Question

1) The Economy cannot be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and explain your answer in a paragraph. What is the current actual u - rate for the US economy as of Sep 2019 Data for 2019 ? Is this unemploymen t rate bel ow or above or equal to u - rate at full employment (usually called natural rate of unemployment or NAIRU)?

2) A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level low er than the "full employment" unemployment rate (NAIRU) and remained at that low level for a year or longer? Explain your answer in a few sentences. 3 pts . B) Draw an AS/AD diagram illustrating your answer to part (A) and refer to the current state of the economy of the US to compare in this context. Be sure to label all lines and axes in your diagram clearly.

3 ) Between Q1, 2016 and Q2 , 2018 measured Output in the non - farm business sector increased by 3.6 %. During this time period t he unemployment rate fell from 4.6% to 3.7 % and total hours worked in the nonfarm busine ss sector increased by 3 .8%. What was the % rate of change in labor productivity ov er the year? Explain your answer briefly. (Hint: Labor productivity = Y/Labor hours; RGDP growth rate = Labor productivit growth plus and Labor Force Growth rate. No need to use u - rate changes for this question )

4 ) a. Suppose that the Fed eral Government under Donald Trump Administration announced a tax rebate of $500 for all individuals filing singly and $1000 for all families filing jointly or as head of household in the upcoming tax year. Further, suppose that the Gov ernment budget included a broad - based reduction in Government spending on goods and services, whose total amount was equal to the total amount of the tax rebates. What would be the overall impact on AD of th is policy change, or would the policy change effects comp letely cancel each other out? Hint: Tax rebate ( A negative tax and direct government expenditure in infrastructure development and construction do not have an identical effect in magnitudes). Need to look at both tax multiplier and G o vernment expenditure m ultiplier explained in the textbook) Explain your answer in detail.

4 ) b. Trump’s imposition of $2 6 0 billion tariff in the Month of May 2019 (taxes on imports to the US Market) on Chinese exports to the US has caused a global tension in fina ncial markets and related business activities. In retaliation of Trump’s tariff, China also imposed almost similar amount of tariff on US exports to China about $200 billon . In response to this trade war between the US and China, the US stock price indices of the Wall Street plummeted in May and June 2019 . Th stock market in Shanghai in China also crashed at the same time. The data on new job for the US economy in May showed a very slow rate of j o b creation at the same time. Given this scenario from the US - China trade war and given your knowledge on macro model of AD an AS, do you think the recession is in the horizon to hit the US economy in early 2020? Give your reason in your opinion as to why or why not the case.

5 . Use the macroeconomic data in the table below for the US economy for 2017 and 2018 to answer the questions followed.

Year

NGDP in ‘000”

RGDP In ‘000’ In 2009 prices

RGDP Growth Rate %

GDPD Inflation Rate %

u - Rate %

CPI Inflation Rate %

19,390.6 17,096.2 - ? 4.4 245.12 -

2017

19,956.8 17,379.7 ? 3.9 250.5 ?

2018 * * Estimated data from 2017 data, but very close. Sources: www.bea.gov and www.bls.gov

5 a. Estimate the values and fill out the boxes with Questions marks.

5 b. Based on your estimated values from Q7a, briefly analyze the state of the US economy from year 2017 to 2018 and make a quick forecast for 2019 and 2020. 3 pts Hint: Similar examples can be found in the textbook in Chapter 6.

6 . Use the following macroeconomic model structure to answer the questions followed. Please note that you must show your work of estimations for these numerical multiple - choice questions for gradable credit. Without showing your works of estimation, your answers won’t credible for take - home exam.

C = 300 + 0. 8 Yd; C = consump tion function; Yd (Y - T) = disposable income I = 20 0; I = Investment G = 4 00; G = Government expenditure T = 2 00; T = Tax revenue Also assume that Yf = Full employment GDP (Potential GDP) = 5 ,000

6 .1 . The equilibrium GDP level (income) is _________. H int: Ye = C+I+G a. 2,850 b. 3,700 c. 3,145 d. 3,800

6 .2 . At the equilibrium level of output, the aggregate consumption level is: a. 3,100 b. 3,250 c. 3,400 d. 3,625

6 .3 . At the equilibrium level of output, the aggregate saving level is: a. 550 b. 450 c. 400 d. 350

6 .4 . The MPC and MPS for the economy is respectively: a. 0.9 and 0.1 b. 0.85 and 0.15 c. 0.75 and 0.25 d. 0.80 and 0.20

6 .5 . The expenditure multiplier for the economy is: a. 10 b. 8 c. 5 d. 4

6 .6 . The tax multiplier for the economy is: a. - 3 b. - 4 c. 4 d. 5

6 .7 . Given the value of full employment level of GDP above, the GDP gap is ______ a. 1,200 b.1,300 c. 1,400

d. 1,500 Hint: GDP gap is the difference between full employment (potential GDP) and existing equilibrium GDP)

6 .8 . The government spending needed to bridge the GDP gap you found in statement 8.7 above would be _____________ Hint: It is also called recessionary or inflationary gap depending on whether the economy is in state of recession or inflation. a. 400 b. 350 c. 260 d. 250

7 . Suppose the Payroll tax reduction for middle - income households has been extended in the amount of $200 billion for the remainder of 201 8 . Assuming the MPC for that income group of households is 0.8 and also assuming that other things st ay the same, the increase in GDP under this proposed extension of tax break is expected to increase by (ΔY) _______ 2 pt s a. $2,000 billion b. $1,000 billion c. $800 billion.

d. $500 billion Hint: Need to use tax multiplier and it is a negative tax.

Answer 1

Answer: u fronomy cannot be considered fully employed unless the measured unemployment rate is below it. : (agree or not) Explanation: , In macro Economics full employment is a condition of the national Economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so. • This is FALSE", we have a constant fluctuation of people entering and exiting the market. • In addition if unemployment was this low, inflation would be outrageously high. Hence disagree" current actual urate for the US economy as of may pate of 2019 is it below or above of equal to CNAIRO); It is possible for an economy to operate for a time with

an unemployment rate less than the natural unemployment, (also known as NAIRO). "This istrue" However market will work itself back out to equilibrium arent US Gop is expected to be 20220.00 USD Billim by the end of this quarter (It is more than NAIRO) • The NAIRU is the Natural rate of themployment and an economy is considered to be in full employment when actual chemployment rate is equal to Natural rate. (2) a Expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than "full Employment" unemployment rate CNAIRU) and remained at lower level for a year or longer because : The money supply demanded will be much higher than the money supplied causing a shortage.

•The only way to compensate is to increase prices of goods and services in the economy. gap and demand This excess demand Greates inflationary polking inflation takes place B) AS/AD Diagram : price i AS (Aggregate supply) level - A03 AD2 ADI National Income (Gop) Yf = output corresponding to full employment level. corrent state of aconomy diagram of USA: (comparing it with the above. AllAD)

Graph price +- AOL Ao -- YF output Here ye is the output level corresponding to full employment shift in Aggregate demand line, Ad as themployment rate decreases indicated by API, AD2, AD3 . (3) Given, As per between 1, 2016. and a2, 2018 measured output in the non farm businesl sector increated by = 3.64. And this day and age the enemployment rate tumbled from 4.6.1 to 3.7% Hence employment increases

Total hours worked in non farm business sector increased by 3.8.6. Laborproductivity = output per period / noof labor work change in output = 3.6 change in total laborwork = 3.8 change in Laborproductivity = Ap = AOLAH = 3.6/3.8 = 0.947 Hence, In this so, the percentage rate of change in Lapor productivity over the year = 0.947