# Economics 101 Homework -- Fall 2008

Document Sample

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Economics 101       Assignment #1 (20 Points)         Name__________________

Part 1: 5 points

1. Assume that there are only four goods produced. The following represent the prices and
quantities sold in the base year (2000) and the current year (2008):
Price00       Quantity00         Price08      Quantity08
A                 \$5             10                \$5            20
B                 10             20               30             40
C                  8              5               16             10
D                 25             10                50            20
What was the Nominal Gross Domestic Product (GDP) in 2000? Show calculations.
What was the Nominal Gross Domestic Product (GDP) in 2008? Show calculations.
What was the Real Gross Domestic Product (Real GDP) in 2008? Show calculations.

2. In the calculation in question 1, by what percent did the Real GDP rise between 2000 and
2008?

3. Assume that Real GDP Per Capita is \$10,000 in 2000. If it grows at 2% per year, what will
the Real GDP per capita be in 2072? If it grows at 3% per year, what will the Real GDP Per
Capita be in 2072? Notice how much of a difference a small change in the rate of growth can
make. (Hint: Use the Rule of 72.)

Part 2: 5 points

4. Click on Nominal GDP and Real GDP on my Web Site
1. What is the Gross Domestic Product for the most recent quarter? What does this number
tell you?

2. What was the Real GDP in the most recent year?

3. In what years did Real GDP decline for two consecutive quarters (this is the definition of a
“recession”)?

5. This time, click on The Economic Report of the President on my web site
What was the American population in the most recent year? Therefore, what was the Real
GDP per capita in the most recent year (you need to calculate this)?

Continued on Page 2
2

6. Choose any country other than the United States. It may be a country that you family
descends from. Or it may be a country in which you have an interest. You will use this country
throughout this assignment. Do a search on Google (or something similar) to find information on
the economy of this country.

What is the most recent Nominal GDP of this country in U.S. dollars? _______________

What is the most recent Nominal GDP per capita in U.S. dollars? ___________________

Over the past few years, how fast has GDP been growing? ________________________
(Give the dates for your data.)

Part 3: 5 points

Click on Unemployment Rate on my Web Site
Most Requested Series
Labor Force Statistics from the Current Population Survey
On the Form:
Click on all that are necessary to answer the questions below
Click on the most recent year
Click Retrieve Data (Click Continue if asked)

1. What is the overall unemployment rate in the most recent month?

2. What is the total civilian labor force? __________________ What is the total number of
people unemployed? __________________________________

3. How many of the unemployed have been unemployed 27 weeks or longer? ______________
What percent is this of the total number of unemployed people? (You need to calculate this.)
_______________________________

4. Pick a month in 2001, a month in 1999, and a month in 1997. Calculate the percent of
unemployed that have been unemployed 27 weeks or longer as you did in Question 3. What has
been happening to this percent in recent years? ___________________________

5. What is the current unemployment rate for males age 20 and over? ____________ for females
age 20 and over? _______________

6. What is the current unemployment rate for whites overall? _________________ for African-
Americans overall? __________________For Latinos/Hispanics overall?
___________________

7. What is the current unemployment rate for people age 16 to 19?

Continued on Page 3
3

8. Go back to the data for the country you have chosen. What is the most recent unemployment
rate? _______________________ Over the past few years, has unemployment in this country
been greater or lower than the unemployment in the United States?
___________________________________

Part 4: 5 points

Follow the path: Consumer Price Index on my Web Site
Most Requested Series
Consumer Price Index --- All Urban Consumers
Fill-out the Form:
Click on U.S. All Items, 1982 - 1984 = 100
Move Down and Click on All Years in the Box
Click the Retrieve Data Button

9. What is the CPI in the most recent month? ___________________ What does this mean?
__________________________________________________________________________

10. What was the last year that prices fell from January to January?

What was the last time that prices fell for two + consecutive years from January to January?

11. By approximately what percent did prices rise from January, 1970 to January, 1980?
(You need to calculate this.)

12. How many years did it take for prices to triple from their January, 1913 value?

How many years did it take for prices to triple from their January, 1970 value?

13. In June, 1965, I started working at an accounting firm for \$7,200 per year (\$600 per month).
I was straight out of college and had no significant work experience. Assume that you begin your
work career in the most recent month noted. What starting salary do you need to have now to

14. Follow the path: Economic Report of the President on my Web Site
2007                       Tables B-3 and B-60

What was the GDP Deflator (called the Implicit Price Deflator) for 2007? _________
By what percent did the GDP Deflator rise in 2007? _______________
What was the CPI for 2007? ________________
By what percent did the CPI rise in 2007? ________________
How do you account for the differences in the number and in the rise in prices between these
two measures of inflation?
End of Assignment 1
4

Economics 101         Assignment #2 on Chapters 5 and 6          Name_________________
(10 points for the entire assignment)

1. In San Diego County, the price of homes has been falling greatly. The median price of a home
fell from over \$500,000 in 2006 to about \$400,000 today. Explain why this has happened.
Consider all of the factors that affect demand and all of the factors that affect supply that would
seem relevant to explain this fall in home prices.

