I need help for my ECON homework

Assignment 3 answers: Chapters 9 and 10

1. Increases, decreases, recession, trough, expansion

2. Unemployed, labor force, multiplying

3. Frictional, structural, cyclical

4. C

5. C

6. B

7. C

8. D

9. 12, 10, 5

10. 5.8, 7, 14

11. 3 (how to do this problem: both the change in the price index and the change in nominal income contribute to the change in real income- you subtract the change in price index from the change in nominal income. The PI changes 12%, so the overall change is 15%-12%= 3%

12. -3 (The PI changes 10%, so the overall change is 7%-10%=-3%. )

13. $22,321 (you need to divide the nominal income by the price index expressed in hundredths, meaning 1.12 instead of 112)

14. $20,292 (25,000/1.232)

15. 3

16. 2 (the nominal interest rate was 14%, and the price index changed by 12%. The change in real interest rate is equal to the change in nominal interest rate less the change in price index). Therefore, 14-12=2.)

17. A. All part-time workers are listed as full-time. By counting these workers as fully employed, the BLS may be understating the employment rate

B. Many workers drop out of the labor force after unsuccessfully seeking employment for a time. One must be actively seeking employment in order to be counted as unemployed. These aforementioned “discouraged workers” are not counted by the BLS as unemployed, and once again the BLS may understate the unemployment rate.

18. Inflation is a rise in the general level of prices, meaning each dollar of income will buy fewer goods and services than before. The BLS measures the Consumer Price Index (CPU) monthly, which involves reporting the prices of a “basket” of typical goods and services purchased by the average consumer. The rate of inflation is equal to the percentage growth of CPI from one year to the next. Inflation data is also calculated month-to-month, and on a month-to-month annualized basis.

19. Hurt by inflation: fixed-income receivers (the same annuity purchases fewer goods and services), savers (real value of accumulated savings decreases), creditors (the borrower pays back less “valuable” dollars to the lender/creditor in the future)

Helped or unaffected by inflation: flexible-income receivers (COLA is an example of this), debtors (the borrower/debtor pays back less “valuable” dollars to the lender in the future)

20. Consumption, saving

21. Wealth, borrowing, expectations, real interest rate

22. Upward, downward, income

23. Inverse, demand, increase

24. B

25. B

26. C

27. D (MPS= change in saving/change in income. According to the text, you can equate disposable income with real GDP. Therefore, MPS= change in saving/change in real GDP. We assume that savings is invested (rather than just sitting there). Therefore,0.40= 20/x. Solve for x.

28. B (MPS= change in saving/change in income. According to the text, you can equate disposable income with real GDP. Saving is also essentially the same as investment spending. Therefore, MPS= change in saving/change in real GDP. MPC+MPS = 1. Plug the numbers from the question into (1-MPC)= change in saving/change in income)

29. C (how to do this problem: figure out the Marginal Propensity to Consume(MPC) first. Initially, a change in investment spending of $150 billion creates $150 billion of income in the first round. Between the first and second rounds, this causes a change in consumption of $105 billion. This $105 billion of consumption spending becomes someone else’s income in the second round. The formula for MPC is change in consumption/change in income. Therefore, the MPC= $105billion/$150billion (moving between steps one and two). Once you have the MPC, it’s easy to find the multiplier. The formula is Multiplier=1/(1-MPC) .

Alternately, you can find the multiplier first. The way I think of this is to first find the amount saved in between the first and second round ($150billion-$105billion in this case). The MPS is therefore $45billion/$150billion. The multiplier is equal to 1/MPS.

30. 0, 10

31. 20, 30 (The first part of each question asks you for the additional amount of investment, while the second number is the cumulative amount of investment)

32. 30, 60

33. Marginal propensity to consume (MPC) is the fraction of any change in disposable income spent for consumer goods, equal to the change in consumption divided by the change in disposable income. Marginal propensity to save (MPS) is the fraction of any change in disposable income that households save, equal to the change in saving divided by the change in disposable income. Average propensity to consume (APC) is the fraction or percentage of disposable income that households plan to spend for consumer goods and services, equal to consumption divided by disposable income. Average propensity to save (APS) is the fraction or percentage of disposable income that households save, equal to saving divided by disposable income.

34. Concerning APC and APS, disposable income is either consumed or saved. The fraction of any disposable income consumed plus the fraction saved/not consumed must exhaust that income. Therefore, APC + APS = 1. Similarly, the fraction of any change in income not consumed is by definition saved. Therefore, the fraction consumed (MPC) plus the fraction saved (MPS) must exhaust the whole change in income. MPC + MPS = 1.

35. Consumption and saving schedules are usually stable. This stability may be due to the fact that consumption vs. saving decisions are strongly influenced by long-term considerations such as saving to meet emergencies/for retirement, etc. Additionally, changes in non-income determinants often work in opposite directions and therefore may be self-canceling. Stability of the consumption and saving schedules may be disturbed due to major tax increases or decreases.