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This 15 page Class Notes was uploaded by Shelby Sorrell on Friday October 9, 2015. The Class Notes belongs to ECO2013 at a university taught by Deborah Paige in Fall 2015. Since its upload, it has received 324 views.
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Date Created: 10/09/15
Eco 2013 Paige Homework 1 Income Consumption APC Savings APS 0 50 50 100 140 14 40 04 200 230 115 30 0 15 300 320 1066 20 00667 400 410 1025 10 0025 500 500 1 0 000 600 590 0983 10 0017 700 680 0971 20 0029 1 Fill in the missing data Wherever there is a question mark 2 Find the MPC and MPS for the above data Show work MPC Change in C Change in income Income 0 C 50 Income 100 C 140 MPC 90100 910 90 Income 100 C 140 Income 200 C 230 MPC 90100 910 90 Income 200 C 230 Income 300 C 320 MPC 90100 910 90 Income 300 C 320 Income 400 C 410 MPC 90100 910 90 Income 400 C 410 Income 500 C 500 20 points 10 points MPS Changing in saving Change in income Saving Saving 50 40 MPS 10100 110 1 Saving Saving 40 30 MPS 10100 110 1 Saving Saving 30 20 MPS 10100 110 1 Saving 20 Saving 10 MPS 10100 110 1 Saving 10 Saving 0 MPC90100910 90 MPS 10100 110 1 Income 500 C 500 Saving 0 Income 600 C 590 Saving 10 MPC90100910 90 MPS 10100 110 1 Income 600 C 590 Saving 10 Income 700 C 680 Saving 20 MPC90100910 90 MPS 10100 110 1 3 What is autonomous consumption in the above data What is the formula for the consumption function in this specific case use relevant numbers from 1 20 points Consumption Autonomous consumption Induced consumption Autonomous consumption is our level of consumption when disposable income is 0 Consumption 500 Autonomous 500 Consumption 500 Autonomous 500 Induced consumption 0 4 A firm expects to earn 14000 a year on an 112000 investment a Calculate the expected profit rate Show work 10 points Expected profit rate expected profitmoney invested 14000112000 125 125 b This firm would be willing to make this investment provided the interest rate is lower than what 10 points This firm would be willing to make this investment provided as long as the interest rate is lower than the 125 profit because if it were higher than they would lose money If the interest rate were 10 the firm would still be able to walk away at a profit of 25 which would be 2800 in the bank 5 Answer True or False for each of the following 3 points each When you buy 100 shares of IBM it is an investment according to economists FALSE If consumers have few durable goods this will lower the C line all other things equal TRUE A corporation is a legal person separate from the owners TRUE Investment is more stable than consumption FALSE Consumption is about 23 of overall spending each year in the US TRUE Net investment is gross investment minus depreciation TRUE High interest rates discourage business investment all other things equal TRUE A bond holder is a part owner of a company FALSE High consumer debt would lower the C line all other things equal TRUE Income is the largest determinant of consumption FALSE Eco 2013 Paige Homework 2 1 Fill in the missing information wherever there is a question mark 15 points Income Tax Ave Tax Rate Marginal Rate 10000 0 0 0 20000 1500 5 75 30000 4000 92 193 40000 7500 13 188 ATR Taxes paid taxable income MRT Additional taxes paid Taxable income ART 010000 0 MRT 00 0 ART 150020000 5 MRT 150010000 75 ART 400030000 92 MRT 2500 10000 25 ART 750040000 13 MRT 350010000 188 2 You pay a marginal rate of 3 on the first 10000 of income and a marginal rate of 5 on the second 10000 of income You make 18000 a year how much is your income tax MRT Additional taxes paid taxable income 3 3 additional cents on every extra dollar 300 of 10000 5 of the next 8000 400 3 of 10000 5 of 8000 700 700 in income tax 3 Answer True or False for each of the following 3 points each In the real world government spending is independent of income levels FALSE Most Americans actually pay more to Social SecurityMedicare than income taxes TRUE Excise taxes are proportional because everyone pays the same amount FALSE Tax rates in the US are higher than is usual among developed countries TRUE Progressive taxes are based on the ability to pay principle TRUE In an open economy aggregate demand or aggregate expenditures is C I G TRUE A trade deficit lowers the demand for a country s goods TRUE The US has not run a trade surplus for over 20 years TRUE The US is the world s largest exporter but not the world s largest importer TRUE Trade makes up a larger percent of the US economy than a couple of generations ago TRUE 3 Show what happens to the Aggregate Expenditures line if the country runs a trade surplus ie draw in a new curve labeled C I G Xn 10 points Agg 45degree line C I G C I G Xn Income I drew the C I G Xn line below the C I G line because Xn is a negative number so overall the C I G Xn line has a less sum than the line C I G 4 Mr A makes 50000 a year and pays 10000 in taxes Ms B makes 30000 a year and pays 6000 in taxes Find the tax rate and after tax income for each of them Identify What type of tax this is 25 points Mr A makes 50000 a year and pays 10000 in taxes Tax rate 1000050000 20 After tax income 40000 Mr B makes 30000 a year and pays 6000 Tax rate 6000 30000 20 After tax income 24000 This scenario is an example of statutory tax rate 5 