2. We all know that the price of gasoline has risen greatly. Gasoline that once sold for less than
\$2 per gallon has sold for as much as \$4.50 per gallon. Explain why this has happened. Consider
all of the factors that affect demand and all of the factors that affect supply that would seem
relevant to explain this rise in gasoline prices.

3. Most people who buy a home pay for it by borrowing money from a bank, savings and loan, or
other such institution. Such a loan is called a mortgage. At present, the interest on a mortgage is
deductible for tax purposes.
To illustrate how this works, assume that a person is in a tax rate of 25% and has a mortgage
of \$200,000 at 6% interest. The annual interest payment is \$12,000 (6% of \$200,000). Of this,
the taxes are reduced by \$3,000 (25% of \$12,000). Thus, the actual cost to the borrower is not
\$12,000, but \$9,000 (\$12,000 - \$3,000).
Some people have proposed that the mortgage interest would no longer be tax deductible.
Therefore the actual cost to the borrower would now be the full \$12,000. There would be no
offsetting savings of the \$3,000.

a. First, show what will occur in the market to borrow money. Explain what will happen to the
equilibrium price (or interest rate) and to the equilibrium quantity.

Interest Rate
Supply

Demand
_____________________________
0                   Quantity of Money to Borrow (Lend)

Continued on Page 5
5

b. Second, show what will occur in the market for homes (homes and borrowing money are
complements). Again, explain what will happen to the equilibrium price (or interest rate) and to
the equilibrium quantity.

Price of Homes
Supply of Homes

Demand for Homes
____________________________
0                    Quantity of Homes

c. Finally, state whether you would favor or oppose this proposal to eliminate the tax deduction
for mortgage interest if you were a

(1) homeowner;

(2) owner of a bank;

(3) prospective homebuyer who does not now own a home;

(4) someone who intends to borrow from a bank to buy a new car.

In each case, explain why.

End of Assignment 2
6

Economics 101 Assignment #3 (20 Points)          Name________________________

Part 1: (5 points)

The cases discussed in class have analyzed the effects on foreign exchange markets of an increase
in interest rates in the United States and of an increase in inflation in the United States. Do the
same analysis for each of the following cases. Show using the demand and supply graph for
Japanese yen. Which money appreciates and which money depreciates? (Show the graphs on
the back of the page.)

1. Incomes rise in the United States and fall in Japan

2. Both Americans and Japanese believe that American goods are of higher quality than before

3. Both Americans and Japanese believe that the Japanese yen will depreciate in the near future

4. Laws change in Japan making it easier for Americans to buy or build companies in Japan

Part 2: (5 points)

1. Go to the site of the Federal Reserve Bank of New York. This is linked as “Foreign Exchange
Rates” on my web site. Or go to http://www.ny.frb.org/pihome/statistics/forex12.shtml
From this site, what is the most recent exchange rate for each of the following foreign monies?

The European Monetary Union Euro __________________
The Japanese Yen                  __________________
The Mexican Peso                 __________________
The British Pound                __________________
The Chinese Renminbi             __________________

2. Assume a Days Inn Hotel Room in Ireland costs 80 Euros a night. The same hotel room in San
Diego costs \$100 American. Using the exchange rate you found in question 1, is the hotel room
cheaper in Ireland or in San Diego?

Part 3: (5 points)

In 1998, two factors happened regarding Russia. First, prices in Russia were rising at a very
rapid rate (hyperinflation) while prices in the United States were hardly rising at all. Second, for
a variety of reasons, those who had made portfolio investments in Russia decided to take their
money elsewhere. This means that they demanded that the loans they had made in Russia be paid
off. When the loans were repaid, the money would be loaned to people in a different country. On
the graph on the next page, show the demand for and the supply of Rubles as of 1997. Then,
show the results of these two events in 1998. Make the appropriate shifts in either demand or in
supply or in both. State what would happen to the Russian Ruble as a result of the 2
changes. Finally, state what would happen to the Russian economy as a result of this
change in the exchange rate.

Continued on Page 7
7

.\$/Ruble

Supply1

P1            E1

Demand1
______________________________
Quantity of Rubles

The Russian Ruble would _______________________________. The effect of this on the

Russian economy would be __________________________________________________

Part 4: (5 points)

Pick out the stock of a particular company (any company). Find the value of the stock of that
company in the most recent week. You will find this information either in a newspaper or on the
Internet. Then, find the value of that stock one year ago (or as close to that date as you can).

The company I chose is _____________________________

Value Now \$_____________

Value Then \$_____________

You will need to do some research as to what has been happening concerning this company. You
know that the price is affected by the demand for and the supply of that stock. Demanders are
those who wish to buy the stock. Suppliers are those who own the stock and are considering
selling. There are six possible determinants of the demand and four possible determinants of the
supply. Based on your research, explain what might be responsible for the change in the price
you have discovered. Show your reasoning on the graph below.

