problem set 3-1

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Using Fischer’s Quantity Theory of Money, calculate inflation if velocity remains constant at 4 and real GDP increases from $1800 billion to $2000 billion while the money supply increases from $1150 billion to $1300 billion. 2. What was the Fed’s announced monetary policy decision at the March 15‐16, 2016 FOMC meeting? What rationale did the fed give for its decision? What hints did they give toward their outlook on the future? How did the financial markets receive their decision? You should be able to find the answer to all of these questions in one or two news reports following the meeting or in the press release issued by the fed.

3. Who votes on the FOMC? 4. For each of the following statements explain whether it is a reason to support or oppose Fed independence. a) The Fed, has its own sources of operating revenue and does not have to rely on federal government appropriations (congress) for money. b) That it is undemocratic to have monetary policy controlled by an elite group responsible to no one. c) An independent Fed conducts will do a much better job in controlling inflation than will a politically connected Fed. 5. From a political view, explain why it may be advantageous for elected officials to have an independent Fed. Excel Problem: For this problem, you must calculate your answer using excel and upload the spreadsheet. 6. We are going to create a college student price index or Coffee & Beer Price Index (CBPI). The market basket includes goods on which college students spend their money: coffee, beer, tuition, apartment rent and computer games. a.) The first job is to find the index values for these five goods. Go to the Bureau of Labor Statistics web page (www.bls.gov) to get the December index value for each of these goods for the last 5 years (2011‐2015). Note: computer games is a part of the category “computer software”. b.) Next you can calculate the inflation rate for each of the last 4 years (2012‐2015). c.) Next we need to find the quantities of these goods in order to construct the proper weights of each good. Go to the Bureau of Economic Analysis (www.bea.gov) to get GDP figures for each of these goods for 2013. Use NIPA table 1.5.5 and search for the following items: For Coffee assume 1% of “all food purchased for off premises use”; For Beer assume 5% of “food service and accommodations”; For Rent use 75% of “housing services”; For Tuition use 10% of “other services”. d.) Now we must recognize that the quantities from part (b) are for the entire economy. But we are interested in quantities for just college students. So we need to adjust these quantities. Obviously, tuition is all paid by college students (or their parents). Assume that college students purchase half of all coffee, two thirds of all beer, 10% of all rent and 90% of computer games. Show the quantities consumed by college students for 2013. e.) Calculate the weights of each good. First add up all the expenses of college students – your amounts from part (c). Then to get the weight for tuition divide the tuition amount by the sum. Repeat this for each of the other four goods. When you are finished your five weights should add up to one (1). f.) Calculate the average inflation that a college student t faced for 2012‐2015. The inflation rate for tuition times its weight plus the inflation rate for coffee times its weight plus etc. g.) Finally calculate the CBPI index from 2011 to 2015 with 2013 as the base year. So the index amount for 2013 is 100 for 2014 it is: 100 * (1+π2014) = index2014. Be sure to use inflation as a decimal here (inflation of 5% is 0.05). Working backwards to find index2012 we use the same formula: index2012 * (1+π2013) = index2013 or index2012 = 100/(1+π2013).

h.) If a college student had $500 in 2012, how much would he have to have in 2014 to have equal purchasing power?

7．Let us regress to basic consumer choice from microeconomics class.

Scenario 1: You have $100. There are two goods, beer and pizza. The price of beer is $2 per mug. The price of pizza is $2 per slice. You must spend all of your money on these two goods. How many mugs of beer do you buy_______? How many slices of pizza do you buy______? Scenario 2: Now you have $200. There are two goods, beer and pizza. The price of beer is $4 per mug. The price of pizza is $4 per slice. You must spend all of your money on these two goods. How many mugs of beer do you buy_______? How many slices of pizza do you buy______?

Scenario 3: Now you have $200. There are two goods, beer and pizza. The price of beer is $8 per mug. The price of pizza is $4 per slice. You must spend all of your money on these two goods. How many mugs of beer do you buy_______? How many slices of pizza do you buy______?

Look at the quantity of pizza. How much did it change from Scenario 1 to Scenario 2? Why do you think this is the case? Now look at the quantity of pizza. How much did it change from Scenario 2 to Scenario 3? Why do you think this is the case?