider
all of the factors that affect demand and all of the factors that affect supply that would seem
relevant to explain this rise in gasoline prices.
3. 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).
Some people have proposed that the mortgage interest would no longer de tax deductible.
Therefore the actual cost to the borrower would now be the full $12,000. There would be no
offsetting savings of the $3,000.
a. First, show what will occur in the market to borrow money. Explain what will happen to the
equilibrium price (or interest rate) and to the equilibrium quantity.
Interest Rate
Supply
Demand
_____________________________
0
Quantity of Money to Borrow (Lend)
Continued on Page 6
6
b. Second, show what will occur in the market for homes (homes and borrowing money are
complements). Again, explain what will happen to the equilibrium price (or interest rate) and to
the equilibrium quantity.
Price of Homes
Supply of Homes
Demand for Homes
____________________________
0
Quantity of Homes
c. Finally, state whether you would favor or oppose this proposal to eliminate the tax deduction
for mortgage interest if 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.
In each case, explain why.
End of Assignment 2
7
8
Economics 101 Assignment #3 (20 Points)
Name________________________
Part 1: (5 points)
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 for each of the following cases. Show using the demand and supply graph for
foreign exchange. Which money appreciates and which money depreciates? (Show the
graphs on the back of the page.)
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 Japanese yen will depreciate in the near future
4. Laws change in Japan making it easier for Americans to buy or build companies in Japan
Part 2: (5 points)
1. Go to the site of the Federal Reserve Bank of New York. This is linked as “Foreign Exchange
Rates” on my web site. Or go to http://www.ny.frb.org/pihome/statistics/forex12.shtml
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 Japanese Yen
__________________
The Mexican Peso
__________________
The British Pound
__________________
The Chinese Renminbi
__________________
2. Assume a six pack of Labatts Beer sold in Windsor Ontario Canada for $6.00 Canadian. The
same six pack of Labatts Beer sold in Detroit Michigan (directly across the river) for $4.50
American. Using the exchange rate you found in question 1, is the six pack cheaper in Windsor
or in Detroit?
Part 3: (5 points)
In 1998, two factors happened regarding Russia. First, prices in Russia were rising at a very
rapid rate (hyperinflation) while prices in the United States were hardly rising at all. Second, for
a variety of reasons, those who had made portfolio investments in Russia decided to take their
money elsewhere. This means that they demanded that the loans they had made in Russia be paid
off. When the loans were repaid, the money would be loaned to people in a different country. On
the graph on the next page, show the demand for and the supply of Rubles as of 1997. Then,
show the results of these two events in 1998. Make the appropriate shifts in either demand or in
supply or in both. State what would happen to the Russian Ruble as a result of the 2
changes. Finally, state what would happen to the Russian economy as a result of this
change in the exchange rate.
Continued on Page 9
9
.$/Ruble
Supply1
P1
E1
Demand1
______________________________
0
Quantity of Rubles
The Russian Ruble would _______________________________. The effect of this on the
Russian economy would be __________________________________________________
Part 4: (5 points)
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).
The company I chose is _____________________________
Value Now $_____________
Value Then $_____________
You will need to do some research as to what has been happening concerning this company. 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
Supply1
P1
E1
Demand1
______________________________
0
Quantity of Shares of the Stock
I shifted demand to the (right, left, or neither?) __________________ because
_________________________________________________________________________
I shifted supply to the (right, left, or neither?) __________________ because
_________________________________________________________________________
End of Assignment 3
10
Economics 101
Assignment #4
(15 Points Total)
Name____________________________
1. 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
Continued on Page 11
Real GDP
11
Yet a final part of the government’s program was to reduce wages. In the graph below,
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?
c.
GDP Deflator
0
Real GDP
d. Write a very brief conclusion: from these policies, what can you conclude would happen
to the Mexican economy?
2. In the graph below, draw the aggregate demand curve, the aggregate supply curve, and the
Potential Real GDP so that there is an Inflationary Gap.
GDP Deflator
_________________________________________
0
Real GDP
Continued on Page 12
12
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?
End of Assignment 4
13
Economics 101
Assignment #5 (20 Points)
Name_____________________
Part 1: 5 points
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
Qpot
Real GDP
Explanation:
Part 2: 5 Points
Assume that there are the two countries: Britain and the United States. The graph is drawn for
the foreign exchange market so that the exchange rate is $5 for one pound. Now assume that the
United States has a deflation. Analyze what would result.