Price of the Stock

Supply1

P1            E1

Demand1
______________________________
0                      Quantity of Shares of the Stock

I shifted demand to the (right, left, or neither?) __________________ because
_________________________________________________________________________

I shifted supply to the (right, left, or neither?) __________________ because
_________________________________________________________________________

End of Assignment 3
8

Economics 101         Assignment #4           Name____________________________
(15 Points Total)

1. In Mexico in 1982, prices were rising very rapidly. On the graph, show aggregate demand,
aggregate supply, and the equilibrium Real GDP and GDP Deflator. Show your graph with a
large inflationary gap.
GDP Deflator

0                                Real GDP

a. The government of Mexico responded to the problem with a program. First, it significantly
reduced government spending. Second, it raised taxes. And third, it decreased the money
supply. Show the result of these three changes on the graph above. Since all three of these
changes have the same effect, you may show them as only one change. As a result of these
policies, what happened to Real GDP in Mexico? What happened to the GDP Deflator?

b. Another part of the government’s program was to create a large depreciation of the
Mexican peso. On the graph below, draw the original situation again. Then, draw the
changes caused by the depreciation of the peso. There will be both a change in aggregate
demand and also a change in aggregate supply. Draw both. Assume, as actually was the case,
that the shift in aggregate supply was the larger shift. As a result of this depreciation of the
peso, what happened to Real GDP in Mexico? What happened to the GDP Deflator?
GDP Deflator

0                                      Real GDP
1
Continued on Page 9
9

c.       Yet a final part of the government’s program was to reduce wages. In the graph below,
again draw the original situation. Then, show the results of reducing wages. There will
be changes in both aggregate demand and also in aggregate supply. Draw both. Assume,
as actually happened, that the shift in aggregate demand was the larger shift in this
case. What happened to the Mexican Real GDP from this policy of decreasing wages?
What happened to the GDP Deflator?

GDP Deflator

0                                   Real GDP

d. Write a very brief conclusion: from these policies, what can you conclude would happen
to the Mexican economy?

2. In the graph below, draw the aggregate demand curve, the aggregate supply curve, and the
Potential Real GDP so that there is an Inflationary Gap.
GDP Deflator

_________________________________________
0                                  Real GDP
Continued on Page 10
10

According to those who believe that an economy is self-correcting, what will happen to
eliminate the inflationary gap? Name the changes that will occur and show their effect
on the graph on Page 9.

1.

2.

3.

In this example, actual real GDP is greater than potential real GDP and the actual rate of
unemployment is below the natural rate of unemployment. How can this occur?

End of Assignment 4
11

Economics 101      Assignment #5 (20 Points)          Name_____________________

Part 1: 5 points

The graph below shows the aggregate demand curve and the long-run aggregate supply curve as
the classical economists would draw them.
Now assume that there is an increase in the money supply for some reason. Show the results on
the graph. Then, explain what will occur and why.

Aggregate
Price Level
Aggregate Supply

P1

Aggregate Demand1 = M x V

0                 Qpot                         Real GDP

Explanation:

Part 2: 5 Points

Assume that there are the two countries: Britain and the United States. The graph is drawn for
the foreign exchange market so that the exchange rate is \$5 for one pound. Now assume that the
United States has a deflation. Analyze what would result.

\$/Pound                       Supply

\$5

Demand
_______________________________________ Pounds

Continued on Page 12
12

Gold would move from which country to which country?
___________________________________________________________________________

Explain why the gold would move.
___________________________________________________________________________

How would the American problem of deflation be solved? ___________________________

__________________________________________________________________________

What would happen to Britain? ________________________________________________

__________________________________________________________________________

Part 3: 5 Points

Case on the Great Depression        For these questions, you are to use the data found in
Chapter 12.

1. A Depression is a period of time during which Real GDP is falling. From 1929 to
1941, during what years was there a Depression (or recession)? How much (or by what
percent) did Real GDP fall? _____________________________________

__________________________________________________________________

2. During periods of Depression, the Classical Economists predicted that both wages
1941? Explain with data.
____________________________________________________

___________________________________________________________________

3. During periods of Depression, the Classical Economists predicted that interest rates
would fall. As a result of the fall in interest rates, they predicted that business investment
spending would rise. This was to end the Depression. Did interest rates fall between
1929 and 1941? Did business investment spending rise in this period? Explain with data.
________________________________________________________

_______________________________________________________________________

Continued on Page 13
13

Part 4: 5 points

(1) Fill in the following consumption function:

Disposable Income          Consumption          Savings
0                    1000
1000                    1900               - 900
2000                    2800               - 800
3000                    3700
4000                                       - 600
5000                     5500
6000                                       - 400
7000                     7300
8000                                       - 200
9000                     9100
10,000                                          0
11,000                   10,900
12,000                   11,800
13,000                                        300
14,000                   13,600
15,000                                        500
16,000                   15,400
17,000                   16,300
18,000                                        800
19,000                   18,100
20,000                                       1000
21,000                   19,900
22,000                   20,800
23,000                   21,700
24,000                   22,600
25,000                                       1500

(2) Calculate the marginal propensity to consume. ________________
Calculate the marginal propensity to save. _____________________

(3) If disposable income is 10,000, what is the average propensity to consume?
_________________
If disposable income is 20,000, what is the average propensity to consume?
_________________
Therefore, as disposable income rises from 10,000 to 20,000, consumption _______
And the average propensity to consume _____________ (answer “rises” or “falls”).

