HW 7 Macreconomics PDF

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Homework 7-Gizem Saka

Student: _____________________ Date: _____________________

11/19/19, 10:56 AM

Instructor: Gizem Saka Course: Econ 10 - Fall 2019

Assignment: Homework 7

1. Following a long period of slow! growth, the government of country X decided to open its economy and reduce trade barriers in order to boost economic growth. This provided the expected impetus to the economy as competition increased and the efficiency of domestic firms improved. A decade after opening the! economy, the! country's GDP is now growing at an average of! 7-8 percent annually. A group of economists claim that the standard of living of the people has improved substantially during this period. They also expect this impressive growth to continue over the next five years. Which of the! following, if! true, will indicate that the standard of living has actually improved since the economy was! opened? A. Country! X's leading trading partner reported a fall in the standard of living over the last two years. B. Overall exports increased because of a fall in domestic consumption during this period. C. Discretionary spending by domestic consumers increased during this time. D. High interest rates have attracted a large amount of foreign investment over the last five years. E. The government pegged its currency to a foreign currency three years back. 2.

! Real-Time Data Analysis! Exercise* Real GDP per capita in the United States grew from about! $6,000 in 1900 to about $48,282 in 2011 !, which represents an annual growth rate of 1.90 percent. !*Real-time data provided by Federal Reserve Economic Data! (FRED), Federal Reserve Bank of Saint Louis. If the United States continues to grow at this! rate, it will take !(Enter your response rounded to two decimal! places.)

36.84

years for real GDP per capita to double.

If government economic policies meant to stimulate economic growth result in the annual growth rate increasing to 2.15 !percent, it will take 32.56 years for real GDP per capita to double. !(Enter your response rounded to two decimal! places.) Answers given reflect the data available at the time the exam was! printed, and thus are subject to change. 3. The two key factors that cause labor productivity to increase over time are A. the quantity of capital per hour worked and the level of technology. B. the decline in unionization and slacking of labor laws. C. better environmental standards and stricter labor laws. D. the quantity of labor per hour worked and the level of technology.

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4. According to an article in the Wall Street Journal!, Federal Reserve Chair Janet Yellen stated that unless obstacles to some women working in the paid labor force are! removed, the United States will! "incur a substantial loss to the productive capacity of our! economy." Ms. Yellen also stated that more women in the labor force would! "help overcome! long-term challenges such as an aging population and slow productivity! growth." ! Source: Harriet! Torry, "Yellen Says! Family-Friendly Work Policies Can Boost! Economy," Wall Street Journal!, May! 5, 2017.

What measure do economists use for the productive capacity of the! economy? A. Potential GDP B. Marginal product of capital C. Real wages D. Real GDP per capita Why might an aging labor force and slow productivity growth pose! long-term challenges to the U.S.! economy? A. The growing number of older workers will squeeze younger workers out of the labor! force, and unemployment will rise. B. As workers! retire, younger workers will not be able to produce as much output per hour worked as older workers. C. Firms will not be able to produce at capacity because an aging labor force will not want to work as many hours. D. An aging labor force and slow productivity growth could reduce the growth rate of potential GDP. How might more women working in the paid labor force help overcome these! challenges? Relative to older male! workers, the average female worker would have (1)

(1)

labor productivity.

a lower a higher the same

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5. The total value of saving in the economy must equal the total value of investment. Assume a closed! economy, where:

I = Investment!, S = Sprivate + Spublic !, Sprivate = Private Saving!, Spublic = Public Saving!, C = Consumption Expenditure!, G = Government Expenditure !, Y = GDP!, TR = Government Tranfers. Which one of the following expressions shows the! investment-saving equality? A. S = Y − C − G B. I = Y + TR − C − T C. S = Y + T − TR − G D. I = Y + TR − C − G 6. Consider the following data for a closed! economy:

Y! = $ ! 12 trillion C! = $ ! 6 trillion   !$ 2 trillion I !=  TR! = $ ! 2 trillion   !$ 3 trillion T! =  Use the data to calculate the following. !(Enter your responses as! integers.) a. Private! saving: !$

5

b. Public! saving: !$

−3

c. Government! purchases: $ !

trillion. trillion. 4

d. The government budget balance is !$ (1)

(1)

trillion. −3

trillion and as a result the government budget is in

. surplus deficit balance

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7. Consider the following data for a closed! economy:

Y! = $ ! 14 trillion C! = $ ! 9 trillion G! = $ ! 3 trillion Spublic! = $ ! − 0.5 trillion T! = $ ! 4 trillion Use the data to calculate the! following: !(Enter your responses rounded to one decimal place.!) a. Private saving! is: !$

trillion.

2.5

b. Investment spending! is: !$

2.0

trillion.

c. Transfer payments! are: $ !

