Economics Exam

ECON102 – On-Line-Introduction to Macroeconomics

Summer 2020

MID-TERM EXAM N. Aman The exam is due back via posting in Turnitin Assignment Link before midnight 11.59PM EST on Monday, June 22, 2020. 1.You may use your textbook and class notes when taking this exam. 2.You may not discuss this exam with anyone else in the class, in your family, among your friends or with anyone online. 3. Also, you may not copy and paste your answers from secondary sources, neither from Internet nor from my lecture notes or any other sources. The contents of your answers must be in your words reflecting your knowledge on related topics the questions are asked from. 4. The Maximum Raw Score Points Available on this exam = 40. Each portion of each question has its potential raw score contribution indicated. 5. Please do not copy exam Qs in your answers, just write Q#s as order of sequence in the exam and your own answers in your own words to submit. Your exam will be rejected if you include questions themselves in your answer document. Also, do not include these instructions in your answer either. Answer all Qs below: 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 May Data for 2020? Is this unemployment rate below or above or equal to u-rate at full employment (usually called natural rate of unemployment or NAIRU)? What state of the economy do you consider from this u-rate fin May 2020 (recession, depression or inflation?) and its sources? 5pts 2) A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower 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. 3pts . 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. 2pts 3) Between Q1, 2016 and Q2, 2018 measured Output in the non- farm business sector increased by 3.6%. During this time period the unemployment rate fell from 4.6% to 3.7% and total hours worked in the nonfarm business sector increased by 3.8%.

What was the % rate of change in labor productivity over this period (Q1 2016 and Q2 2018)? Explain your answer briefly. (Hint: Labor productivity = Y/Labor hours; RGDP growth rate = Labor productivity growth plus and Labor Force Growth rate. No need to use u-rate changes for this question) 4 pts 4) a. The Federal Government distributed a recovery relief fund to all households with $600 for all individuals filing and $1,200 for all households filing jointly and $500 for each children in each household. This was part of the $2.2 Trillion stimulus package under CARES Act of March 2020 that also included employee job protection plan for small business owners and restaurants, travel related businesses, unemployment insurances and households with no taxes filed. What would be the overall impact on AD of this recovery relief fund caused by COVID- 19 public health crisis and its effect on change in real GDP? Assume that the Marginal Propensity to Consume (MPC) for all American consumers is 0.8 in March 2020. Explain your answer briefly as well in your own words. Make sure you use your understanding of the concept of expenditure multiplier in estimating this problem. 4 pts 4) b. Trump’s imposition of $260 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 financial 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 job 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 the retaliation of China in response to Trump’s Tariff would have a negative impact on the US economy in near future?? Give your reason in your opinion as to why or why not the case. 4 pts 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 %

2017 19,390.6 17,096.2 - ? - 4.4 245.12 -

2018* 19,956.8 17,379.7 ? ? ? 3.9 250.5 ?

* Estimated data from 2017 data, but very close. Sources: www.bea.gov and www.bls.gov 5a. Estimate the values and fill out the boxes with Questions marks. 5 pts 5b. Based on your estimated values from Q5a, 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. 8 pts C = 300 + 0.8Yd; C = consumption function; Yd (Y-T) = disposable income I = 200; I = Investment G = 400; G = Government expenditure T = 200; T = Tax revenue Also assume that Yf = Full employment GDP (Potential GDP) = 5,000 6.1. The equilibrium GDP level (income) is _________. Hint: 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 $500 billion for the remainder of 2020 to recover from COVID-19 crisis. Assuming the MPC for that income group of households is 0.8 and also assuming that other things stay the same, the increase in GDP under this proposed extension of tax break is expected to increase by (ΔY) _______ 2 pts

a. $2,500 billion b. $2,000 billion c. $1,000 billion d. $1,500 billion

Hint: Need to use tax multiplier and it is a negative tax.