2. The consumption function is repeated on the following page. Business Investment Spending of

Continued on Page 14
14

Real GDP (=Income)     Consumption      Business Investment Spending
0                  1000                   200
1000                 1900                    200
2000                 2800                    200
3000                 3700                    200
4000                 4600                    200
5000                 5500                    200
6000                 6400                    200
7000                  7300                   200
8000                 8200                    200
9000                 9100                    200
10,000                10,000                   200
11,000                10,900                   200
12,000                11,800                   200
13,000                12,700                   200
14,000                13,600                   200
15,000                14,500                   200
16,000                15,400                   200
17,000                16,300                   200
18,000                17,200                   200
19,000                18,100                   200
20,000                19,000                   200
21,000                19,900                   200
22,000                20,800                   200
23,000                21,700                   200
24,000                22,600                   200

Calculate the Equilibrium Real GDP. ____________________________________

\$1000 cannot be the Equilibrium Real GDP because ______________________________

________________________________________________________________________

\$25,000 also cannot be the Equilibrium Real GDP because _________________________

___________________________________________________________________

Continued on Page 15
15

3. Now assume that the government spends \$1000 and also taxes \$1000. There are no transfers.
What is the new Equilibrium Real GDP? _____________________
Real GDP Taxes        Disposable Income Consumption Investment Government Aggregate Demand
1000      1000                    0         1000          200        1000
2000      1000                 1000         1900          200        1000
3000      1000                 2000         2800          200        1000
4000      1000                 3000         3700          200        1000
5000      1000                 4000         4600          200        1000
6000      1000                 5000         5500          200        1000
7000      1000                 6000         6400          200        1000
8000      1000                 7000         7300          200        1000
9000      1000                 8000         8200          200        1000
10,000      1000                 9000         9100          200        1000
11,000      1000               10,000       10,000          200        1000
12,000      1000               11,000       10,900          200        1000
13,000      1000               12,000       11,800          200        1000
14,000      1000               13,000       12,700          200        1000
15,000      1000               14,000       13,600          200        1000
16,000      1000               15,000       14,500          200        1000
17,000      1000               16,000       15,400          200        1000
18,000      1000               17,000       16,300          200        1000
19,000      1000               18,000       17,20           200        1000
20,000      1000               19,000       18,100          200        1000

4. Now assume that exports equal \$1000 and also that imports equal \$1000. What is the new
Equilibrium Real GDP? _____________________________________
Taxes      Disposable Consumption Investment Government Exports Imports            Aggregate
Real GDP
Income                                                                  Demand
1000       1000            0          1000         200         1000     1000       1000
2000       1000         1000          1900         200         1000     1000       1000
3000       1000         2000          2800         200         1000     1000       1000
4000       1000         3000          3700         200         1000     1000       1000
5000       1000         4000          4600         200         1000     1000       1000
6000       1000         5000          5500         200         1000     1000       1000
7000       1000         6000          6400         200         1000     1000       1000
8000       1000         7000          7300         200         1000     1000       1000
9000       1000         8000          8200         200         1000     1000       1000
10,000       1000         9000          9100         200         1000     1000       1000
11,000       1000       10,000        10,000         200         1000     1000       1000
12,000       1000       11,000        10,900         200         1000     1000       1000
13,000       1000       12,000        11,800         200         1000     1000       1000
14,000       1000       13,000        12,700         200         1000     1000       1000
15,000       1000       14,000        13,600         200         1000     1000       1000
16,000       1000       15,000        14,500         200         1000     1000       1000
17,000       1000       16,000        15,400         200         1000     1000       1000
18,000       1000       17,000        16,300         200         1000     1000       1000
19,000       1000       18,000        17,200         200         1000     1000       1000
20,000       1000       19,000        18,100         200         1000     1000       1000
21,000       1000       20,000        19,000         200         1000     1000       1000
16

5. Assume now that the Potential Real GDP is equal to \$10,000. How large is the gap?
____________________________ What kind of gap is it? _________________________

6. Go back to the table above. Now assume that the government decreases its purchases
from \$1000 to \$500. There is no change in any other variable, including taxes. Use the
multiplier formula to calculate the new Equilibrium Real GDP.

_____________________________________________________________________

Now calculate the new gap (Potential Real GDP is still \$10,000). __________________

What kind of a gap is it? __________________________________________

7. If the government had desired to eliminate all recessionary and all inflationary gaps, what
should its purchases be equal to? Again show using the multiplier formula.