1.5

trillion.

d. The government budget balance! is: $ ! (1)

(1)

− 0.5

trillion and as a result the government budget is in

. deficit surplus

8. The federal government in the United States has been running very large budget deficits. Suppose that Congress and the president take actions that turn the budget deficits into budget surpluses. The graph for the loanable funds market can be used to illustrate the effect of the budget surpluses.

supply curve of loanable! funds, S1 . The loanable funds market is initially in equilibrium at point A. !1.) Use the line drawing tool to draw a new demand or supply curve for loanable funds to illustrate the effect of a federal budget surplus. Label the graph D2 or S2 as

Real interest rate

The graph on the right shows the market for loanable funds with demand curve for loanable! funds, D1 and the

S1

S3 S2

A C B

appropriate. !2.) Use the point drawing tool to locate the new equilibrium point. Label this point! 'B'.

D1 Loanable funds (dollars per year)

!Then, suppose that households believe that surpluses will result in Congress and the president cutting taxes in the near future in order to move from budget surpluses to balanced budgets. As a! result, households increase their consumption spending in anticipation of paying lower taxes. !3.) Use the line drawing tool to draw a new demand or l f l bl f d ill h ff f https://xlitemprod.pearsoncmg.com/api/v1/print/en-us/econ

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supply curve for loanable funds to illustrate the effect of an increase in household spending. Label the graph D3 or S3 as appropriate. !4.) Use the point drawing tool to locate the new equilibrium point. Label this point! 'C'. Carefully follow the instructions above and only draw the required objects. When the government begins to run a budget! surplus, A. savings and investment increase. B. the equilibrium interest rate decreases and the quantity of loanable funds increases. C. the supply of loanable funds curve shifts to the right. D. all of the above hold true. When households increase their consumption in anticipation of future tax! decreases, all of the following! hold, except that A. savings and investment decrease. B. investment increases. C. the supply of loanable funds decreases and the supply curve shifts to the left. D. the equilibrium interest rate rises and quantity of loanable funds decreases.

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9. As the economy nears the end of an! expansion, which of the following typically! occurs? A. The profits of firms will be falling. B. Wages are usually rising faster than prices. C. Interest rates are usually rising. D. All of the above occur. Purchases of which types of goods are business cycles most likely to! affect? A. goods the government purchases B. nondurable goods C. durable goods D. services Recessions cause the inflation rate to! _________, and the unemployment rate to! _________. A. !increase; increase B. !decrease; decrease C. !decrease; increase D. !increase; decrease

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10.

11/19/19, 10:56 AM

!Real-Time Data Analysis Exercise Click the following link to view Saving and Investment data from FRED1!.* Then use that data to answer the following questions. 2 For this exercise you will need to enter data from FRED for gross private saving !(Series !ID: GPSAVE!) and gross government saving !(Series !ID: GGSAVE!). Using data from! FRED, enter the values for gross private saving and gross government saving for second quarter of 2014 and 2019 !(shown as 2014 − 04 − 01 and 2019 − 04 − 01 in! FRED). !(Enter your responses exactly as they appear in FRED.!)

!Quarter/Yr

Gross Private Saving! (bils.)

Gross Government Saving! (bils.)

Second!/2014

3869.295

− 303.452

Second!/2019

4690.653

− 773.958

Real interest rate

The Market for Loanable Funds Supply of loanable funds

Equilibrium interest rate

Demand for loanable funds Equilibrium quantity of loanable funds

Loanable funds (dollars per year)

!*Real-time data provided by Federal Reserve Economic Data! (FRED), Federal Reserve Bank of Saint Louis.

Using the data recorded! above, complete the following table by! computing, for each! period, total gross saving in the economy. !(Enter your responses rounded to one decimal! place.) Quarter/Yr !

Gross Saving! (bils.)

Second!/2014

3565.8

Second!/2019

3916.7

In the loanable funds market displayed in the! figure, gross saving is represented by the (1) loanable funds. The change in gross saving from the second quarter of 2014 to the second quarter of 2019 would be displayed in the figure to the right as a (2)

curve.

1: http://research.stlouisfed.org/fred2/categories/112 2: More Info The! "FRED" link will take you directly to the Saving and Investment page on FRED. To answer the! questions, you will need to click on the individual! series, and then you will need to click on the! "view data" link. For any numerical! questions, be sure to enter the value exactly as it appears in FRED. There are a lot of data! points, so be sure to select the value that corresponds to the date asked for in the exercise.

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Navigation! hint: For Google Chrome! users, the browser window that will open when you click the! "FRED" link will not have a back button. To go! back, right mouse click anywhere on the page and choose! "Back" from the popup menu.! Alternatively, when navigating to another! page, right mouse click the link and choose! "Open link in new! window" to open the information in a new window.

(1)

supply of demand for

(2)

stable supply rightward shifting supply leftward shifting supply

Answers given reflect the data available at the time the exam was! printed, and thus are subject to change. 11. Use the graph to help determine which one of the following statements regarding unemployment and       business cycles is true.  A. The unemployment rate fell right after the end of the recession in November 2001. B. The unemployment rate fell right the beginning of the recession in November 2001. C. The unemployment rate usually continues to rise even after the recession has ended. D. The unemployment rate was not affected by the recession in November 2001.

