Discussion Topic

Calculate the value for this economy's nominal GDP in year 1, year 2, and year 3. Calculate the value for this economy's real GDP in year 2 and the values for this economy's GDP deflator in year 1 and year 2. Calculate the value for this economy's real GDP in year 3

5 Figure 1: Research and Development (R&D) expenditures as a percentage of Gross National Product (GNP) Given the data above, how would you rank the countries above in terms of predicted future real GDP per capita growth? Explain your answer.

Calculate the cost of a bundle with 100 units of good A, 200 units of good B, and 100units of good Z for 2017, 2018, and 2019 using the prices shown in the table 1.a. Then convert the results into an index for each year using 2017 as the base year.(Calculate total spending and price index for 2017, 2018 and 2019.) Calculate the percentage rate of change of the price level from 2018 to 2019 and from 2017 to 2018. Now suppose that the base year is 2019. Recalculate the price index for 2017, 2018, and 2019. Using the index with the 2019 base year, calculate the percentage rate of change of the price level from 2018 to 2019 and from 2017 to 2018.

6. Real and nominal interest rates (2 MARKS) (Maximum length: half-page) Figure 1 shows the trend in real rates for the Federal Funds rate in the US (equivalent to the short- run money market interest rate) from 1956-2010. Why are the real rates sometimes negative? Use the Fisher Equation and speculate about how short-run output gaps over that period might have led to temporarily negative real interest rates.

1. TRUE/FALSE/MAYBE and EXPLAIN: (2 MARKS). (Maximum length: half-page) "The Aggregate Expenditure (A) model is a short-run model. The Solow-Swan model is a long-run model. Yet both assume that there are no "idle funds", i.e. any funds not consumed are saved and automatically funneled into investment. How can this be possible given that there can be output gaps in the short run?"

For each of following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. a) An easing of monetary policy by the Reserve Bank (a downward shift in the policy re- action function)

3. TRUE/FALSE/MAYBE and EXPLAIN: (4 MARKS). (Maximum length: one page) "A government sells a large amount of new bonds to finance an immediate cut in personal income taxes. According to the Loanable Funds and Money Market models this will lower short- and long-run real interest rates (ceteris paribus)."

Students should post a short, relevant essay related to that week's material: it should open with a thesis, briefly defend that thesis, and have a useful title. You may write an essay about anything related to this week's material, so you do not need to respond one of my prompts. If your post does originate as an answer to one of my questions, write it as a standalone essay (i.e. leave out the question that motivated it). You are encouraged to link to relevant articles or videos from outside of class. Please respond to your peers' posts by either agreeing or disagreeing with them while presenting a new idea, anecdote, or data point. Disagreement is fine, but please do so respectfully and remember we're discussing ideas not people.

• If government increases government spending by $100 million and increases tax by $100 million so that the fiscal deficit does not increase, what happens to GDP? (Hint: the conclusion is the same regardless the value of marginal propensity to consumer.)

3. Analytic Question on Consumption and Labor decisions during the Pandemic In this question we will study how workers change their labor supply. Imagine there is a consumer/worker with preference over consumption C and leisure & given by the equation below: U(C,) = log(C) + log(l) 1. Assume the consumer faces a wage rate of w and consumption price P. She also has one unit of available time to spend working or resting. Solve for the consumer's optimal choice of consumption and hours worked. 2. Now assume a pandemic hits the economy and the consumer receives more utility from leisure. We model this by changing the preferences to: U(C,) -log(C) + 0 log(l) 0 with > 1. Solve for the hours worked and consumption under these new preferences. Compute the elasticity of labor supply and consumption with respect to real wages. Compare your answer with the previous part (when 0-1). Does the consumer wants to work more or less? 3. The government wants to increase hours worked, and so it enacts a law that includes a subsidy on wages. This subsidy is proportional to labor income. Explain why the new budget constraint can be expressed as: PC = (1+7)w(1-0), where is the subsidy (with 7 > 0). Solve for the optimal hours worked and consumption and compare your answer with that of the previous question. What is the effect of this subsidy on hours worked? 4. Now the government wants to try a different fiscal policy. Instead, it creates a new lump-sum tax that the consumer has to pay regardless of income or consumption. Explain why the new budget constraint can be written as: PC w(1)-T, where T is the new lump-sum tax. Assume 0 <T<w and w is sufficient, large to have a positive consumption. Solve for hours worked and consumption. Compare with part 2. - 5. Imagine the government wants to choose the tax amount T such that the worker supplies exactly the same number of hours worked as in part 1. Find this tax amount. Assume < 1+0. Is the consumer better off? Relate your answer to the First Welfare Theorem, assuming the given prices clear markets in a competitive equilibrium.