Fall 2001

ECONOMICS 1312

J.G. Gonzalez

 

 

 

 

Problem Set # 1

 

 

            This problem set is due Thursday, September 27, at the beginning of the class period.  Problem sets done on notebook paper or unstapled will not be accepted.  Late problem sets are unacceptable also.

 

1.   a)   Use aggregate supply and demand analysis to explain the macroeconomic consequences of a doubling in the price of oil due to military conflicts in the Middle East.

 

  b)   Assume that the President Bush says that he wants to follow non-accommodative economic policy in response to the changes in part a).  What fiscal policies would you suggest be used?  What monetary policies could also be used?  Use a diagram to show the effects of your suggested polices.

 

 

2.  You are the President's economic advisor and you are trying to figure out where the U.S. economy is headed next year.  You have the following forecasts for next year's AD, short-run AS, and long-run AS curves (output is given in trillions of 2001 dollars):

 

 

Price

Level

 

Real GDP

Demanded

Real GDP

Supplied in

the short run

Long-run

Aggregate

     Supply

126

10.8

9.4

10.4

128

10.5

9.8

10.4

130

10.2

10.2

10.4

132

9.9

10.6

10.4

 

 

            This year, real GDP is $10.3 trillion and the price level is 126.  The President wants answers to the following questions:

 

a)  What is your forecast of next year's real GDP?

b)  What is your forecast of next year's price level?

c)  What is your forecast of the inflation rate?

d)  What will happen to the unemployment rate?

e)  Will real GDP be above or below potential output? By how much?

 

3.  Use the information in problem 2 to answer the following questions (use diagrams in your answers):

 

a)  What will have to be done to aggregate demand to move the economy to potential output?  What type of monetary policy could be used to achieve this objective?  What fiscal policy could be used to achieve this objective?

 

b)  What will the price level be if aggregate demand is manipulated to move the economy to potential output?  (For simplicity you can assume that the AD and AS are straight lines).

 

 

4.  Use the information available on the Internet (http://www.stls.frb.org/fred/data/wkly.html) to obtain the data necessary to answer the following questions.

 

a)  What were the interest rates on 3-month U.S. Treasury bills (the data series is called:  3-Month Treasury Constant Maturity Rate –daily-) on:

                     i.  January 3, 2000

                   ii.  April 3, 2000

                  iii.  July 3, 2000

                 iv.  October 2, 2000

 

b)  What were the interest rates on 10-year U.S. Treasury bonds (the data series is called:  10-Year Treasury Constant Maturity Rate –daily-) on:

                     i.       January 3, 2000

                   ii.       April 3, 2000

                  iii.       July 3, 2000

                 iv.       October 2, 2000

 

c)  Draw the yield curves for:

                     i.       January 3, 2000

                   ii.       April 3, 2000

                  iii.       July 3, 2000

                 iv.       October 2, 2000

 

d)  What were the changes in the yield curve from Jan. 3, 2000 to October 2, 2000 predicting about the future of the U.S. economy for 2001?  Explain.

 

e)  What was probability of a recession for 2001 according to the yield curve of October 2, 2000  (Note: Use the diagram from the WSJ article -Aug. 12, 1996- that we discussed in class to answer this question).  On the basis of that information, what actions would you have recommended the Fed take at that time?  Why?

 

f)  Find the corresponding interest rates for September 14, 2001.  What are the changes in the yield curve from October 2, 2000 to September 14, 2001 predicting about the future of the U.S. economy for 2002?  Explain.

 

g)  What is the probability of a recession according to the yield curve of September 14, 2001?  (Note: Use the diagram from the WSJ article (Aug. 12, 1996) that we discussed in class to answer this question).

 

 

5.  The country of Roswell has 240 million people over the age of 16.  You are told that there is only one wage in the economy and that it is equal to $30 per hour.  At this wage 160 million people are willing to work.  You are told that when the wage equals $30 per hour there is no involuntary unemployment in Roswell.

 

a)  Use the geometry of supply and demand to describe the labor market of Roswell (Make sure that you show the number of workers employed, voluntarily unemployed, and the total population).

 

b)  Suppose that as a result of a decline in consumption and investment expenditures, 30 million workers become involuntarily unemployed.  Illustrate these changes with the use of a new diagram (Make sure that you show the number of workers that are employed, involuntarily unemployed, voluntarily unemployed, and the total population).

 

c)  What assumption is necessary to generate involuntary unemployment in the labor market?

 

 

6.  Find a newspaper or magazine article published between September 19, 2001 and September 24, 2001 describing an event that may affect the U.S. price level and real GDP.  Draw an initial set of AD and AS curves, then determine which curve will be affected, and in which direction it will shift.  What do you predict will happen to the price level and real GDP?  Your answer must include a short summary of the article and an explanation of how the event affects AD or AS (you should also include a copy of the article).