Homework_06__Econ_104_Spring_2019.pdf

Homework_06__Econ_104_Spring_2019.pdf - Homework 06 Econ...

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Unformatted text preview: 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 Homework 06 Due Apr 14 at 11:59pm Points 100 Questions 52 Available until Apr 15 at 4am Time Limit None Instruc ons Homework 06 Lessons 10 and 11 100 points This homework is composed of multiple choice and true/false questions. There is no time limit. It will be available for review starting the day after the assignment is due. A empt History LATEST Attempt Time Score Attempt 1 207 minutes 100 out of 100 Correct answers will be available on Apr 15 at 4am. Score for this quiz: 100 out of 100 Submitted Apr 12 at 2:35pm This attempt took 207 minutes. Part 1: Multiple choice questions: Questions 1­8 are worth 3 points each. Questions 9­12 are worth 4 points each. Question 1 3 / 3 pts Consider the following model i) C = 1650 + mpc (Y ­ tY) ii) I = 800 1/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 iii) G = 500 iv) X ­ M = 500 ­ mpi (Y) where: t = the (flat) tax rate mpc = the marginal propensity to consume mpi = the marginal propensity to import suppose mpc = .60, t = .15, mpi = .2 Given the information above, solve for the equilibrium output: Y* = 5000 Y* = 5500 Y* = 3450 Y* = 1650 Y = C + I + G + X­M Y = 1650 + mpc(1­t)Y + 800 + 500 + 500 ­ mpi Y Y ­ mpc(1­t)Y + mpiY = 3450 Y [ 1 ­ mpc(1­t) + mpi ] = 3450 Y = 1 / [1 ­ mpc(1­t) + mpi] X 3450 Y = 1 / [1 ­ .6(1­.15) + .2] X 3450 Y = 5000 Question 2 3 / 3 pts We know that the formula for the (government) spending multiplier is 1/(1­ [mpc(1­t) ­ mpi]). The value of the government spending multiplier in this problem is: Round to 2 decimal places. 1.67 2.04 2/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 4.33 1.45 1 / [1 ­ mpc(1­t) + mpi] Y = 1 / [1 ­ .6(1­.15) + .2] = 1.45 Question 3 3 / 3 pts When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an increase in income of 100 to consumers. We will trace out exactly where this 100 increase in income goes in the second round. Recall, there are three leakages to address (via taxes, imports and savings). Given that t=.15, we know that .15 of every dollar increase in gross income is a leakage due to taxes. Since the increase in income is $100, we know the leakage due to taxes is: $15 $100 $25 $85 3/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 40 cents since the mpc = .6. The government gets 15 cents since the tax rate is .15. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 40, taxes up by 15, imports up by 20, consumption up by 25 Question 4 3 / 3 pts Given that mpi=.2, we know that .2 of every dollar increase in gross income is a leakage due to imports. Since the increase in income is $100, we know the leakage due to imports is: $20 $40 $100 $80 We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 40 cents since the mpc = .6. The government gets 15 cents since the tax rate is .15. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 40, taxes up by 15, imports up by 20, consumption up by 25 Question 5 3 / 3 pts 4/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 Given that the MPC=.6, we know that .4 of every dollar increase in gross income is saved. Since the increase in income is $100, we know the leakage due to savings is: $40 $60 $20 $100 We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 40 cents since the mpc = .6. The government gets 15 cents since the tax rate is .15. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 40, taxes up by 15, imports up by 20, consumption up by 25 Question 6 3 / 3 pts To find out how much consumption increases we need to take the increase in income ($100) and subtract out the leakages. So take the $100 and subtract your answers from #3, #4 and #5 above. When income increases by $100, consumption increases by: $20 $35 $65 $25 5/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 40 cents since the mpc = .6. The government gets 15 cents since the tax rate is .15. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 40, taxes up by 15, imports up by 20, consumption up by 25 Question 7 3 / 3 pts What would happen to the multiplier if the mpi rises to .25? Round to 2 decimal places. the new multiplier is 1.54 the new multiplier is 1.25 the new multiplier is 1.89 the new multiplier is 1.35 Question 8 3 / 3 pts What would happen to the size of the leakage if the mpi rises to .25? this would increase the size of the leakage this would reduce the size of the leakage Question 9 4 / 4 pts 6/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 In this question, we are going dig deeper into the Taylor Rule and it variants (modifications). Federal Reserve data from October 1, 2011: Potential GDP growth y* = 1.1% Actual GDP Growth yA = 1.6% Inflation PCE (actual inflation) πA = 2.7% Effective Federal funds Rate = .07% As Taylor assumed, we assume the equilibrium real rate of interest r* = 2% and the optimal inflation rate, the target inflation rate π* is also equal to 2%. The standard (original) Taylor rule formula: iff TR = r* + πA + 0.5[πA ­ π*] + 0.5 [ yA ­ y*] Using the 'standard' Taylor rule from above and using the data provided, what is the federal funds rate implied by the 'standard' Taylor