Econ homework
ECO 204 Homework 2 (35 points)
1. Unemployment rates:
Civilian, non-institutional, population over 16 years of age in country A is 243 million. Of the 243 million, 141 million are employed, and 23 million are unemployed of whom 2 million are frictionally and 4 million are structurally unemployed. (8 points)
You must round numbers to the nearest hundredth.
a. Calculate the actual (or total) unemployment rate. ___________________
b. Calculate the Natural Rate of Unemployment (NRU). _______________
c. Is this country in a recession or a boom? _____________________________
d. Explain your answer to part c. ________________________________________
2. Present value of a future return:
What is the present value of $3,000, four years from now if the annual fixed interest rate is 5.9%? (3 points)
3. Does government budget deficit “crowds out” investment spending?
Support your response using economic reasoning. (6 points)
4. Give one reason why demand for loanable funds may increase (shift up and to the right), and one reason why supply of loanable funds may decrease (Shift up and to the left). (6 points)
5. Use the graph below to answer questions a-e on the concept of Consumption Function.
a. What is the dollar value of “autonomous consumption”? (2 points)
$ __________________________________
b. Using the green AD curve, calculate Marginal Propensity to Consume (MPC). (2 points)
_________________________________%
c. What would the multiplier be if MPC is 0.60 (60%)? ______________ (2 points)
d. If the current income-expenditure equilibrium is at E1, but full employment equilibrium GDP is at $17 million, and the multiplier is 3, by how much should autonomous consumption increase to raise AD to close the “GDP gap” of $7 million; ($17 - $10)? (2 points)
$ __________________________________
Total spending, in $ billions
45-degree line:
Where total GDP = Total spending: AS = AD
$20
$17
$15
$14
$12
$10
$7
$5
$17
$5
$4
B
A
D
C
E1
Real GDP (total Income) in $millions
Aggregate Expenditure (AE): AKA Aggregate Demand (AD)
$0
$20
$15
$10
e. If the economy is operating at $5 of GDP, firms respond by increasing production, explain why. (4 points)
1