Assignment

• Chapter 1

1. Go to bea gov website to find the latest quarterly report on GDP to answer these questions:

a. What is the latest quarterly estimate of nominal GDP? Of real GDP? Explain why nominal and real differ.
b. What was the rate of economic growth in the most recent quarter (compared to the previous quarter, compared to year ago)?
c. Using nominal and real GDP data, show how you can calculate the rate of inflation in the most recent quarter.

2. Using the most recent quarterly GDP data from bea.gov, find Nominal GDP (Y), Consumption (C), Gross Investment (I), Government spending (G), and Net Exports (NX).

a. Find C/Y, I/Y, G/Y and NX/Y. Compare these percentages to those in Table 1.1. Which ones have risen? Which ones have declined? Which ones are about the same?

Chapter 2

2. In the great recession of 2008-09, US output fell about$ 0.9 trillion below full employment output.

a. The government spending multiplier has been estimated to be 2. What change in government spending would restore full employment?

b. If the simple multiplier is 2, how large is the implied MPC?

c. In fact, the MPC is probably closer to 0.8 even though the multiplier is 2 (not 5). How can we explain this?

Chapter 3

1. One friend tells you the IS curve represents (Y, r) points where current production balances with current spending.

A second friend tells you the IS curve represents (Y, r) points where total saving balances with total investment.

Which friend of yours is right? Explain why.

2. Show how to derive the IS curve (that is, show where it comes from) using all underlying graphs.

3. Show how to derive the LM curve using all underlying graphs.

4. Using any and all relevant graphs, explain what happens to the LM curve when the money supply is reduced.

5. Using any and all relevant graphs, explain what happens to the IS curve when there is a tax increase.

6. At the end of chapter 3, do questions # 5, 10 and 11.

Chapter 4

2. Using IS - LM curves, show graphically what will happen to output (Y) and interest rates (r) if:

a. FED increases money supply and Congress cuts spending.
b. Both government spending and the money supply increase.
c. The FED cuts the money supply and taxes are increased.

Chapter 5

1. Suppose investment is not very sensitive to interest rates. Would you rather use fiscal or monetary policy to stimulate an economy that is in a recession. Explain in pictures and words.

2. Suppose that money demand is extremely sensitive to interest rates. Would you use fiscal or monetary policy to stimulate an increase in GDP? Explain in words and pictures.

3. What is meant by quantitative easing? When would the FED use it? Explain what it is meant to do and how it would work.

4. What does the LM curve look like in the liquidity trap? How effective is monetary policy? Fiscal policy?