$/Pound
Supply
$5
Demand
_______________________________________ Pounds
Continued on Page 14
14
Gold would move from which country to which country?
___________________________________________________________________________
Explain why this would happen.
___________________________________________________________________________
How would the American problem of deflation be solved? ___________________________
__________________________________________________________________________
What would happen to Britain? ________________________________________________
__________________________________________________________________________
Part 3: 5 Points
Case on the Great Depression
Chapter 12.
For these questions, you are to use the data found in
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
and 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. ________________________________________________________
_______________________________________________________________________
Continued on Page 15
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Part 4: 5 points
(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”).
2. The consumption function is repeated on the following page. Business Investment Spending of
200 is added in.
Continued on Page 16
16
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
Calculate the Equilibrium Real GDP. ____________________________________
$1000 cannot be the Equilibrium Real GDP because ______________________________
________________________________________________________________________
$25,000 also cannot be the Equilibrium Real GDP because _________________________
___________________________________________________________________
Continued on Page 17
17
3. 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
4. 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
18
5. Assume now that the Potential Real GDP is equal to $10,000. How large is the gap?
____________________________ What kind of gap is it? _________________________
6. Go back to the table above. Now assume that the government decreases its purchases
from $1000 to $500. 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? __________________________________________
7. 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.
End of Assignment #5
19
Economics 101
Assignment #6 (20 Points)
Name____________________________
Part 1: 5 points
1. Go to the following site. http://www.stls.frb.org/fred/data/rates.html or 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 following site: http://www.conferenceboard.org or Consumer Confidence link on my web
site. Click on the Latest Consumer Confidence Index 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. http://w3.access.gpo.gov/eop or to 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 3 years – by month where possible.
Then go back to the menu. Click on Total and Per Capita 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. http://w3.access.gpo.gov/eop or to 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?
Continued on Page 20
20
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 (i.e., the GDP Deflator) over the period shown? What effect should this have on
consumer spending? Explain why.
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.
Part 2: 5 points
1. 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.
Continued on Page 21
21
Part 3: 5 points
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
622.4
1991
598.2
1992
612.1
1993
666.6
1994
731.4
1995
810.0
1996
875.4
1997
968.7
1998
1052.6
1999
1133.9
2000
1232.1
2001
1176.8
2002
1066.3
2003
1082.4
2004
1198.8
2005
1328.3
In Billions of Current Dollars
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
551.6
586.9
607.3
624.7
675.1
713.4
748.8
800.3
851.2
914.3
990.8
1075.5
1080.3
1112.8
1206.2
1327.2
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
101.3
-14
-30.4
-7.4
1.1
% 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
2.5
1.0
0
0
0
0
22
Continued on Page 22
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
2001
2002
2003
2004
2005
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
622.4
598.2
612.1
666.6
731.4
810.0
875.4
968.7
1052.6
1133.9
1232.1
1176.8
1066.3
1082.4
1198.8
1328.3
Continued on Page 23
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
23
3. Examine the data below and answer the following questions:
How well does the trend in after-tax profits explain the trend in business investment spending
shown on Page 21 above?
How well does the change in stock market prices explain the trend in business investment
spending shown on Page 21 above?
Continued on Page 24
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
397.3
Stock
Prices*
45.72
54.22
60.29
57.42
43.84
45.73
54.46
53.69
53.7
58.32
68.1
74.02
68.93
92.63
92.46
108.09
136
161.7
149.91
180.02
183.46
206.33
229.01
249.58
254.12
291.15
358.17
456.54
550.26
619.16
24
4. 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? Was depreciation a higher percent of
gross private business investment spending in the years when the investment performance was
especially poor?
5. The table below 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.
Continued on Page 25
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
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
83.6
83.9
83.0
83.9
82.7
81.9
25
2000
2001
2002
2003
2004
2005
81.8
76.3
75.1
75.7
78.6
80.0
6. Below, 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.
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
Continued on Page 26
Part 4: 5 Points
1. 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
26
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?
End of Assignment #6
27
Economics 101
Assignment #7 (15 Points) Name____________________________
Part 1: 5 Points
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?
1980
2005
$20,000
$40,000
$100,000
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 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?
1980
1986
1992
2005
4. 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
Continued on Page 28
28
Part 2: 5 Points
1. Assume that Equilibrium Real GDP equals $110. 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 and the changes
made by President George W. Bush in 2001 and 2003 were discussed in the chapter. Review these
changes. It is estimated that the income tax now provides only half the amount of automatic
stabilization as it did in 1980. Explain why the changes that were made reduced the extent of automatic
stabilization of the income tax.