End of Assignment #5
17

Economics 101        Assignment #6 (20 Points)       Name____________________________

Part 1: 5 points

1. Look up the most recent data you can find on interest rates, consumer confidence, consumer
debt, disposable income, common stock prices, the GDP Deflator. You can find some of these
linked on my web site. Others you can find by starting with Google.
Use all of these data to make a prediction consumer spending in the near future.
Explain why you make this prediction, giving reference to all of these data.

Part 2: 5 points

2. Americans save a very low portion of their incomes and spend a high portion of their incomes.
The portion saved is low in comparison to that of past years and is low compared to other
countries. From the points made in Chapter 14, what reasons can you give for the low portion
of income saved (and the high portion of income spent) by American consumers? Name at
least three reasons.

Continued on Page 18
18

Part 3: 5 points (Pages 18 – 21)
Private Investment Spending                  Net Investment Spending
Year         on Structures and Equipment   Depreciation   on Structures and Equipment   % of GDP
1959                    46.5            40.2                          6.3              1.2
1960                    49.4            41.8                          7.6              1.4
1961                    48.8            42.8                            6              1.1
1962                    53.1            44.3                          8.8              1.5
1963                    56.1              46                        10.1               1.6
1964                    63.1            48.4                        14.7               2.2
1965                    74.8            51.7                        23.1               3.2
1966                    85.4            56.3                        29.1               3.7
1967                    86.4            61.4                           25                3
1968                    93.4            67.4                           26              2.9
1969                   104.7            74.5                        30.2               3.1
1970                   109.1            81.8                        27.3               2.6
1971                   114.1            89.8                        24.3               2.2
1972                   128.8            99.4                        29.4               2.4
1973                   153.3           109.1                        44.2               3.2
1974                   169.5           126.9                        42.6               2.8
1975                   173.7           149.1                        24.6               1.5
1976                   192.4           164.5                        27.9               1.5
1977                   228.7           184.4                        44.3               2.2
1978                   278.6           210.7                        67.9               2.9
1979                   331.6           244.9                        81.7               3.2
1980                   360.9           282.6                        78.3               2.8
1981                   418.4           323.9                        94.5                 3
1982                   425.3           357.5                        67.8               2.1
1983                   417.4           372.7                        44.7               1.3
1984                   490.3           393.5                        96.8               2.5
1985                   527.6           422.5                      105.1                2.5
1986                   522.5           450.8                        71.7               1.6
1987                   526.7           478.2                        48.5                 1
1988                   568.4           512.4                           56              1.1
1989                   613.4             554                        59.4               1.1
1990                   622.4           551.6                        50.8               0.8
1991                   598.2           586.9                          0.8                0
1992                   612.1           607.3                       -16.1                 0
1993                   666.6           624.7                        22.1               0.3
1994                   731.4           675.1                           34              0.5
1995                   810.0           713.4                        81.6               1.1
1996                   875.4           748.8                      117.5                1.5
1997                   968.7           800.3                         167                 2
1998                 1052.6            851.2                      128.1                1.5
1999                 1133.9            914.3                      241.7                2.6
2000                  1232.1            990.8                      241.3                2.5
2001                  1176.8           1075.5                      101.3                1.0
2002                  1066.3           1080.3                         -14                 0
2003                  1082.4           1112.8                       -30.4                 0
2004                  1198.8           1206.2                        -7.4                 0
2005                  1328.3           1327.2                          1.1                0
In Billions of Current Dollars
19

3. Examine the table on the previous page. Briefly describe the overall performance of the
American economy in terms of Net Investment Spending (especially as a percent of GDP). In
which years was the performance good and in which years was it poor?

4. Examine the data below and answer the following questions:
How well does the trend in after-tax profits explain the trend in business investment spending
shown on Page 18 above?

How well does the change in stock market prices explain the trend in business investment
spending shown on Page 18 above?

Year          Corporate Profits   Profits Tax Dividends Retained Earnings       Stock
Prices*
1970         81.6                34.4         24.3        23                  45.72
1971         95.1                37.7         25.1      34.3                  54.22
1972        109.8                41.9         26.8      41.1                  60.29
1973        123.9                49.3         29.9      44.8                  57.42
1974        114.5                51.8         33.2      29.5                  43.84
1975        133.1                50.9           33      49.1                  45.73
1976        160.6                64.2           39      57.3                  54.46
1977        190.9                73.1         44.8      73.1                  53.69
1978        217.2                83.5         50.8      82.9                   53.7
1979        222.5                88.1         57.5        77                  58.32
1980        198.5                84.8         64.1      49.6                   68.1
1981        219.1                81.1         73.8      64.1                  74.02
1982        201.2                63.1         76.2      61.9                  68.93
1983        254.1                77.2         83.6      93.2                  92.63
1984        309.8                94.1           91     124.7                  92.46
1985        322.4                96.5         97.7     128.3                 108.09
1986        300.7               106.5        106.3        88                     136
1987        346.6               127.1        112.2     107.3                  161.7
1988        405.1               137.2        129.6     138.3                 149.91
1989        395.7               141.5          155      99.2                 180.02
1990        408.6               140.6        165.6     102.4                 183.46
1991        431.2               133.6        178.4     119.2                 206.33
1992        453.1               143.1        185.5     124.4                 229.01
1993        510.5               165.4        203.1       142                 249.58
1994        573.2               186.7        234.9     151.6                 254.12
1995        668.8               211.1        254.2     203.6                 291.15
1996        754.1               223.6        297.7     232.7                 358.17
1997        833.8               237.2        335.2     261.3                 456.54
1998        815.1               244.6        351.5     218.9                 550.26
20

