Macroeconimic

1.  Suppose Covid-19 permanently closes thousands of restaurants and bars across the country and in so doing, permanently eliminates 500,000 jobs. Suppose Covid 19 also creates 500,000 new job openings at Amazon doing highly technical, computer-based supply-chain logistics and robotics. Focusing only on the hospitality workers who lost their job because of COVID-19 and the job openings at Amazon, which type of unemployment would increase? Explain.

2.    Nominal GDP in 2010 in the (made up) country of Druckeria was $2.0 billion and it was $3.0 billion in 2020.  Despite this, all of the citizens of Druckeria were unambiguously worse off in 2020.  How is that possible?  Give two ways that they could all unambiguously be worse off despite this growth in Nominal GDP.

3.  Suppose the unemployment rate is 10% this month and there are 20 million officially unemployed people.  Since last month’s unemployment report, 2 million people found jobs but 4 million unemployed people became discouraged and stopped searching.  If there were no other changes in the labor market, what was the unemployment rate last month?

4.  Suppose the Keynesian model had income taxes instead of the fixed taxes that we used in class (so now, Tx = tY where ‘t’ is the income tax rate).  What would happen to the Keynesian multipliers that we derived in class (bigger or smaller)? Intuitively, why?  Would business cycles be more or less pronounced (bigger or smaller booms and busts)? Would fiscal policy (government spending) be more or less powerful?

5.  Suppose the Federal Reserve sells bonds (undertakes Open Market Operations) when the economy is below full employment.  According to the Keynesian model and the usual effects of monetary policy, what would happen to consumption, investment, and government (rise, fall, not change)?  Briefly explain each of the changes you describe within the framework of the Keynesian model.  (Like ‘Consumption would rise because the model assumes that…..’) Would this policy on the part of the Federal Reserve be sensible if they were mostly worried about unemployment?  

6.  Suppose every time there was a demand-side recession, the government responded with increased spending programs (increase in G) and every time there was over-expansion (inflation caused by increase aggregate demand while the economy is at full employment) the government responded with decreases in the money supply.  What would the composition of the economy at full employment GDP (C + I + G) look like after a few recessions and over-expansions?  Why is that composition problematic for the economy in the long run (especially considering the Keynesian approach to government spending)?

7.  Suppose the chairman of the Board of Governors of the Federal Reserve, Jerome Powell, is much less interested in fighting inflation than his predecessors and more interested in making sure the economy is always or above full employment.  How would his approach to monetary policy likely affect long-term interest rates?  Explain.

8.  Our economy is composed entirely of farms and farmers. Suppose one quarter of the workforce got sick and couldn’t work this year.  How would this affect consumption and savings (or investment) this year according to the Supply-side model? The stock market in this economy represents shares of next year’s crop. How will this supply shock affect stock prices?

9.  If the government didn’t regulate markets, we could correct some externalities through litigation.  If air or water pollution by large corporations harmed us, we could sue the polluters for the damages.  There are at least two reasons why this is not a good substitute for government regulation.  One has to do with the impact that the externality needs to cause in order to file a lawsuit and get compensation and the other has to do with the financial resources that large firms have as opposed to individuals?  What are these two reasons for keeping government policies in place to control externalities?

10.  Suppose the economy is now below full employment and the Fed has undertaken massive, expansionary monetary policy. In the international version of the Keynesian model, how would each sectors of the economy (C, I, G, X, and M) change and why?  

1. Suppose Covid-19 permanently closes thousands of restaurants and bars across the country and in so doing, permanently eliminates 500,000 jobs. Suppose Covid 19 also creates 500,000 new job openings at Amazon doing highly technical, computer-based supply-chain logistics and robotics. Focusing only on the hospitality workers who lost their job because of COVID-19 and the job openings at Amazon, which type of unemployment would increase? Explain.

2. Nominal GDP in 2010 in the (made up) country of Druckeria was $2.0 billion and it was $3.0 billion in 2020. Despite this, all of the citizens of Druckeria were unambiguously worse off in 2020. How is that possible? Give two ways that they could all unambiguously be worse off despite this growth in Nominal GDP.

3. Suppose the unemployment rate is 10% this month and there are 20 million officially unemployed people. Since last month’s unemployment report, 2 million people found jobs but 4 million unemployed people became discouraged and stopped searching. If there were no other changes in the labor market, what was the unemployment rate last month?

4. Suppose the Keynesian model had income taxes instead of the fixed taxes that we used in class (so now, Tx = tY where ‘t’ is the income tax rate). What would happen to the Keynesian multipliers that we derived in class (bigger or smaller)? Intuitively, why? Would business cycles be more or less pronounced (bigger or smaller booms and busts)? Would fiscal policy (government spending) be more or less powerful?

5. Suppose the Federal Reserve sells bonds (undertakes Open Market Operations) when the economy is below full employment. According to the Keynesian model and the usual effects of monetary policy, what would happen to consumption, investment, and government (rise, fall, not change)? Briefly explain each of the changes you describe within the framework of the Keynesian model. (Like ‘Consumption would rise because the model assumes that…..’) Would this policy on the part of the Federal Reserve be sensible if they were mostly worried about unemployment?

6. Suppose every time there was a demand-side recession, the government responded with increased spending programs (increase in G) and every time there was over-expansion (inflation caused by increase aggregate demand while the economy is at full employment) the government responded with decreases in the money supply. What would the composition of the economy at full employment GDP (C + I + G) look like after a few recessions and over-expansions? Why is that composition problematic for the economy in the long run (especially considering the Keynesian approach to government spending)?

7. Suppose the chairman of the Board of Governors of the Federal Reserve, Jerome Powell, is much less interested in fighting inflation than his predecessors and more interested in making sure the economy is always or above full employment. How would his approach to monetary policy likely affect long-term interest rates? Explain.

8. Our economy is composed entirely of farms and farmers. Suppose one quarter of the workforce got sick and couldn’t work this year. How would this affect consumption and savings (or investment) this year according to the Supply-side model? The stock market in this economy represents shares of next year’s crop. How will this supply shock affect stock prices?

9. If the government didn’t regulate markets, we could correct some externalities through litigation. If air or water pollution by large corporations harmed us, we could sue the polluters for the damages. There are at least two reasons why this is not a good substitute for government regulation. One has to do with the impact that the externality needs to cause in order to file a lawsuit and get compensation and the other has to do with the financial resources that large firms have as opposed to individuals? What are these two reasons for keeping government policies in place to control externalities?

10. Suppose the economy is now below full employment and the Fed has undertaken massive, expansionary monetary policy. In the international version of the Keynesian model, how would each sectors of the economy (C, I, G, X, and M) change and why?