Consumption is 6 trillion investment is 2 trillion and government purchases are 25 trillion The country exports 1 trillion and imports 15 trillion Find net exports and solve for the level of aggregate demand 10 points Net export export import Net export 115 Next export 05 trillion Aggregate demand Consumption Investment Government spending Net Exports C 6 trillion I 2 trillion G 25 trillion Xn 05 trillion AD 10 trillion Eco 2013 Paige Homework 3 1 Find nominal GDP for the US in 2002 dollar figures are in billions Show your work consumption 7304 gross private investment 1593 wages 5977 government purchases 1973 indirect taxes 695 net interest 684 net exports 424 depreciation 1393 rent 142 profit 1545 net foreign factor income earned in the US 10 Expenditure approach personal consumption expenditure gross private domestic investment government purchases net exports 7304 1593 1973 424 10446 Income approach Wages Indirect taxes net interest Depreciation Rent Profit Net Foreign Factor Income Earned in the US 5977 695 684 1393 142 1545 10 10446 2 Real GDP in 2002 was 94399 billion What is the GDP de ator Nominal GDP was 10446 Show work The GDP de ator formula is GDPd Nominal GDP100Real GDP 10446 X 100 94399 X 100 GDP de ator 110658 3 Answer True or False for each of the following GDP per capita is GDP divided by the population growth rate TRUE Disposable personal income is what you have left over after paying basic living expenses FALSE Gross Domestic Product is always preferred to Net Domestic Product by economists TRUE Real GDP is always lower than nominal GDP FALSE The GDP de ator is a good cost of living index FALSE GDP is more volatile in the shortrun than the longrun TRUE All government spending is in GDP FALSE If GDP is adjusted for purchasing power the US usually improves its relative position TRUE The sale of primary and intermediate goods are excluded from GDP TRUE Historically a recession generally meant GDP was falling TRUE A nGDP is 5 trillion in Yr 1 and 54 trillion one year later What is the GDP growth rate Year 1 NGDP 5 trillion Year 2 NGDP 54 trillion Growth in NGDP 04 trillion Growth in NGDP 04 5 8 B If rGDP in Yr 1 was also 5 trillion what can you say about le Nominal GDP is the market value of goods and services produced in an economy unadjusted for in ation Real GDP is nominal GDP adjusted for inflation to re ect changes in real output Hence if RGDP was equal to NGDP then there was no in ation C If rGDP grew 5 between Yr 1 and Yr 2 what did GDP prices do Hint use part A If you know GDP growth with both output and prices and now you now output by itself what must prices have done If you can assume that since in Year 1 nGDP was the same as rGDP then is should correlate between Year 2 as well Since it grew 5 then rGDP should grow 5 as well That would mean there is no in ation since nGDP is rGDP and that prices would rise since more product is being output and sold or more input and being sold 5 Determine whether GDP will be underestimated or overestimated in each of the following 0 The quality of goods is declining When quality of a good is declining GDP will be underestimated since it does not consider the quality of goods and services produced 0 Production is accompanied by significant spillover costs When there is signi cant costs GDP will be underestimated since the spillover costs are not taken into account while computing GDP 0 The government produces valuable goods and services at a low cost When government is producing valuable goods and services at a low cost GDP will be overestimated since it is computed at market price which is higher than the actual cost 0 The cost of living is lower in the country than is typical in the world When cost of living is lower GDP will be overestimated since it excludes cost of living from calculation Eco 2013 Paige Homework 4 2012 version 1 The following information is for the US economy in 1998 Find the US labor force the number unemployed and the unemployment rate for 1998 Numbers are in millions Hint start with population and kick out all those not in the labor force 15 pts Population 2702 million Under 16 or institutionalized 650 million Retired full time students and other out of the labor force 675 million Employed 1315 million Labor Force 1377 million Unemployed 62 million US labor force subtract under 16 and Retired from the population to equal the labor force 2702 million 650 million 675 million 1315 million 137 7 million in the US labor force in 1998 Unemployed labor force subtract employed 1377 million 1315 million Unemployed 62 million unemployed in the US in 1998 Unemployment rate of employed labor force 62 million 1377 million 0450 x 100 450 is the unemployment rate in the US in 1998 2 Answer True or False for each of the following 4 points each Most economists want a 0 target for unemployment FALSE The current natural rate of unemployment is thought to be somewhere around 5 FALSE If the economy is above full employment it causes higher than normal unemployment TRUE In ation can be increased by either an increase in AD or AS TRUE Cyclical unemployment can be caused by a drop in AD or AS TRUE The natural rate of unemployment is associated with high in ation TRUE The core PPI is often used to predict where we are relative to full employment FALSE In a closed economy in