Economic Growth and Fluctuations
ECON 3133
Dr. Keen
Answers
1.
a. P = 1/2, D = S =4.
b. P = 1, D = S = 4.
c. Quantity demanded, D, increases by 1.
2. Yes, provided the economy grows by 2 or 3% per year. Over a period of 10 years
equilibrium output will gr
Consumption Demand
Additional Homework Problems
ECON 3133
Dr. Keen
1. Suppose that we have a consumption function of the form
C = 220 + 0.9Yp,
where Yp is permanent disposable income. Suppose that consumers estimate their permanent
disposable income by a
Economic Growth and Fluctuations
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1.
a. P = 1/2, D = S = 4.
b. P = 1, D = S = 4.
c. Quantity demanded, D, increases by 1.
2. Yes, provided the economy grows by 2 or 3% per year. Over a period of 10 ye
Measuring Economic Performance
Additional Homework Problems
ECON 3133
Dr. Keen
1. The following are data from the U.S. economy in billions of dollars
Rental income
Depreciation
Employee compensation
Consumption
Sales and excise taxes
Business transfers
St
Long-Run Economic Growth
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1.
a. 1,000 + 12W/P = 2,000 8W/P
W/P = 50 and N = 1,600.
Yes, it exhibits diminishing marginal product.
c. N = 1,600; Y = 4,000 in equilibrium.
2.
a. For A =1, output Y = K1/
Responding to Economic Fluctuations
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1.
a. In the year of the shock, the price level, being a predetermined variable, will stay at 1. Therefore,
the real money supply will also stay constant and be
MS
The Adjustment Process
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1. This periods inflation rate is a function only of last periods output and last periods inflation
rate both of which are predetermined variables (as of this period).
2. When
Fiscal and Monetary Policy in the Growth Model
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1. Y/Y = C/Y + I/Y + G/Y.
I/Y = 0.02R.
a. Y/Y = C/Y + I/Y + G/Y = 1.0.
Since C/Y does not depend on R, I/Y must adjust enough to offset the fall in G/Y.
Unemployment, Job Creation and Job Destruction
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1.
a. Job losing rate (l) is 0.03
Job finding rate (f) is 0.40
Unemployed is 9.1 million
Labor force is 130 million
Jobs found = 0.49.1 million = 3.64 m
Unemployment, Job Creation and Job Destruction
Additional Homework Problems
ECON 3133
Dr. Keen
1. In a particular month, the labor force is 130 million, there are 9.1 million unemployed
workers, the job-losing rate is 3 percent per month, and the job-find
Responding to Economic Fluctuations
Additional Homework Problems
ECON 3133
Dr. Keen
1. Suppose the economy is initially described by the following equations.
Y = C + I + G + (X IM)
C = 220 + 0.63Y
I = 1,000 2,000R
(X IM) = 525 0.1Y 500R
MS = (0.1583Y 1,00
Fiscal and Monetary Policy in the Growth Model
Additional Homework Problems
ECON 3133
Dr. Keen
Problems
1. Consider a closed economy in which net exports, X IM, equals 0. Suppose that
consumption is insensitive to the interest rate, but the share of inves
2Aggregate supply captures the implications of equilibrium in the labor market
Aggregate demand captures the implications of equilibrium in both the goods and
financial markets
Aggregate supply relation captures the effects of output on the price level
In
Goods market and IS curve
Equilibrium in the goods market is when production Y is equal to demand Z IS Relation
Demand is the sum of consumption, investment, and government spending
Consumption was a function of function of disposable income
Z= C(Y-T) +I
CH 2
GDP
Aggregate=total
Aggregate output The total amount of output produced in the economy
Gross domestic product (GDP) A measure of aggregate output in the national income account
Intermediate goods A good used in the production of a final good
GDP: Pr
If there is an increase in demand then firms react by increasing production
o Higher production -> higher employment -> lower unemployment -> higher wages ->
increase in production costs -> firms increase prices -> higher prices-> workers ask for
higher
Measuring Economic Performance
Additional Homework Problems
ECON 3133
Dr. Keen
Answers
1.
a. GDP = C + I + G + X IM
= 4,378.2 + 882.0 + 1148.4 + 659.1 724.3
= $6,343.4 billion.
b. NNP = GDP + net factor income from abroad depreciation
= 6,343.4 + 5.7 669.
Long-Run Economic Growth
Additional Homework Problems
ECON 3133
Dr. Keen
1.
a. The labor supply function is given by N = 1,000 + 12(W/P) and labor demand is N =
2,000 8(W/P). Draw a diagram showing these schedules. Find the equilibrium level of
employment
The Adjustment Process
Additional Homework Problems
ECON 3133
Dr. Keen
1. According to the equation 0.6 1 f
(Y1 Y*)
, is inflation a predetermined
Y*
variable? Explain.
2. Suppose that there is a sudden and permanent decline in potential GDP, describe th
Unemployment, Job Creation and Job Destruction
ECON 3133
Dr. Keen
Answers
1.
a. Job losing rate (l) is 0.03
Job finding rate (f) is 0.40
Unemployed is 9.1 million
Labor force is 130 million
Jobs found = 0.49.1 million = 3.64 million
Jobs lost = 0.03130 mi
Long-Run Economic Growth
ECON 3133
Dr. Keen
Answers
1.
a. 1,000 + 12W/P = 2,000 8W/P
W/P = 50 and N =1,600.
Yes, it exhibits diminishing marginal product.
c. N = 1,600; Y = 4,000 in equilibrium.
2.
a. For A =1, output Y = K1/2N1/2 = 9001/24001/2 = 600.
Ou
Fiscal and Monetary Policy in the Growth Model
ECON 3133
Dr. Keen
Answers
1. Y/Y = C/Y + I/Y + G/Y.
I/Y = 0.02R.
a. Y/Y = C/Y + I/Y + G/Y = 1.0.
Since C/Y does not depend on R, I/Y must adjust enough to offset the fall in G/Y.
Therefore I/Y must rise by 4
Growth and the World Economy
ECON 3133
Dr. Keen
Answers
1. The problem states that (K/N)US = $2,250,000 and (Y/N)US/(Y/N)I = 15.
15 = (Y/N)US/(Y/N)I = (K/N)1/2US/(K/N)1/2I
152 = 225 = (K/N)US/(K/N)I
225 = 2,250,000/(K/N)I
(K/N)I = 2,250,000/225
(K/N)I = $
The Adjustment Process
ECON 3133
Dr. Keen
Answers
1. This periods inflation rate is a function only of last periods output and last periods inflation
rate both of which are predetermined variables (as of this period).
2. When there is a decline in potenti
Responding to Economic Fluctuations
ECON 3133
Dr. Keen
Answers
1.
a. In the year of the shock, the price level, being a predetermined variable, will stay at 1.
Therefore, the real money supply will also stay constant and be
M/P = 900/1 = 900.
To calculate
Investment Demand
ECON 3133
Dr. Keen
Answers
1.
a. K* = 400; I = 0.25(400 400) = 0.
b. K* = 500.
Given K*, actual investment is calculated as I = s(K* K-1).
Given I, capital stock this period equals K = I + K-1.
Year
2
3
4
K-1
400
425
444
I
25
19
14
K
425
Foreign Trade and the Exchange Rate
ECON 3133
Dr. Keen
Answers
1.
a. Endogenous: Y, C, I, (X IM), R, E.
Exogenous: G, M, P, PW .
b. Y = C + I + G + (X IM)
= (220 + 0.63Y) + (400 2000R + 0.1Y) + G + [600 0.1Y 100(0.75 + 5R)]
= 1145 + 0.63Y 2500R + G, or,
I