1999     856.1                       255.9        370.7   229.4                619.16
2000     817.9                       265.2        377.9   174.8
2001     767.3                       204.1        370.9   192.3
2002      886.3                       192.6        399.2   294.5
2003     1031.8                       232.1        423.2   376.5
2004     1161.5                       271.1        493.0   397.3
*NYSE Index 1965 = 50

5. Examine the data on from the first table. If the expected duration of capital goods has
become shorter, one would expect that depreciation would represent a higher percent of gross
private business investment spending. Has this been happening? Was depreciation a higher
percent of gross private business investment spending in the years when the investment
performance was especially poor?

6. The table below gives the data for Capacity Utilization in Manufacturing. Examine the
years for which the investment performance was poor. Was Capacity Utilization falling and
particularly low in those years.

Year          Capacity Utilization in Manufacturing (%)
1967                      87.2
1968                      87.1
1969                      86.8
1970                      79.4
1971                      77.9
1972                      83.4
1973                      87.7
1974                      83.4
1975                      72.9
1976                      78.2
1977                      82.6
1978                      85.2
1979                      85.3
1980                      79.5
1981                      78.3
1982                      71.8
1983                      74.4
1984                      79.8
1985                      78.8
1986                      78.7
1987                      81.3
1988                      83.8
1989                      83.6
1990                      81.4
1991                      77.9
1992                      79.4
1993                      80.4
1994                      83.6
21

1995                   83.9
1996                   83.0
1997                   83.9
1998                   82.7
1999                   81.9
2000                   81.8
2001                   76.3
2002                   75.1
2003                   75.7
2004                   78.6
2005                   80.0

7. Below, there is a table of data concerning raw materials’ prices and unit labor costs. Raw
materials’ prices and unit labor costs should be rising slowly (if at all) during the years of good
investment performance and should be rising greatly in the years of poor investment performance.
Does the data support this hypothesis? Explain.

Year          Raw Materials Prices      Unit Labor Costs
1974                      52.5                 43.2
1975                        58                 46.1
1976                      60.9                 48.4
1977                      64.9                 51.4
1978                      69.5                 55.3
1979                      78.4                 60.7
1980                      90.3                 67.4
1981                      98.6                 72.4
1982                       100                 78.2
1983                    100.6                  78.6
1984                    103.1                  79.8
1985                    102.7                  82.1
1986                      99.1                 83.9
1987                    101.5                  86.7
1988                    107.1                  89.8
1989                       112                 91.3
1990                    114.5                  95.3
1991                    114.4                  98.7
1992                    114.7                   100
1993                    116.2                 101.9
1994                    118.5                 102.6
1995                    124.9                 104.1
1996                    125.7                 104.5
1997                    125.6                 105.3
1998                       123                107.9
1999                    123.2                 109.9
Nov-00                    130.5                 110.8
1982 = 100              1992=100

Continued on Page 22
22

Part 4: 5 Points

8. Question 3 asked you to characterize the overall investment performance of the United States -
-- stating in which years that performance was good and in which years it was bad. Other
questions have asked you to relate these periods to other data. Now, it is time to summarize.
Write a short paragraph on the following question: when the investment performance of the
American economy was poor, what factors can explain this poor performance? And when
the investment performance of the American economy was good, what factors can explain
this good performance?

End of Assignment #6
23

Economics 101         Assignment #7 (15 Points) Name____________________________

Part 1: 5 Points

1. Using the tax table in the text, in 1980, in what tax bracket would you be in if your adjusted
gross income were \$20,000? \$40,000? \$100,000? What tax bracket would you be in as of 2006?
1980                  2006
\$20,000

\$40,000

\$100,000

2. Use the principle concerning the sales tax to explain why each of the following taxes is
regressive:
1. the gasoline tax

2. the cigarette tax

3. Assume that you had a capital gain of \$10,000. Also assume that you are in the highest
possible tax bracket (even before the capital gain is counted as part of your income). In 1980,
how much would you have paid in capital gains tax? (Remember that 60% of the gain was tax-
free in 1980.) In 1986, how much would you have paid in capital gains tax? (Now, all of the
gain is taxable and you pay at the highest rate.) In 1992, how much would you have paid in
capital gains tax? In 2006, how much would you have paid in capital gains tax?
1980

