Prof. Janis KaplerPublic Policy 622, Part II Department of Economics Spring 2006

ECONOMICS FOR POLICY ANALYSIS: MACROECONOMICS

Problem Set #1

INSTRUCTIONS: The assignment is due March 27. For work with equations, please show your work, meaning the equations you use and what values you plug into them. Please keep a copy of the assignment when you hand in the original, so we may discuss them in class as necessary. Where explanations are required, they should be brief and addressed to a non-economist policy maker.

  1. Multiplier model:

C=500+.5Yd T=600 I=300 G=2000

(a)Solve for equilibrium GDP and graph the solution.

(b)Demonstrate mathematically that total national saving equals total national investment at your solution for (a).

(c)How much of an increase in I would be needed to increase equilibrium GDP by $1000? Graph the solution.

(d)Start with the original equilibrium. The government wants to increase spending for hurricane clean-up, but does not want the budget deficit to get worse. Government decides to increase government purchases AND taxes by $200 each. What will happen to equilibrium GDP?

2. Multiplier model: Assume the simple economy (and world) of chapter 3, in which there is no inflation and little worry about budget deficits. Graph and explain the likely effects of a decline in consumer confidence. What positive role is there here for fiscal policy? Explain what could be done, why, and how it would likely affect the economy. Demonstrate your fiscal solution on your graph.

  1. Nominal and real values: Download Tables B47 and B60 from The Economic Report of the President 2006 to help you answer the following questions.

(a)Using the Consumer Price Index (CPI), calculate the real (1982 dollars) hourly manufacturing wage in the US in 1973, 1994, 1999 and 2005.

(b)How much (%) did medical care prices and food prices rise between 1973 and 2005? How much did the nominal hourly manufacturing wage rise? How much did overall consumer prices rise (CPI)?

(c)Briefly explain the meaning of your results above to a person who is not familiar with the real/nominal values issue.

Problem Set #2

INSTRUCTIONS: The assignment is due April 24. For work with equations, please show your work, meaning the equations you use and what values you plug into them. Please keep a copy of the assignment when you hand in the original, so we may discuss them in class as necessary. When explaining your IS-LM graphs, please use prose instead of the symbols I used in class.

  1. On pp. 85-87 of the textbook, complete problems numbered 2,3,4 and 11.
  1. On pp. 111-12 of the text,complete problems numbered 4, 7,8, and 9a,b,c.
  1. From the 2003 comprehensive exam: Analyze the economic impacts of the following scenario [include an IS-LM graph and analysis]:

a)What would be the effect on the economy of large cuts in Medicaid spending at the federal level? In order to keep the analysis focused on federal fiscal effects, without the complications of state budget effects, assume here that the state portion of Medicaid spending is unchanged, that is, states spend the same amount of state dollars, so total Medicaid spending falls by the amount of the federal cuts. Also assume no other changes in federal spending or taxes. [Skip the next part until we’ve done AS-AD.] Does it matter if the economy is in recession, as it is now? How would the impacts differ if the economy was not in recession, but instead was operating above the natural rate of output?

INSTRUCTIONS: The assignment is due May 15 no later than 5 pm. P When explaining your graphs, please use prose instead of the symbols I used in class.

  1. From the 2003 comprehensive exam: Analyze the economic impacts of the following scenario [include an AS-AD graph and analysis]:

b)What would be the effect on the economy of large cuts in Medicaid spending at the federal level? In order to keep the analysis focused on federal fiscal effects, without the complications of state budget effects, assume here that the state portion of Medicaid spending is unchanged, that is, states spend the same amount of state dollars, so total Medicaid spending falls by the amount of the federal cuts. Also assume no other changes in federal spending or taxes. Does it matter if the economy is in recession, as it is now? How would the impacts differ if the economy was not in recession, but instead was operating above the natural rate of output?

2. From the 2004 comprehensive exam: Individuals and society have much at stake in education. Proponents of charter schools (and school choice generally) argue that they will improve the quality of education. What role does education play in economic growth and what macroeconomic impacts might charter schools have if advocates are correct?

3. Do problems 7 and 8 on p. 162.

  1. (a) AS-AD PROBLEM: Explain and show a recession with Y less than the natural level, and the medium run adjustment assuming no policy changes.

(b) AS-AD PROBLEM: Explain and show a recession with Y less than the natural level, and the medium run adjustment due to an immediate monetary expansion designed to combat the recession.

(c) Explain the different outcomes.