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UNIT 5 Economics Problems
Complete all three for u05a1

Problem 1   Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the unemployment rate?

Problem 2    If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? In contrast, suppose that the CPI was 110 last year and 108 this year. What is this year’s rate of inflation? What term do economics use to describe this second outcome?

Problem 3   Use the hypothetical economy data in the table below to answer the following questions.

Amount of Real GDP Demand, in Billions    Price Level
(Price Index)    Amount of Real GDP Supplied, in Billions
$180    300    $500
260    250    400
300    200    300
420    150    200
560    100    100

a) What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Use Excel to graph both the aggregate demand and aggregate supply curves. Can there be equilibrium level of output at below full employment?

b) At what price level will aggregate supply FALL BELOW [equal] aggregate demand? At what price level will demand fall below aggregate supply? If given a price level of 250, will aggregate demand exceed supply?

c) If the aggregate demand schedule shifted by $140 billion to the right at every level, what would be the new equilibrium level of income?

The Federal Reserve Bank’s Primary Role
This is the Transcript
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The Federal Reserve Bank’s Primary Role
Male Speaker
The Federal Reserve Bank manages the nation’s money supply, buying and selling government bonds adjusting interest rates. The Fed stimulates the economy by lowering interest rates to make money cheaper and borrowing and the spending easier. It slows the economy by making money more expensive and borrowing harder by raising interest rates. Occasionally, the Fed Chairman for many years, Alan Greenspan emerges from his temple and makes somewhat cryptic pronouncements about where he and his crew were trying to steer the economy.
Alan Greenspan
Or if that tended of indications that the contraction face of this business cycle is drawing to a close are ultimately confirmed. We will have experience a significantly milder down turn than the long history of business cycles would have led us to expect.
Male Speaker
Now, if you do not fully get this, you are hardly alone. But the basic problem is simple. How does the recourse between inflations and recession?
Franco Modigliani
He reminds me of a famous passage in the Odyssey that describes Ulysses trying to negotiate the passage between two rocks, two great dangerous rocks.
Male Speaker
In the Odyssey, one of these rocks harbored Zilla, a six-headed monster who like to eat pets and sailors. In our epic, Zilla represents the dangers of inflation and beneath the other rock Lake Charybdis, a ship sucking whirlpool. For us, it is the downward spiral of recession. We were at sea at number of years ago with two Noble price winning economists. The late Franco Modigliani sees it and Bob Solow who took a day from their vacation in ritzy Martha’s Vineyard, Massachusetts to explain the analogy between Ulysses passage through Zilla and Charybdis and the Federal Reserve chair’s job at the helm of the economy.
Robert Solow
And so he is trying to steer a course somewhere between those two things without coming between Zilla and Charybdis if you like it, without coming too close to either and certainly, without getting all the way into the whirlpool or into the sea monster.
Male Speaker
Like Ulysses, the Fed is forever navigating treacherous waters. In recent decades, the greater fear has been Zilla, the monster of inflation. Because inflation rubs innocent victims of their wealth threatens to devour them and the economy as a whole.
Franco Modigliani
There are many, many costs in society pieces when there is inflation.
Male Speaker
When inflation was high, people like our local charter captain for example, found that if they wanted to buy a boat, they would face the impossibly high interest payments that inflation brought. Those who wanted to by a house on shore, these double-digit mortgage rates and retirees on six pensions had to give up their dream of retiring to resorts like Martha’s Vineyard. Inflation turned around their expectations, reduced the value of their income and sent them home on the afternoon ferry.
Franco Modigliani
So, there are really big costs and the worst fact is that once you get in to get out of it, is very costly. If people think that view that inflation does not matter, then there is no end to inflation, because unless we make an effort, inflation does not stop by itself.
Male Speaker
But you see countries around the world, you are going to read in papers a thousand percent of inflation and the year and so forth, those countries still function, do not they?
Franco Modigliani
Oh, are they unhappy. You should be there and you will hear how people waste their time. In all kinds of revelations, Richard, you always have inflation, spending quickly, investing never having a bend in your pocket because it looses values.
Professor Jeffrey Sachs
Does the country know that?
Male Speaker
Some years ago, Professor Jeffrey Sachs saw the misery of inflation in first hand. In the South American country of Bolivia, several of whose politicians had taken a course with Sachs at Harvard.
Professor Jeffrey Sachs
That is really a relief because there was one pretty bad week two ways back.
Male Speaker
When Sachs was higher, Bolivia was in turmoil, to a largely to rampant inflation.
Professor Jeffrey Sachs
Prices were doubling almost every month and there were huge stocks of currency to make any transaction. The first thing I saw when I arrived in La Paz was an old man counting out 30,000 pesos to buy a piece of chewing gum.
Male Speaker
In the 1980s, Bolivia’s annual inflation rate reached 50,000%, one of the highest in recorded history. To an economist, the reason was obvious.
Professor Jeffrey Sachs
It is large. Everywhere you turn around that its money printing which drives the prices, there is nothing to subtle about it. So one tries to device policies that can help them in a short term, get away from the need to print money.
Male Speaker
So first, Sachs stopped the currency presses. He then advised the government to curb its deficit spending. On money losing, government runs tin mines for example, but tight economic policies like these create their own problem. The tin miners took to the streets to protest the fact that they were about to be unemployed.
Back in the U.S., when the Federal Reserve fears that the Zilla of inflation is about to rear its ugly head here, it comes about. Clamps down on the money supply, and set sail in the direction of a slower economy, but then the danger is that we will get sucked into the Charybdis of recession.
Robert Solow
If you go too far, if you steer too hard in that direction, then you get forces which begin to pull the economy down. That is the Charybdis whirlpool. A little bit of recession creates a little pressure from your recession. My business is bad. I buy a fewer materials. I lay off workers. They cannot spend incomes they do not have. My suppliers find that they are loosing money and that can accumulate too.
Male Speaker
In short, if a country Central Bank like the Fed comes down too hard on inflation, it can slow the economy in ways that could make it hard to revive. That what happened in Bolivia which is barely grown at all in the years since Jeffrey Sachs helped with inflation there. A similar pattern repeated itself in Indonesia, in Argentina and the less drastically has trapped the history of the United States. And if you think the inflation makes people unhappy, just look at unemployment.
Greg LeRoy
It is a typical to have higher rates of stress related disease like cardiovascular problems, heart attacks, high blood pressure, ulcers, alcoholism, cirrhosis the liver. All those have been shown in the higher incidence among to just chronically unemployed dislocated workers.
Male Speaker
A sailor tries to steer a middle course like keeping an eye on which way the wind is blowing, watching for dangerous cross coast, standing the sky for storm clouds ahead. So, too the Fed chairman on his Odyssey consults a variety of economic data and trend.
Alan Greenspan
Complex nature of the economy and the chance of fault signals demand that we cast our net broadly gathering information on prices, real activity, financial and foreign exchange markets and related data.
Male Speaker
As our economist point out even after years of low inflation, we ignore it at our peril so to recession.
Robert Solow
You have to worry about both of them. The big mistake is to concentrate on only one thing. Of course, there are extreme times in the bottom of a deep recession you do not worry about inflation. If you are all way over on the suicide, you have eyes only for Charybdis and vise versa. It is when you are going down the middle that you have to keep looking one side or the other.
Male Speaker
And so that is what we are always helping, that the Fed can guide us safely through these dire straits to the land of low inflation and the continued growth with no recession in sight.
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