3.Year (Fiscal) Deficit (Billions) Unemployment Rate
Structural Budget Deficit
1963
4.8
5.7%
1964
5.9
5.2%
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? Provide evidence from the numbers.
Continued on Page 29
29
Part 3: 5 Points
1. From 2001 through 2003, the economy of the state of California has 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 and for 2000 were given in Chapter 17. Assume you have a
family income of $25,000 in 1980. Between 1980 and 2000, prices approximately doubled. So
an income of $50,000 in 2000 would represent about the same purchasing power as the income of
$25,000 did in 1980.
a. Now assume that the family income from working would rise by $1,000 (from $25,000 to
$26,000 in 1980). How much of this extra income would have gone to the federal government in
taxes in 1980?
b. How much of the extra $1,000 of income (from $50,000 to $51,000) would go to the federal
government in taxes in 2000?
c. 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. What is the Laffer Curve?
What criticisms can be made of the argument behind the Laffer Curve?
End of Assignment #7
30
Economics 101
Assignment #8 (10 Points)
Name______________________
Part 1: 5 Points
1. Click on Money Supply Data on my web site.
a. What are the components of M-1? What is the total amount of each?
b. What is the total value of M-1 for the most recent period? _________________
c. What are the additional components of M-2? What is the total value of each?
d. What is the total value of M-2 in the most recent period? ___________________
Part 2: 5 Points
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 a person took the $1,000 he or she
found on the “tree” out of his checking account and put it in his savings account? Explain.
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.)
End of Assignment #8
31
Economics 101
Assignment #9 ( Points)
Name______________________
Part 1: 5 Points
1. Assume that Bank A has $10,000 in checkable deposits, $2000 in reserves, and $8,000 in
loans when the reserve requirement is 20%. If the reserve requirement (ratio) is lowered to
10%,
Bank A's excess reserves increase by $_____________________
the money supply will ultimately ___________(increase or decrease?)
by $______________________.
The money multiplier increases from _________ to ______________.
2. Assume that the discount rate is lowered from 6% to 4%. As a result, Bank A
borrows $1,000 from the Fed.
The monetary base ____________(increases or decreases?) by $_________________
Bank A's excess reserves ________(increase or decrease?) by $_________________
With a reserve ratio of 10%, the money supply will ______________(increase or
decrease?) by $______________________.
3. Now, assume that the Fed buys $1,000 worth of Treasury Bills from Bank A.
The monetary base ______________(increases or decreases?) by $________________
Bank A's excess reserves ____________(increase or decrease?) by $_______________
With a reserve ratio of 10%, the money supply will ______________(increase or
decrease?) by $__________________.
4. Explain in your own words why an increase in the money supply would cause real interest
rates to fall.
5. 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.
Part 2: 5 Points
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?
Continued on Page 32
32
2. Now, from Question 1, 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?
3. Notice in the 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?
Part 3: 5 Points
1. On the demand for money curve, state whether there is a movement along the line, a shift to
the right, or a shift to the left for each of the following cases:
a. prices, as measured by the GDP Deflator, rise (inflation) _____________________
b. quantity produced, as measured by the Real GDP falls (a recession) ______________
c. real interest rise from 4% to 5% ______________________________
d. people expect lower rates of inflation in the near future ____________________
2. Let us explore the Keynesian view that velocity is not constant. Remember that velocity and
the demand for money are inversely related. When the government increases its spending and
correspondingly increases its borrowing, interest rates rise. As we explored earlier, when interest
rates rise, the demand for money ____________(answer “rises” or “falls”). This change in the
demand for money is the same as velocity __________(answer “rising” or “falling”).
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:
a. the rise in the use of temporary employment agencies
b. the decline in the number of people age 16 to 22
c. the fact that married women are more experienced workers now than they were in the
1980s
Continued on Page 33
33
Part 4: 5 Points
4. Chapters 23 provided the monetarist explanation of what occurs following an increase in the
money supply. Now assume that inflation has been very high.
The Fed now 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")
a. 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".
b. Describe what will occur in the long-run. Explain why. Be sure to define “long-run”.
c. On the graphs, draw aggregate demand and aggregate supply and the Phillips Curve. 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
_______________________
0
Real GDP
End of Assignment 9
Inflation Rate
_________________________________
0
Unemployment Rate