Fall 1998

ECONOMICS 1312

J.G. Gonzalez
Problem Set # 1

This problem set is due Thursday, September 24, 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 1997 United States’ national income accounts:

1. Government transfer payments $
1083.3
2. Personal income taxes  
989.0
3. Consumer purchases of goods and services   
5493.7
4. Rental income  
158.2
5. Government expenditures on goods and services  
1454.6
6. Value of leisure time  
7361.8
7. Imports of goods and services  
1058.8
8. Gross domestic investment  
1256.0
9. Depreciation  
871.8
10. Pollution damage  
2455.4
11. Exports of goods and services  
965.4
12. Proprietors' income  
551.2
13. Corporate profits  
817.9
14. Receipts of factor income from the rest of the world  
265.5
15. Indirect business taxes  
584.6
16. Social Security taxes  
326.2
17. Household production  
4588.9
18. Corporate profits tax  
452.3
19. Personal dividend income  
260.3
20. Personal interest income  
342.8
21. Payments of factor income to the rest of the world  
273.5
22. Net interest  
432.0
23. Business transfer payments  
27.2
24. Wages and salaries  
4687.2
a) Compute the U.S. GDP for 1997 using the flow-of-expenditures approach.

b) Compute the U.S. GDP for 1997 using the flow-of-earnings approach.

c) Compute the U.S. GNP for 1997.

d) Compute the U.S. NNP, NI, PI, and DI for 1997.
 
 

2. a) Use aggregate supply and demand analysis to explain the macroeconomic consequences of the devaluation of the Ruble for the Russian economy.

b) Assume that President Yeltsin 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.
 
 

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):

 
Price
Level
 
Real GDP
Demanded
Real GDP
Supplied in
the short run
Long-run
Aggregate
Supply
110
9.3
8.3
8.6
114
9.0
8.5
8.6
118
8.7
8.7
8.6
122
8.4
8.9
8.6
 

This year, real GDP is $8.4 trillion and the price level is 116. 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 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).

 

5. After interviewing Kyle McBride you get the following information about his personal finances. Each month he spends $4,000 regardless of his level of income. In addition to those $4,000 he always spends 8/10 of his monthly disposable income.

a) Draw Kyle’s monthly consumption function.

b) Draw the corresponding savings function.

c) What is the break-even point?

d) What are Kyle’s MPC and MPS?

e) If Kyle’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:

b) What were the interest rates on 10-year U.S. Treasury bonds (the data series is called: 10-Year Constant Maturity Rate) on:
c) Draw the yield curves for:
d) What were the changes in the yield curve form Jan. 3, 1997 to October 3, 1997 predicting about the future of the U.S. economy for 1998? Explain.

e) Find the corresponding interest rates for September 11, 1998. What are the changes in the yield curve form October 3, 1997 to September 11, 1998 predicting about the future of the U.S. economy for 1999? Explain.

f) What is the probability of a recession according to the yield curve of September 11, 1998? (Note: Use the diagram from the WSJ article (Aug. 12, 1996) that we discussed in class to answer this question).