1) For this question, you will need to visit the Federal Reserve’s website (here) and the European Central Bank’s website (here). In answering the questions, make sure to 1) use your own words and 2) provide the link where you found the information (do not use any source outside of the Fed and ECB websites listed above – that includes your textbook – you must get your answer from the websites)
a. What is the mandate or goal (hint: there are (only) two) of the Federal Reserve?
. What is the mandate or goal (hint: there is (only) one) of the European Central Bank?
c. Compare and contrast the two mandates. In particular, are there differences between the two central banks? Why or why not?
2) Go to the economic research website of the St. Louis Federal Reserve (here). Answer the following questions:
a. Get the following data for Q1 2021:
i. Quarterly Personal Consumption Expenditures (PCEC)
ii. Gross Private Domestic Investment (GDPI)
iii. Net Exports of Goods and Services (NETEXP)
iv. Government Consumption and Expenditures and Gross Investment (GCE)
v. Gross Domestic Product (GDP)
vi. Real GDP (GDPC1)
. Explain, in your own words, what each of these variables represents (no more than one sentence each).
c. Using the values you got from (i) through (iv), calculate the nominal GDP. Is it the same value as what you got in (v), why or why not?
d. Calculate the GDP deflator. Interpret your answer (i.e. what does the number mean?).
e. Let’s take a look at the impact that the coronavirus has had on the economy. For variables (i) through (iv), calculate the percent change in the variables (to calculate the percent change, do the following: (Q1 2021 value - Q4 2019 value)/Q4 2019 value) and tell me which has been most impacted by the coronavirus. Does this make intuitive sense? Do you expect this to change over the next 12 months?
3) You be the economist: For this question, I want you to determine the effects of the last increase in interest rates made by the Federal Reserve (see the press release here - the last rate increase by the Fed was conducted on December 20, 2018) on the macroeconomy. Assume, for simplicity, that the Federal Reserve accomplishes its goal of increasing interest rates by decreasing the money supply.
a. Start by showing the effects of the monetary policy on a graph. Make sure to label the x-axis, y-axis, and the two curves/lines (functions in the graph). Clearly indicate the direction of the curve shifts (if any) and conclude (or show) that the effect would be an increase in the nominal interest rate.
. Using the quantity theory of money equation, determine the expected effect of the Fed’s monetary policy on the inflation rate. Assume that the percent decrease in the money supply is about 0.25% and that the percent decrease in output is about 0.10%. Provide both a numerical and an intuitive answer. In other words, along with your numerical answer, provide an intuitive explanation for why we observe an increase/decrease in inflation based on this economic situation.
c. Assume that the monetary policy of the Federal Reserve has the effect of increasing the nominal interest rate by 0.25%. What is the expected effect on the real interest rate?
d. Based on your answer to part (c), show, using a graph, the expected effect of this monetary policy on investment (assume, for simplicity, that there is no effect on the saving curve).
e. Now that you have determined the expected outcome of the monetary policy enacted by the Fed, go back to the press release and tell me why, specifically, the Federal Reserve adopted this type of monetary policy. In other words, is the outcome that you obtained in your analysis what the Fed was looking for?
4) Consider an economy that produces and consumes pizza and hot dogs. The following table shows data for two different years.
________________________________2010______________________________2014___________
Good
Qty
Price
Qty
Price
Pizza
200
$3.25
200
$5.12
Hot Dog
200
$2.68
400
$3.09
a. Using 2010 as the base year, compute the following statistics for each year:
i. nominal GDP
ii. real GDP,
iii. the implicit price deflator for GDP, and
iv. a fixed-weight price index such as the CPI.
. What does the CPI tell you about inflation in this economy?
c. Convert the inflation rate to a percent (take your CPI answer in part a(iv), subtract 1 and multiply the decimal by 100). Assume that the Federal Reserve wants to keep inflation at its target of 2%. Assume that velocity of money and output is constant such that their growth rate is equal to 0%. What must the Fed do to the money supply in order to keep inflation at 2%?
d. Based on your answer to part (c), what do you expect to happen to the nominal interest rate?
e. The city of Baltimore wants to invest in its infrastructure (they want to build roads). To do so, they will need to bo
ow money. They will issue municipal bonds to do so. Should they bo
ow now or wait until the Federal Reserve implements the monetary policy you found in part (c)? Explain.