ation represents a decline in average real income TRUE Frictional unemployment is permanent for the labor force temporary for individuals TRUE It is possible although unusual for cyclical unemployment to be negative FALSE 3 There is one scenario where the unemployment rate would probably be underestimated due to the discouraged worker effect One where the rate would probably be underestimated due to underemployment One scenario where the rate would probably be overestimated due to the underground economy and one where the rate would probably be overestimated due to government encouraged unemployment There is also one scenario with none of these errors and the unemployment rate is probably accurate Identify which for each scenario 35 pts Corporation X lays off 500 skilled workers when general unemployment is low The unemployment rate is probably accurate Unemployment benefits and time of eligibility are raised while unemployment is low One where the rate would probably be overestimated due to government encouraged unemployment Corporation X reduces the hours for 500 unskilled workers Unemployment rate would probably be underestimated due to underemployment Country Y has little ability to track jobs and income and has high taxes Unemployment rate would probably be overestimated due to underground economy Corporation X lays off 500 unskilled workers when unemployment is extremely high Unemployment rate would probably be underestimated due to the discouraged worker effect 4 Calculate the real interest rate if nominal interest rate is 12 and in ation 5 5 pts Real interest rate nominal interest rate in ation expected or actual 12 5 7 real interest rate 5 Using the information below find the price index for year 2 5 pts 3 chickens 95 each 285 5 lbs hamburger 39 a lb 195 2 kilowatts of electricity 53 a kilowatt 1060 YEAR 1 base year 16 gallons of gasoline 6 a gallon 960 1 dentist visit 1500 1500 3 chickens 125 each 375 5 lbs hamburger 79 a lb 395 2 kilowatts of electricity 775 a kilowatt 1550 YEAR 2 16 gallons of gasoline 105 a gallon 1680 1 dentist Visit 20 2000 Chicken 3 95 285 Hamburger 5 39 195 Electricity 2 530 1060 Gas 16 60 960 Dentist 1 1500 1500 Year 1 base year Total 4000 Year 2 Chicken 3 125 375 Hamburger 5 79 395 Electricity 2 775 15 50 Gas 16 105 1680 Dentist 1 20 20 Total 60 Consumer Price Index CPI divide cost of liVing of the base year into the cost of liVing in the current year 60 40 15 x 100 150 is the price index for Year B The percentage prices rose between Year A and Year B is 15 150 100 Eco 2013 Paige Homework 6 1 The price level is 16 real GDP is 3 trillion and the money supply is 12 trillion What is the velocity of money 10 pts Velocity of money price level X real GDP money supply 16 trillion X 3 trillion 12 trillion 4 trillion 2 The economy is made up of C and I and is currently at full employment If consumption is 5 trillion While savings is 1 trillion What is current investment according to the Classical economists Suppose consumption falls by 500 billion What Will happen to savings and investment according to the classical economists 15 pts Classical economists Savings I for equilibrium I 1 trillion At full employment total output C S 6 trillion If C decreases by 500 billion then S 15 trillion for C S I and I 15 trillion 3 Full employment is 190 billion and equilibrium output is 200 billion According to the Classical economists 20 pts Wages and prices Will DECREASE Interest rates Will INCREASE Equilibrium output Will DECREASE TO 200 to 190 BILLION 4 The price level times real GDP equals What 5 pts Real GDP Nominal GDP price level Real GDP X price level Nominal GDP 5 The government spends 20 billion less what do the Classical economists say that the private sector will do What is this called 10pm If the government spends 20 billion less then the private sector would spend more by 20 billion due to the inverse crowding out effect This would happen because the government would borrow 20 billion less from the loanable funds market which will then lower the interest rate The private sector can then afford to borrow the extra 20 billion that the government didn t borrow 6 If savings is less than investment what will happen to interest rates in the Classical model 10 pts Interest rate would increase because the supply of money is less than the demand for loanable funds As the interest rate is equivalent to the price of loaning money it would increase due to the demandsupply 7 Answer True or False for each of the following 3 pts each 30 pts TRUE Government spending can raise Aggregate Demand and real GDP in the Classical model FALSE Classical economists said that the velocity of money is very volatile FALSE Classical Economists claim interest rates guarantee that savings will equal investment MAccording to money neutrality the Ms determines nominal but not real variables FALSE According to Say s Law demand creates its own supply MClassical economists said that markets are highly competitive mm the Classical model monetary policy is cannot change AD TRUE Classical Economists claim interest rates guarantee that savings will equal investment FALSE Classical in uence starts to wane during the 1960s FALSE Laissezfaire means the government can do anything it wants to the economy
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