Assignment

Part 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?

Part 2

1. Do at least 6 of the questions from the textbook at the end of Part 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?

1. Over the business cycle, real GDP tends to increase during the expansion and decrease during the con- traction. Can you name some other macro variables that fluctuate over the business cycle like GDP does? Can you name some macro variables that do not fluctuate like GDP?

2. In the long run, real GDP tends to grow over time. Can you name some other macro variables that also tend to grow over time? Can you name some macro variables that do not grow over time?

3. What is meant by the term stock variable? Give at least 3 examples of economic stocks. What is meant by the term flow variable? Give at least 3 examples of economic flows. Explain how stocks and flows are related to each other, and give at least one specific example.

4. How would it be possible for GDP to exceed GNP this year, and then for GNP to exceed GDP next year? 5. What are two basic methods or approaches for counting GDP? Why they should get the same answer? 6. How does a macroeconomist define "investment"? When you buy stocks or bonds, people often say you

5. What are two basic methods or approaches for counting GDP? Why they should get the same answer?

6. How does a macroeconomist define "investment"? When you buy stocks or bonds, people often say you made an investment. Would a macroeconomist agree? If not, what are you doing when you buy stocks and bonds?

Part 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. Given the following information, find the economy's IS curve and graph it.

C = 150 + .75(Y - T) I = 200 - 40r G = T = 200

10. Given the following information, find the economy's LM curve and graph it.

Ms = 130 and Md = 100 + .1Y - 10r 11.

11. Using the information in questions 5 and 10, find the economy's equilibrium output and interest rate.

Part 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.

8. Verify that equilibrium output will be 800 (Y = 800) and the interest rate 5 percent (r = 5).

9. Suppose government spending increases by 65 (from 200 to 265) financed by running a budget deficit. What will happen to output and the interest rate?

10. Suppose the government raises taxes by 65. What happens to output and the interest rate?

11. Suppose governments pending increases by 65 financed by a tax increase of 65. What happens to output and the interest rate?

12. Suppose the money supply increases by 65 (from 130 to 195). What happens to output and the interest rate?

13. Suppose government spending increases by 65 and this is financed by an equal increase in the money supply. What happens to output and the interest rate?

Part 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?