5) Changes in economic policies will frequently have an impact on the unemployment rate. Start by describing (in your own words) the difference between structural and frictional unemployment. Explain whether each of the policy changes described is likely to: (1) affect frictional or structural unemployment, and (2) increase or decrease the measured unemployment rate.
a. States are starting to consider rolling back unemployment insurance to prepandemic levels - assume that they are simply decreasing the number of weeks of unemployment insurance that unemployed workers can receive to prepandemic levels (here).
. In April of 2021, President Biden announced an executive order to increase the minimum wage of federal contractors (here).
c. In a previous round of stimulus spending, the government increased spending on job-training programs (here).
6) PART 1. The following statements represent a transaction or event that may or may not have an impact on one (or more) of the macroeconomic variables for the United States (the macroeconomic variables of interest here are: consumption, investment, government expenditures, exports, and imports). If the transaction/event does not impact any of the macroeconomic variables, write “neither.” If the transaction/event impacts one or more macroeconomic variable(s), indicate (1) which variables (using the appropriate notation), (2) the direction of the effect (increase or decrease), and (3) the amount of the effect.
a. The city of College Park pays an intern $3,600 for work during the summe
. The summer intern then pays $1,600 rent
c. For her coursework, the intern purchases $120 of books which she purchases from a popular online retailer located in the United Kingdom
d. Oh no! The intern must pay tuition to the University of Maryland. The tuition amount is $3650
e. Because of the tuition payment, the student has no more money. She decides to bo
ow $3,050 in student loans from the U.S. government
f. The student decides that, because of an intermediate macroeconomics course, she needs a vacation! She decides to fly to Paris using a domestic (U.S.) airline. The price of the ticket was $200 (wow!).
g. In France, the student decides to stay in a local hotel (a hotel owned by a French firm). The cost of the hotel stay was 160 euros. The cost of the euro is $2.00 USD.
h. While away, the landlord decides to renovate the apartment of the student. The landlord therefore spends $7,700 making the apartment all shiny and new!
PART 2. What was the total impact of all of the above transactions ((a) through (h)) on the U.S. gross domestic product?
7) Under what circumstances is it possible for domestic output to not be equal to domestic spending? Explain (this answer requires about a paragraph).
8) Answer the following questions:
a. The federal government has decided to implement a policy that removes investors’ investment tax credit. Show, using a graph, the effect that the new policy would have on the economy. Make sure to use the appropriate labels for your graph. Explain, in your own words, what is happening in your graph.
. Up to this point, we have assumed that we were in a closed economy. Now, assume that we are a small open economy. What would be the impact of the policy in part (a) of this question on the trade deficit? Why?
c. Thinking back to your answer to question 3, how would the federal government undermine the effectiveness of the Federal Reserve’s monetary policy?
9) Assuming a Solow Growth Model with population growth but without technological progress, determine whether each of the following statements is true or false. In each case, explain your choice in your own words. Use the equations whenever possible. Just answering true/false without an explanation will result in a grade of zero for the question regardless of whether or not you are co
ect.
a. In the steady state, savings equal investment.
. The size of total GDP has an upper bound.
c. Income per capita is determined (only) by the capital-labor ratio.
d. When the population growth rate increases, the growth rate of total GDP decreases.
e. When the economy is in steady state growth, consumption per capita grows at a constant rate that is equal to the population growth rate.
f. If the rate of depreciation falls, consumption per capita will also decrease.
10) In order to conduct its monetary policy, the Federal Reserve assumes that its measures of the money supply are accurate. Answer the following questions:
a. Why can’t the Federal Reserve control the money supply accurately? In your own words, give an example of why it is hard to control the money supply.
. Why is calculating the money supply accurately important? How does that impact monetary policy? Give an example from the point of view of the Federal Reserve.
11) Determine whether each of the following statements is true or false. In each case, explain your choice in your own words and/or show using the equations if possible. Just answering true/false without an explanation will result in a grade of zero for the question.
a. In the Solow model, people are always better off when they save more.
. In order to ensure maximum output in the economy, the cu
ent administration should do everything it can to achieve an unemployment rate of zero.
c. If we want maximum consumption in the economy, the federal government should cut taxes to zero so that people can consume more. After all, the government can