E212ex_s04

# E212ex_s04 - 1(15 points National Income Accounting Suppose...

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1. (15 points) National Income Accounting Suppose the following data explain the economic activity in a country in the year 2000. Component of spending Value in billions of dollars Consumption 140 Business fixed and residential investment 27 Inventory stock at the end of 1999 10 Inventory stock at the end of 2000 5 Depreciation 12 Government outlays 80 Government purchases 65 Total government tax receipts 65 Exports 21 Imports 17 Labor income 126 Capital income 70 Net income of foreigners 5 Sales taxes 28 Given these data, calculate the following: a) Inventory investment b) Net exports c) Gross Domestic Product d) Statistical discrepancy e) National saving

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f) Government saving g) Verify that national saving equals investment plus net exports. 2. (15 points) Labor Market Explain each of the following using labor supply and demand graphs for young workers. a) Decline in the minimum wage. b) Immigration of unskilled workers to the United States. c) Technological change biased against unskilled labor. 2
d) A reduction in the social security tax on wages. 3. (15 points) Share Allocation Suppose the following equations describe the relationship between shares of spending in GDP (Y) and the interest rate (R), measured in decimal fractions (that is, R=.05 means that the interest rate is 5 percent). ) 05 . 0 ( 95 . 0 0 ) 05 . 0 ( 8 . 0 2 . 0 ) 05 . 0 ( 2 . 0 7 . 0 - - = - - = - - = R Y X R Y I R Y C a) Suppose the government share of GDP is 20%. Determine the equilibrium interest rate and the investment share of GDP. b) Now suppose the government share of GDP falls to 17%. Determine the new equilibrium values of the interest rate and the investment share of GDP. c) Explain briefly the effect of this decline in the government share of GDP on the long-run growth rate of GDP. 3

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d) Describe the long-run impact of defense spending cut if the funds saved from the defense cut are used to increase government expenditures on roads and bridges. 4. (10 points) Fiscal Policy a) Graphically illustrate a scenario in which there exist a structural surplus and an actual deficit. b) Now suppose the government decreases taxes. On the same diagram, illustrate the effects of this action. c)
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## This note was uploaded on 04/07/2008 for the course ECON 211 taught by Professor Na during the Spring '08 term at Rice.

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E212ex_s04 - 1(15 points National Income Accounting Suppose...

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