Name __________________________ _________ last 4 PSU ID _______
Instructions: Please show all work or points will be taken off. Good luck!
185 TOTAL POINTS
1. (40 points total) In this first 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!)
Use the following three links to answer the following questions:
For Nominal Wages (W)
Price index CPI (P)
PCE price index (this is the one the Fed targets!)
Please show all work throughout this assignment or points will be taken off – with no work shown, you get zero points!
a) (10 points) Most of you are somewhere around 20 years of age. Using the CPI (Consumer Price Index), compare the real wage back in July of 2001 to the real wage in July of XXXXXXXXXXyears later). That is, calculate the real wage in July of 2001 and then in July of 2021 and calculate the % change in the real wage during this time. Show all work or points will be taken off. The less rounding the better but take the real wage to 2 decimal places.
) (10 points) Most of you are somewhere around 20 years of age. Using the PCE price index, compare the real wage back in July of 2001 to the real wage in July of XXXXXXXXXXyears later). That is, calculate the real wage in July of 2001 and then in July of 2021 and calculate the % change in the real wage during this time. Show all work or points will be taken off. The less rounding the better but take the real wage to 2 decimal places.
c) (5 points) Why is the percent change in the real wage so different in part a) relative to part b)? To answer this question, calculate the percent change of the CPI over this 20 year period and compare to the percent change in the PCE price index over the same 20 year period.
d) (5 points) Why are the actual real wages, the ones you calculated, so different in part a) vs. part b)?
e) (5 points) Using the PCE price index, compare the percent change in real wage between April 2019 to April 2020 and compare to the percent change in the real wage between July 2020 and July 2021 (the most recent available data).
f) (5 points) So a friend, a non econ friend, looks at your answers in e) above and asks you: Why are your answers so different? How would you answer your friend (act like you are an economist!)?
2. (40 POINTS total)
You will need to use the following links to answer this question.
Nominal one year interest rate (GS1)
Price index (CPI)
Expected Inflation
We are going to estimate ex-ante and ex-post one year real rates of interest.
.
Note: Expected inflation data is one year hence - so for example, expected inflation for the period from July 2010 to July 2011 is given in July 2010 and if you view the data, the expected inflation during this time is 2.7% = πe.
a) (5 points) Let’s go back 20 years to July 2001. Calculate the ex-ante real rate of interest between July 2001 and July 2002.
) (5 points) Now calculate the ex-post real rate of between July 2001 and July 2002.
c) (5 points)Why are your answers in part a) and b) different and under what conditions would the answers in a) and b) be the same? Explain.
d) (5 points) Calculate the most recent ex-ante real rate of interest (this would be from July 2021 to July of 2022.
e)(5 points) Give two reasons why this most recent ex-ante rate is so low!
Click Here for data on the Minimum Wage
f) (5 points) Using the MW link, what is the rate of inflation between 1974 and 1975? (please take the inflation rate to two decimals)
g) (5 points) Using the MW link , what would the nominal minimum wage have to be in 2015 to equal the real purchasing power of the minimum wage in 1969?
h)(5 points) (show all work) When I was in Orlando, Florida back in the summer of 1988 I would do some side jobs in plastering/stucco. I remember that when making bids, after accounting for all the material etc, I would plan on making $200 per day. Let’s suppose that this was in July of XXXXXXXXXXUsing the CPI index below, calculate what I would need to make now, as defined by July 2021 (the most recent data), to equal the purchasing power of $200 / day back in July of 1988.
CPI
XXXXXXXXXXpoints) You can hire all the workers you want at $100 per worker. The output price of your product is $10. Fill in the Table below (10 points)
TABLE 1 (Note: W = $100)
N
Y
MPN
MRPN
Marginal Profit
Total Profit
0
P = $10
P = $12
P = $10
P = $12
P = $10
P = $12
1
20
2
38
3
53
4
66
5
77
6
86
7
93
a) (5 points) How many workers will you hire and what is your maximum profit in nominal terms? In real terms?
) (5 points) Suppose due to the phone ringing off the hook, you decide the raise the price of your output – fill in the P = $12 columns. How many workers will you hire now and what is your maximum profit in nominal terms? In real terms?
c) ( 10 points) In the space below, draw the supply curve for your firm. Be sure to put all the shift variables in parentheses next to the supply curve (like we did in class).Please label as point A when the price is $10 and as point B when the price is $12.
10 points for co
ect and completely labeled diagram.
d) We now have another shock and that is it is next to impossible to keep workers at $100 per day – so you decide to raise wages to keep your workers and that new wage is $120 per day. Please fill in the following table (10 points).
TABLE 2 (Note: W = $120)
N
Y
MPN
MRPN
Marginal Profit
Total Profit
0
P = $10
P = $12
P = $10
P = $12
P = $10
P = $12
1
20
2
38
3
53
4
66
5
77
6
86
7
93
e) (5 points) How many workers will you hire and what is your maximum profit in nominal terms when the price of your output is $10? In real terms? Note, this is when the wage is $120.
f) (5 points) How many workers will you hire and what is your maximum profit in nominal terms when the price of the output is $12? In real terms? Note, this is when the wage is $120.
g) ( 10 points) In the space below, draw two supply curves – redraw the supply curve from part c) above (with points A and B) and then add the new supply curve when wages are $120. Be sure to put all the shift variables in parentheses next to the two supply curves (like we did in class). Please label as point C when the price is $10 and as point D when the price is $12.
10 points for co
ect and completely labeled diagram.
h) The final shock is a productivity shock in the happy direction where the marginal product of labor, the MPN, rises by 2 for EACH worker (we did this in class!). We go back to original conditions with wages (W) = $100. Please fill in the following Table (10 points).
TABLE 3 (Note: W = $100)
N
Y
MPN
MRPN
Marginal Profit
Total Profit
0
P = $10
P = $12
P = $10
P = $12
P = $10
P = $12
1
2
3
4
5
6
7
i) (5 points) How many workers will you hire and what is your maximum profit in nominal terms when the price of your output is $10? In real terms? Note, this is when the wage is $100.
j) (5 points) How many workers will you hire and what is your maximum profit in nominal terms when the price of the output is $12? In real terms? Note, this is when the wage is $100.
k) (10 points) In the space below, draw three supply curves – redraw the two supply curves from above (completely labeled with points A,B,C,D) and add the new supply curve given the productivity shock. Be sure to put all the shift variables in parentheses next to all three supply curves. On this third supply curve, please label as point E when the price is $10 and as point F when the price is $12.
10 points for co
ect and completely labeled diagram.
l) (15 points) Suppose that the workers that are more productive ask for a raise since their increase in productivity was the reason your profits went up. Assuming that your output price is $10, calculate the number of workers that you would hire, your nominal profit, your real profit if you raised