Macroeconomics Policy Math Project

Think of yourself as the President of your own Island Country and the following is your economy that you are to manipulate to get the economy you want. This math is called econometrics; it is economics and algebra with a twist, it is also the math of the Economic Advisory Council for the President of the United States. Economy I is moving too slow and Economy II is moving too fast, you will learn how to speed up and slow down an economy.

Economy I & Economy II

I. Your Economy: Assume that C = 100 + .5(Y-T); I = 120- 10(i); i = 6%; G = 90;

T = 100; X = 100; M = 110; full capacity output is 400

Macroeconomics Symbols

C = Consumption spending
I = Investment is firms spending
G = Government spending
T = Taxes
X = Exports
M = Imports
i = interest rate, use the whole number 6 in your math, do not use a percentage
S = Savings
a = transfer payments (in your math problem it is 100 in the C formula)
b = MPC= marginal propensity to consume = how much you as a consumer spends out of $1, this is a percentage (in your math problem it is the .5 in the C formula)

Aggregate means total
GDP = aggregate output
Y = aggregate income
GDP = Y
Wish GDP = Y potential = full capacity output of 400, this is your wish GDP

Show all math from the formula line to the sub formula line, through all the numbers, until the answer. You must show all math, there are no shortcuts, and do not fill in a number for Y when solving for Y.

Macroeconomics Math Project

Economy I: Economy I is moving too slow and eventually you will learn how to speed it up. When solving for Y, you may not put numbers in the problem for Y.

1. Find Y, C, and S for your Island country.

1a. Y= C + I + G + (X - M) = your Island GDP which is the Economy

1b. C= a + b (Y - T) = your peoples Consumption on the Island

1c. S= I + G - T+ (X - M) = your peoples Savings on the Island

2. Calculate the approximate unemployment rate with Okun's Law Theory that is not in your textbook. To calculate the unemployment rate with Okun's Law do the following.

All of this is the Formula: Y potential - Y divided by Y potential x (100) = GDP Gap divided by 2.5 = Cyclical rate Increase above (add to) the Natural Rate of Unemployment of 4% = Unemployment Rate.

Theory: Okun's Law indicates that for every 1 percentage point by which the cyclical unemployment rate exceeds the natural rate, a GDP Gap of about 2.5 percent occurs.

Theory means: Okun's Law means if unemployment decreases by 1%, 1% of the people go to work and GDP will increase by 2% approx.....or if 1% of the people lose their jobs GDP will decrease by 2% approx.

Prosperity and full employment are other names for unemployment in macroeconomics.

4% NAIRU = natural rate of unemployment = full employment. 4% natural rate is the best unemployment rate the U.S. had over a consistent period of time from 1995-2000.

A GDP Gap is the gap between where your GDP is in your country and where you want it to be, or your wish GDP.

3. Improve your initial economy through monetary policy via interest rates.

Decrease the interest rate from 6 to 5 using the Y formula, solving for Y.

4. Improve your initial economy through fiscal policy via taxes.

Decrease taxes from 100 to 80 using the Y formula, solving for Y.

5. Improve your initial economy through fiscal policy via government spending.

Increase government spending from 90 to 100 using the Y formula, solving for Y.

Problems 3, 4, and 5 are showing you, once you do the math, that your Island Country's economy can be manipulated and corrected with only one change.

Macroeconomics Math Project

Economy II: Your economy is changing due to the instructions below.

Economy I was going too slow and you increased your Island economy to where you wanted it to be. Economy II is going too fast and eventually you will slow it down to where you want your Island to be again at 400 GDP.

1. Take the Economy I and cut taxes by 20 and raise G by 20.

Use Y formula, solving for Y, no numbers are to be used for Y.

2. What will this fiscal policy do to the budget? Budget formula = G - T

Slow Economy G-T= __ vs. Fast Economy G-T=__ (each: surplus or deficit)

3. What will this fiscal policy do to inflation?

This is a sentence about inflation either increasing or decreasing based on your GDP in this new economy.

4. What will this fiscal policy do to prosperity?

Remember prosperity is another name for unemployment or full employment. Use Okun's Law with new GDP and 400 Y potential.

5. How will the Federal Reserve react?

The Federal Reserve is over Monetary Policy via interest rates.

Use the Y formula, solving for Y, and increase interest rates from 6 to 8.

6. What will be the result on investment spending?
Remember investment spending is firms spending not the stock market. Formula is I = 120 - 10 (i).

Do formula twice with 6 then 8 to show what your firms are spending with the different interest rates.

7. What will be the result on economic growth for Economy II?

For each math question in II write a sentence and number from 1, 2, 3, 4, 5, and 6 about what happened to the economy in your math (include math numbers in sentences).