Rule? 5.05% 2.04% 6.04% 5.30% Original Taylor Rule: iff TR = r* + πA + 0.5[πA ­ π*] + 0.5 [ yA ­ y*] 5.30 = 2 + 2.7 + .5[2.7 ­ 2] + .5[1.6 ­ 1.1] Question 10 4 / 4 pts According to the actual federal funds rate (use the Effective Federal Funds Rate provided above for 2011­10­01), is the Fed being hawkish or dovish? hawkish 7/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 dovish The actual, effective funds rate = .07. The Fed is being very dovish since the Taylor rule implies ff = 5.30% but the Fed has ff down to .07%! Question 11 4 / 4 pts Now consider the modified version of the Taylor using the unemployment gap instead of the GDP gap just like we did in the lectures. Also, we will use the PCE core rate of inflation instead of overall inflation like you used above ­ the Fed arguably cares more about core inflation than overall inflation. Modified Taylor Rule formula: iff TR = r* + πA + 0.5[πA ­ π*] + (­1.25) [URA ­ NAIRU] Additional needed data from Federal Reserve data from October 1, 2011: Unemployment Rate URA = 8.6% NAIRU = 5.15% Inflation PCE Core (actual inflation) πA = 1.9% Now what is the federal funds rate implied by the modified Taylor Rule above? Round to 2 decimal places. ­.30 0.32 ­.46 0.25 8/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 ­.4625 = 2 + 1.9 + 0.5[1.9 ­ 2] + (­1.25) [8.6 ­ 5.15] Question 12 4 / 4 pts According to the actual federal funds rate, is the Fed being hawkish or dovish? dovish hawkish The Fed is being hawkish using the modified version of the Taylor Rule. But since this is the period that includes the zero bound, they are doing all they can according to the modified Taylor Rule. So at this time period, the modified Taylor Rule explains Fed behavior much better than the original Taylor Rule. This is more evidence that the modified Taylor Rule explains Fed behavior better than the original ­ the unemployment gap is driving Fed behavior, not the GDP gap. Part 2: True/false questions: Questions are worth 1.5 points each. Question 13 1.5 / 1.5 pts Unemployment benefits are an example of fiscal policy. 9/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 14 1.5 / 1.5 pts According to Ricardian Equivalence in a strict sense, the tax multiplier is nonzero. True False Question 15 1.5 / 1.5 pts When looking at the GDP data from quarter 3 of 2012, government purchases accounted for a smaller share of the economy than investment expenditures did. True False Question 16 1.5 / 1.5 pts According to one of the lectures featuring a pie chart on federal government expenditures, transfer payments went from about 5% of total expenditures in the 1960s to over 66% of total expenditures in 2010. 10/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 17 1.5 / 1.5 pts As of 2010, interest payments on the federal debt exceeded 10% of total expenditures. True False Question 18 1.5 / 1.5 pts We argued that the tax revenue that the federal government collects is pro­ cyclical, that is, when economic activity is growing so is tax revenue. An example of this is the new economy when tax revenue increased along with the economic growth. True False Question 19 1.5 / 1.5 pts If aggregate expenditures exceed aggregate income then inventories will rise and firms will eventually lay off workers. 11/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 20 1.5 / 1.5 pts We argued that cutting the corporate income tax will have supply side effects in that cutting the corporate income tax can potentially increase the pace of technological change with the implication being the aggregate supply will shift to the right. True False Question 21 1.5 / 1.5 pts According to the Laffer curve, increases in tax rates can result in less tax revenue. True False Question 22 1.5 / 1.5 pts One reason that tax revenue may fall when tax rates are increased is due to tax evasion, that is, the higher the tax rate, the higher the probability of the tax evasion and thus, lower tax revenue. The example I used was when Canada quadrupled the tax rate on cigarettes Canadian citizens sought out 12/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 to buy illegally smuggled in US cigarettes to evade the tax on Canadian cigarettes. True False Question 23 1.5 / 1.5 pts The term 'voodoo economics' is a term used by the proponents of supply side economics trying to explain to its critics that lower tax rates will result in higher tax revenue. True False Question 24 1.5 / 1.5 pts Barro is considered to be a supply side economist which is consistent with his idea that we should eliminate the corporate income tax. True False Question 25 1.5 / 1.5 pts According to the table depicting the effective tax rate on capital for 2007, the only country that has a higher effective tax rate on capital is Greece. 