1986

1992

2006

4. Go over this chapter. Rank these taxes (1) being “best” and (5) being worst according to the
three criteria.
Equity        Ease of Administration Incentive Effects
Personal Income Tax

Corporate Profits Tax

Social Security (FICA) Tax

Sales Tax

Property Tax

Continued on Page 24
24

Part 2: 5 Points

1. Assume that Equilibrium Real GDP equals \$110. Potential Real GDP equals \$200. The
marginal propensity to consume equals 0.9. According to Keynesians, government purchases
should __________ (increase or decrease?) by \$___________. Or taxes should ____________
(increase or decrease?) by \$_____________. Or transfers should ____________ (increase or
decrease?) by \$_____________. Show calculations.

2. The changes to the tax system initiated by President Reagan in 1981 and again in 1986 and the
changes made by President George W. Bush in 2001 and 2003 were discussed in the chapter.
Review these changes. It is estimated that the income tax now provides only half the amount
of automatic stabilization as it did in 1980. Explain why the changes that were made reduced
the extent of automatic stabilization of the income tax.

3.Year (Fiscal) Deficit (Billions) Unemployment Rate Structural Budget Deficit
1966             3.7                     3.8%
1967             8.6                     3.8%
1968            25.2                     3.6%
1969            –3.2 (Surplus)           3.5%
1970             2.8                     4.9%
1971            23.0                     5.9%
1972            23.4                     5.6%
1973            14.9                     4.9%
1974             6.1                     5.6%
1975            53.2                     8.5%
1976            73.7                     7.7%
1977            53.7                     7.1%
1978            59.2                     6.1%
1979            40.7                     5.8%
1980            73.8                     7.1%
1981            79.0                     7.6%
1982           128.0                     9.7%
1983           207.8                     9.6%
1984           185.4                     7.5%
1985           212.3                     7.2%
1986           221.2                     7.0%
1987           149.8                     6.2%
1988           155.2                     5.5%
1. Based on the structural budget deficit, in which of these years was fiscal policy
expansionary and in which years was it contractionary? Although this is not likely to be
correct, calculate the structural budget deficit by assuming that full employment was 4%
throughout the entire period and that each rise in the unemployment rate increases the budget
deficit by \$30 billion.
2. Examine the data. In the years that fiscal policy was expansionary, did unemployment fall in
the following years? And in the years that fiscal policy was contractionary, did
unemployment rise in the following years? Provide evidence from the numbers.

Continued on Page 25
25

Part 3: 5 Points

1. From 2007 through 2008, the economy of the state of California has experienced a serious
recession. Tax revenues fell for the state. As a result, the state of California experienced a
budget deficit. By its Constitution, the state of California is not allowed to have a budget deficit.
Go on the Internet or to any major newspaper. You can visit that site for the state of California if
you wish. What actions have been taken by the state government to eliminate the budget
deficit? That is, what was done to California government spending and to taxes?
Considering that California is a very large state, what are the likely effects of these policies?

2. The marginal tax rates for 1980 and for 2000 were given in Chapter 17. Assume you have a
family income of \$25,000 in 1980. Between 1980 and 2000, prices approximately doubled. So
an income of \$50,000 in 2000 would represent about the same purchasing power as the income of
\$25,000 did in 1980.
a. Now assume that the family income from working would rise by \$1,000 (from \$25,000 to
\$26,000 in 1980). How much of this extra income would have gone to the federal government in
taxes in 1980?

b. How much of the extra \$1,000 of income (from \$50,000 to \$51,000) would go to the federal
government in taxes in 2000?

c. Did the marginal tax rates of 2000 provide a greater incentive to work than the marginal tax
rates of 1980? Explain why or why not.

End of Assignment #7
26

Economics 101          Assignment #8 (10 Points)     Name______________________

Part 1: 5 Points

1. Click on Money Supply Data on my web site.

a. What are the components of M-1? What is the total amount of each?

b. What is the total value of M-1 for the most recent period? _________________

c. What are the additional components of M-2? What is the total value of each?

d. What is the total value of M-2 in the most recent period? ___________________

Part 2: 5 Points

1. The reserve requirement on checkable deposits is 10%. The reserve requirement on savings
deposits is zero. What would happen to the money supply if a person took the \$1,000 he or she
found on the “tree” out of his checking account and put it in his savings account? Explain.

2. We assumed that the financial institutions choose to hold no excess reserves. Suppose that
they become afraid that if they make loans, the loans will not be repaid. So they do indeed hold
on to the excess reserves, rather than lend them. What happens to the money supply (M-1)?
Why?

3. If you draw a Supply of Money curve, it looks like any other supply curve: it is upward
sloping. This means that as interest rates rise, the money supply also rises. Explain why this
is so. (If you have trouble with this, review the chapter.)

