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Name ________________________________________ Date ________ last 4 PSU ID _______ Economics 304 Homework 2 190 points Instructions: Please show all...

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Name ________________________________________ Date ________ last 4 PSU ID _______ Economics 304 Homework 2 190 points Instructions: Please show all work or points will be taken off. Good luck! 1. (80 points total – 10 points each part) In this homework assignment, we are getting our ‘hands dirty’ to get familiar with some of the major macroeconomic variables that we will be using and working with throughout the semester. Our first chapter with ‘something to sink our teeth into’ is chapter 3 and it is all about the factors of production, the labor market, and of course, the production function. Major variables in this part of the macroeconomy (i.e., the supply side of the economy) include, but certainly are not limited to, employment (denoted N), real wages (denoted w = W/P where W = nominal wage and P is the price index - typically the CPI) and real GDP (denoted Y). When we move to chapter 4 we encounter many more major macroeconomic variables including consumption (C), investment (I), and the real interest rate (denoted r), among others. We are going to use FRED as our source of data (many professional economists use this site, nice clean data!) 1 I provide you with the links to the data that is needed throughout this assignment. For an interesting look at the %ΔW vs. the %ΔP, see this graph from the FRED site . As we move forward through the class, we are going to learn about some “business cycle facts.” See page 290 in text, Chapter 8. In this first question, among other things, we are going to investigate the behavior of the real wage over the most recent business cycle. (See the National Bureau of Economic Research (NBER) site - look at right hand side of page for the official dates of the most previous 4 recessions). In particular, we are going to calculate the percent change in the real wage during the most recent recession (12/07 – 6/09) and compare it to the percent change during the most recent recovery, 7/09 to the present. 1 FRED stands for F ederal R eserve E conomic D ata.- see the FRED website .
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Use the following two links to answer the following questions: Nominal Wages (W) Price index CPI (P) 2 a) Calculate the real wage (W/P) the first month of the recession 12/07 and compare it to the last month of the recession 6/09. What is the percent change in the real wage during this most recent recession? In the lesson we argued that a good approximation of the percent change of the real wage can be obtained with the following expression: %Δ(W/P) = %ΔW - %ΔP b) Using the expression above, re-calculate the percent change in the real wage during the most recent recession (12/07 – 6/09) and compare to your answer in part a). Does the expression above serve as a good approximation (i.e., is your answer similar to your answer in part a)? Please show all work. c) Now calculate the real wage during the first month of the recovery, 7/09 and compare it to the real wage according to the most recent data. What is the percent change in the real wage during this recovery thus far? d) According to the business cycle facts, the real wage is ‘pro-cyclical’ suggesting that the real wage moves directly (shares a positive relationship) with the state of the economy (GDP) growth. Another element of the business cycle fact(s) of economic time series is its timing: i.e., whether the economic variable is leading, coincident, or lagging (see the Investopedia site for help with these terms and/or read pages 284-285 in text). According to your results above, how would you characterize the behavior of the real wage during this business cycle in terms of: 1) it's cyclicality and 2) it's timing. Please consider all three of the possible timings (since we are are not sure) and then determine its cyclicality, based on the timing. There are three cases to consider. e) The last four years of the Clinton Administration were arguably the absolute best in terms of the recent performance of the US economy (1/97 - 12/00). When we get to Chapter 3, we will discuss this period in much more detail and we refer to this period as the "new economy." Of course one metric of the health of any economy is the behavior of the real wage. In this part, we repeat the analysis above but use the final four years of the Clinton Administration. In particular, calculate the real wage (W/P) the first month of Clinton's second term (1/97) and compare it to the last month of Clinton's second term(12/00). Did real wages rise or fall during this period? Please show all work. 2 Hint, when deflating using a price index, we typically move the decimal two place to the left. For example, in 12/09 W = $18.80 and the price index was 217.541. The real wage is thus 18.80 divided by 2.17541.
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This question was asked on Jan 18, 2013.

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