13/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 26 1.5 / 1.5 pts According to our discussion of supply side economics, there are positive aggregate demand side effects and positive supply side effects, similar to what happened during the new economy. True False Question 27 1.5 / 1.5 pts We argued that the tax multiplier is higher in absolute value than the government spending multiplier. True False Question 28 1.5 / 1.5 pts The more the Fed accommodates shocks to money demand, the larger the (government) spending multiplier. True 14/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 False Question 29 1.5 / 1.5 pts According to the Congressional Budget Office (CBO), the stimulus package failed in terms of creating jobs, lowering unemployment, and raising GDP. True False Question 30 1.5 / 1.5 pts Spending by local governments to stimulate or slow down their local economies is an example of fiscal policy. True False Question 31 1.5 / 1.5 pts When talking about tax multipliers using tax rates instead of the more simple lump sum taxes, we argued that the social security tax cut resulted in a higher tax multiplier. True False 15/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 Question 32 1.5 / 1.5 pts When we add the marginal propensity to import to our model, the spending multiplier falls. In fact, the higher the marginal propensity to import, the smaller the spending multiplier, all else constant. True False Question 33 1.5 / 1.5 pts According to the "We are all Keynesians Now" article, the labor secretary at that time wanted the unemployment rate to fall down to 5%. True False Question 34 1.5 / 1.5 pts The misery index in 1980 exceeded 25. True False 16/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 Question 35 1.5 / 1.5 pts The mid to late 1970s was the 'heyday' of Keynesian economics in the US economy. True False Question 36 1.5 / 1.5 pts Keynes believed that it was not the responsibility of the government to use its powers to increase production, incomes and jobs. True False Question 37 1.5 / 1.5 pts Consistent with his thought on spending heavily, Keynes was known as an excellent tipper. True False Question 38 1.5 / 1.5 pts 17/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 The steeper the SRAS curve, the steeper the short­run Phillips curve. True False Question 39 1.5 / 1.5 pts If the long­run aggregate supply curve is vertical so is the long­run Phillips curve. True False Question 40 1.5 / 1.5 pts Friedman and Phelps agreed that there is a trade­off between unemployment and inflation, but only in the long run. True False Question 41 1.5 / 1.5 pts If actual inflation is lower than expected inflation, then the actual real wage is higher than the expected real wage. This being the case, firms will lay off workers. 18/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 42 1.5 / 1.5 pts According to the Taylor Rule described in the lectures, if the Fed is getting an A+, then the federal funds rate should be set at 5%. True False Question 43 1.5 / 1.5 pts According to the Taylor principle, if actual inflation rises by 1% over target inflation, then the Fed should raise the federal funds rate by 2% to make sure that the real federal funds rate rises which is referred to as "leaning against the wind." True False Question 44 1.5 / 1.5 pts If the actual federal funds rate is higher than the funds rates implied by the Taylor rule, then we say that the central bank is dovish. 19/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 True False Question 45 1.5 / 1.5 pts If actual inflation rises one percent above target and the central bank raises the actual funds rate by one percent then according to the Taylor rule, the central bank is being hawkish. True False Question 46 1.5 / 1.5 pts According to the Taylor rule, the Greenspan Fed was hawkish during the new economy years. True False Question 47 1.5 / 1.5 pts According to the Taylor rule, the Greenspan Fed was hawkish during the job­ less recovery as well as the job­loss recovery. True 20/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 False Question 48 1.5 / 1.5 pts One way to explain the apparent tradeoff between inflation and unemployment during the 1960s, expected inflation was consistently higher than the actual inflation implying that firms would be willing to hire more workers given this difference between expected and actual inflation. The result therefore would be higher inflation and lower unemployment, consistent with the facts during the 1960s. True False Question 49 1.5 / 1.5 pts We argued that the modified version of the Taylor rule during the jobless recovery following the 1990 ­ 1991 recession explained Greenspan and the Fed's behavior much better than the original Taylor Rule. True False Question 50 1.5 / 1.5 pts According to the Phillips curve analysis, if expected inflation is equal to actual inflation then we are at NAIRU. However, if actual inflation is higher than 21/22 4/15/2019 Homework 06: Econ 104 WC Sec 3 Spring 2019 expected, then the actual unemployment rate will be higher than that associated with NAIRU. True False 1.5 / 1.5 pts Question 51 If firms and workers had perfect foresight as to inflation so that actual = expected inflation at all times, then the Phillips curve would be vertical and thus, there would be no trade between unemployment and inflation, even in the short run. True False 1.5 / 1.5 pts Question 52 We argued that a federal funds rate target of 4% is consistent with the stance of monetary policy being neutral as in neither tight nor loose. True False Quiz Score: 100 out of 100 22/22 ...
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  • Fall '10
  • staff
  • Economics, Fed, Econ104, Howework06

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