End of Assignment #8
27

Economics 101      Assignment #9 (20 Points)         Name______________________

Part 1: 5 Points

1. Assume that Bank A has \$10,000 in checkable deposits, \$2000 in reserves, and \$8,000 in
loans when the reserve requirement is 20%. If the reserve requirement (ratio) is lowered to
10%,
Bank A's excess reserves increase by \$_____________________
the money supply will ultimately ___________(increase or decrease?)
by \$______________________.
The money multiplier increases from _________ to ______________.

2. Assume that the discount rate is lowered from 6% to 4%. As a result, Bank A
borrows \$1,000 from the Fed.
The monetary base ____________(increases or decreases?) by \$_________________
Bank A's excess reserves ________(increase or decrease?) by \$_________________
With a reserve ratio of 10%, the money supply will ______________(increase or
decrease?) by \$______________________.

3. Now, assume that the Fed buys \$1,000 worth of Treasury Bills from Bank A.
The monetary base ______________(increases or decreases?) by \$________________
Bank A's excess reserves ____________(increase or decrease?) by \$_______________
With a reserve ratio of 10%, the money supply will ______________(increase or
decrease?) by \$__________________.

4. Explain in your own words why an increase in the money supply would cause real interest
rates to fall.

5. Explain in your own words why a decrease in the price of a security is the same as an increase
in the interest rate on that security.

Part 2: 5 Points

1. Assume that every time the Federal Reserve increases the supply of money by \$20 billion,
interest rates will fall by 2 percentage points (for example, from 8% to 6%). Also assume that
every time interest rates fall by 2 percentage points, business investment spending rises by \$10
billion. Equilibrium Real GDP is equal to \$400 billion. Potential Real GDP is equal to \$500
billion. The marginal propensity to consume (MPC) is equal to 9/10 (0.9). The interest rate is
8%. Business investment spending is \$20 billion. And the supply of money is \$120 billion. In
order to eliminate the recessionary gap, by how much and in what direction should the Federal
Reserve change the supply of money?

Continued on Page 28
28

2. Now, from Question 1, assume that the reserve requirement is 1/10 (0.1). In order to eliminate
the recessionary gap, by how much and in what direction should the Federal Reserve change the
monetary base?

3. Notice in the charts in the text that velocity has been trending upward, especially since the
end of the recession of the early 1990s. If velocity is trending upward, then the demand for
money must have been trending downward. This means that people have been holding less
money as part of their wealth. Based on what you have learned about the demand for money,
what reasons can you suggest for this change?

Part 3: 5 Points

1. On the demand for money curve, state whether there is a movement along the line, a shift to
the right, or a shift to the left for each of the following cases:
a. prices, as measured by the GDP Deflator, rise (inflation) _____________________
b. quantity produced, as measured by the Real GDP falls (a recession) ______________
c. real interest rise from 4% to 5% ______________________________
d. people expect greater rates of inflation in the near future ____________________

2. Let us explore the Keynesian view that velocity is not constant. Remember that velocity and
the demand for money are inversely related. When the government increases its spending and
correspondingly increases its borrowing, interest rates rise. As we explored earlier, when interest
rates rise, the demand for money ____________(answer “rises” or “falls”). This change in the
demand for money is the same as velocity __________(answer “rising” or “falling”).

3. The natural rate of unemployment is estimated to be about 4% today. In the 1980s, it was
estimated to be about 6%. By any estimation, it has fallen. Each of the following has been given
as explanations for the decline. Explain why each of the following might have contributed to the
decline in the natural rate of unemployment:
a. the rise in the use of temporary employment agencies

b. the decline in the number of people age 16 to 22

c. the fact that married women are more experienced workers now than they were in the
1980s

Continued on Page 29
29

Part 4: 5 Points

4. Chapters 23 provided the monetarist explanation of what occurs following an increase in the
money supply. Now assume that inflation has been very high.
The Fed now decreases the money supply, causing aggregate demand to ________________.

Inventories in stores ________________. Orders from manufacturers_________________.

Production by manufacturers___________. The number of people employed____________.

Wages should _______________ and prices should ________________. (Answer "rise" or
"fall")

a. Describe what will occur in the short-run if expectations are adaptive. Explain why. In

b. Describe what will occur in the long-run. Explain why. Be sure to define “long-run”.

c. On the graphs, aggregate demand - aggregate supply graph, the reservation wage – wage
offers graph, and the Phillips Curve are drawn. Show the changes you have described above ---
first for the short-run and then for the long run. Also, draw the long-run aggregate supply
curve and the long-run Phillips Curve.

Inflation Rate

3%        A                                4% is the Natural Rate of Unemployment

Short-run Phillips Curve
0      4%                             Unemployment Rate

Continued on Page 30
30

GDP Deflator
Short-run Aggregate Supply1

100                            A

Aggregate Demand1 = M1 x V

0                     \$1,000                          Real GDP

(\$1,000 is Potential Real GDP)

\$
Wage Offers1

A

Reservation Wage1

3                        Time (Months)

End of Assignment 9

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