This problem set is due Thursday, September 25, 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. The following information is from the 1996 United States’ national income accounts: 

 a) Compute the U.S. GDP for 1996 using the flow-of-expenditures approach.

 b) Compute the U.S. GDP for 1996 using the flow-of-earnings approach.

c) Compute the U.S. GNP for 1996.

 d) Compute the U.S. NNP, NI, PI, and DI for 1996.

2. a) Use aggregate supply and demand analysis to explain the macroeconomic consequences of a doubling in the price of oil due to a new Iraqi invasion of Kuwait.

 b) Assume that the President says that he wants to follow 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.

3. 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 1997 dollars): 

 This year, real GDP is $8.0 trillion and the price level is 112. 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 trend? By how much?

4. Use the information in problem 3 to explain (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).

5. After interviewing Amanda Woodward you get the following information about her personal finances. Each month she spends $2,500 regardless of his level of income. In addition to those $2,500 she always spends 9/10 of her monthly disposable income.

a) Draw Amanda’s monthly consumption function.

b) Draw the corresponding savings function.

c) What is the break-even point?

d) What are Amanda’s MPC and MPS?

e) If Amanda’s disposable income were $10,000 this month, how much would be saved?

6. 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 Constant Maturity Rate) on:

• January 5, 1996
• April 5, 1996
• July 5, 1996
• October 4, 1996

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

• January 5, 1996
• April 5, 1996
• July 5, 1996
• October 4, 1996

 c) Draw the yield curves for:

• January 5, 1996
• April 5, 1996
• July 5, 1996
• October 4, 1996

 d) What were the changes in the yield curve form Jan. 5, 1996 to October 4, 1996 predicting about the future of the U.S. economy for 1997? Explain.

 e) Find the corresponding interest rates for September 12, 1997. What are the changes in the yield curve form October 4, 1996 to September 12, 1997 predicting about the future of the U.S. economy for 1998? Explain.