Fall 1995 | ECONOMICS 312 | J.G. Gonzalez |
Problem Set # 1
This problem set is due Thursday, September 28, 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. Use the following information to compute the United States NDP and DI for 1994:
| 1. Government transfer payments | $ | 963.4 |
| 2. Personal income taxes | 703.9 | |
| 3. Consumer purchases of goods and services | 4628.4 | |
| 4. Rental income | 458.6 | |
| 5. Government expenditures on goods and services | 1175.3 | |
| 6. Value of leisure time | 6837.1 | |
| 7. Imports of goods and services | 816.9 | |
| 8. Gross domestic investment | 1032.9 | |
| 9. Depreciation | 712.7 | |
| 10. Pollution damage | 1994.5 | |
| 11. Exports of goods and services | 718.7 | |
| 12. Proprietors' income | 467.1 | |
| 13. Corporate profits | 532.9 | |
| 14. Indirect business taxes | 594.1 | |
| 15. Social Security taxes | 697.3 | |
| 16. Household production | 4056.1 | |
| 17. Corporate profits tax | 187.3 | |
| 18. Personal dividend income | 193.4 | |
| 19. Personal interest income | 719.5 | |
| 20. Net interest | 468.7 | |
| 21. Wages and salaries | 3525.4 | |
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 nonaccommodative 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 1995 dollars):
| Price Level | Real GDP demanded | Real GDP supplied in the short run | Long-run aggregate supply |
| 130 | 6.5 | 4.3 | 5.8 |
| 140 | 6.0 | 4.9 | 5.8 |
| 150 | 5.5 | 5.5 | 5.8 |
| 160 | 5.0 | 6.1 | 5.8 |
This year, real GDP is $5.8 trillion and the price level is 140. 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 Dylan McKay you get the following information about his personal finances. Each month he spends $2,000 regardless of his level of income. In addition to those $2,000 he always spends 8/10 of his monthly disposable income.
a) Draw Dylan's monthly consumption function.
b) Draw the corresponding savings function.
c) What is the break-even point?
d) What are Dylan's MPC and MPS?
e) If Dylan's disposable income were $12,000 this month, how much would be saved?