hw2_key2 - University of Minnesota Department of Economics...

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University of Minnesota Department of Economics Econ 3102 – 001: Intermediate Macroeconomics Problem Set 2 This problem set (PS) is due on at the beginning of class. Be sure to review the Syllabus for details about PS and their grading! Feel free to contact me via e-mail if you have specific questions about the HW assignment. Note that some Exercises have several parts, and each part may conceal more than one task for you. Be sure to answer every question thoroughly for full credit! 1 Data crunching (10 points) Go to the BEA website and get expenditure approach data for quarterly RGDP (it would be convenient to point your browser to http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y and select Table 1.1.6). Be sure to get this information for the period 1985Q1 to the most current date 2008Q4. Also, note that you don’t need to copy the information directly from the web browser; at the bottom of the page, there is an option for “Download dates shown (CSV).” You can use this file directly in Excel. You may remember from your 1102 days that increased government expenditure was able to create what was known as crowding out, where government expenditures actually makes private consumption go down. This happened during World War II. (See Figure 5.7 in Williamson.) The purpose of this exercise is to verify whether this claim holds (or not) in the recent U.S. experiences in Iraq. To do this, follow the instructions: (a) In an Excel sheet, put the data you got for real GDP, consumption, investment, and government expenditures. (These should be lines 1, 2, 6 and 20 in the Excel file you downloaded.) (b) To avoid problems with the scale, work with the natural logs of the variables. The magnitude will be smaller and better suited for a graph. (c) Plot all variables in a time-series graph which spans 1985Q1 to 2008Q4. Does it look like the U.S. economy has experienced a crowding out phenomenon during the recent wars? If yes, comment on what you see. If not, do you think we have a result which is contradictory to standard theory?
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