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12. Andover Bank and Lowell Bank each sell! one-year certificates of deposit! (CDs). The interest rates on these CDs are given in the table below for a! three-year period. Bank Andover Bank Lowell Bank

2018

2019

2020

1!% 4!%

2!% 4!%

9!% 4!%

Suppose you deposit $ ! 10,000 in a CD in each bank at the beginning of 2018. At the end of! 2018, you take your !$ 10,000 and any interest earned and invest it in a CD for the following year. You do this again at the end of 2019. At the end of! 2020, the interest over this! three-year period at Andover Bank is !$ rounded to the nearest penny!.) At the end of! 2020, the interest over this! three-year period at Lowell Bank is !$ rounded to the nearest penny!.) At the end of! 2020, you will have earned more on your (1)

. !(Enter your response

1229.18

1248.64

. !(Enter your response

Bank! CD, because

A. it all depends on which bank has the higher interest rate in the beginning. B. Lowell Bank uses compound interest! calculation; Andover does not. C. even a modest increase in the interest rate compounded over time will make the earnings higher. D. the average rate of interest charged by Andover is less than the average rate of interest charged by Lowell.

(1)

Lowell Andover

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13. In his book The White! Man's Burden!, William Easterly reports that A vaccination campaign in southern Africa virtually eliminated measles as a killer of children. Routine childhood immunization combined with measles vaccination in seven southern Africa nations starting in 1996 virtually eliminated measles in those countries by 2000. A national campaign in Egypt to make parents aware of the use of oral rehydration therapy from 1982 to 1989 cut childhood deaths from diarrhea by 82 percent over that period. !Source: William! Easterly, The White! Man's Burden: Why the! West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good!, New! York: The Penguin! Press, 2006, p. 241.

As a result of the near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and! Egypt,     A. the mortality rate in these! low-income countries became higher. B. the real GDP per capita for these! low-income countries increased significantly. C. the standard of living for these! low-income countries increased significantly. D. these! low-income countries were on a path to! catch-up with the living standards with! high-income countries. The near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt A. increased real GDP per! capita, but decreased productivity and human capital resulting in a lower standard of living. B. did not increase real GDP per! capita, but productivity and human capital development fell resulting in a lower rate of growth. C. helped the people of southern Africa and Egypt temporarily but did not make help much in the long run. D. did not increase real GDP per! capita, but increased productivity and human capital resulting in a higher standard of living. The elimination of measles and childhood deaths from diarrhea will      A. remove a major impediment to! growth, but productivity will not change and this will not lead to economic growth. B. remove a major impediment to growth and help the nation so much that per capita GDP will rise immediately. C. be a motivating factor for the countries to save more and invest more but may not lead to economic growth. D. remove a major impediment to! growth, increase productivity and should eventually lead to increases in real GDP per capita.

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14. In the 1961 edition of his! best-selling introductory economics! textbook, the late Nobel laureate economist Paul! Samuelson, noted that Soviet GDP might become larger than U.S. GDP by 1984.    !Source: Paul A.! Samuelson, Economics,! New! York: McGraw-Hill,! 1961, Figure! 37.1, as reproduced in David M. Levy and Sandra J.! Peart, "Soviet Growth and American! Textbooks: An Endogenous! Past," Journal of Economic Behavior and Organization!, Vol.! 78, No.! 1-2, April! 2011, p. 115.

In! 1961, why might a leading economist have expected the Soviet economy to eventually have become larger than the U.S.! economy? A. Soviet entrepreneurs had more incentive to innovate and were constantly searching for better ways to produce things. B. There were rapid increases in capital per hour! worked, which led to rapid increases in real GDP per hour worked. C. The Soviet government owned nearly every business and made all production and pricing decisions. D. Centrally planned economies like the Soviet Union usually grow faster over the long run than market economies. Briefly explain why the Soviet economy failed to overtake the U.S. economy. A. The Soviet Union experienced diminishing returns to capital and a slower rate of technological advance. B. Firms in the Soviet Union faced more domestic and foreign competition than firms in the United States. C. Entrepreneurs in the Soviet Union made the decisions about which investments to make and which technologies to use. D. Soviet entrepreneurs were driven to earn profits and failed to produce the! profit-maximizing quantity of output.

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15. Refer to the diagram to the! right, to answer the! following:

Aggregate Production 1,000

(1) b. The movement from point B to point C !represents: (2) c. The movement from point A to point C !represents: (3)

Real GDP per hour Worked Y/L ($, 000)

a. The movement from point A to point B represents!:

900 800

D

700 600

E

500

C B

400

A

300 200 100 0 0

20

40

60

80

100

Capital per hour worked K/L ($, 000)

(1)

(3)

more hours worked per unit of capital

(2)

technological change

technological change

a decline in...