Ch#2(review questions)

Q5:
The BLS uses the respondents' answers to divide people into three
categories: 1) employed--someone who currently has a job; 2) out of the
labor force--someone who doesn't have job right now but is not actively
looking for a job; or 3) unemployed--someone who does not have a job now
and is actively looking for a job. In general, the unemployment rate in the
United States is obtained by dividing the number of unemployed persons by
the number of persons in the labor force (employed or unemployed) and
multiplying that figure by 100.
Q6: First measurement of total employment is coming from household
survey and with that we get number of people who state that they are
working. The second is, establishment survey, that includes people who
are on firms payroll and excludes people who are, for example, self-
employed.
PROBLEMS:
Q10: As Senator Robert Kennedy pointed out, GDP is an imperfect measure of
economic performance or well-being. In addition to the left-out items that
Kennedy cited, GDP also ignores the imputed rent on durable goods such as cars,
refrigerators, and lawnmowers; many services and products produced as part of
household activity, such as cooking and cleaning; and the value of goods
produced and sold in illegal activities, such as the drug trade. These imperfections
in the measurement of GDP do not necessarily reduce its usefulness. As long as
these measurement problems stay constant over time, then GDP is useful in
comparing economic activity from year to year. Moreover, a large GDP allows us
to afford better medical care for our children, newer books for their education,
and more toys for their play. Finally, countries with higher levels of GDP tend to
have higher levels of life expectancy, better access to clean water and sanitation,
and higher levels of education. GDP is therefore a useful measure for comparing
the level of growth and development across countries.
Q11: a) Real GDP falls because Disney does not produce any services while it is
closed. This corresponds to a decrease in economic well-being because the
income of workers and shareholders of Disney falls (the income side of the
national accounts), and people’s consumption of Disney falls (the expenditure
side of the national accounts).
b) Real GDP rises because the original capital and labor in farm production now
produce more wheat. This corresponds to an increase in the economic well-being
of society, since people can now consume more wheat. (If people do not want to
consume more wheat, then farmers and farmland can be shifted to producing
other goods that society values.)
c) Real GDP falls because with fewer workers on the job, firms produce less. This
accurately reflects a fall in economic well-being.
d) Real GDP falls because the firms that lay off workers produce less. This
decreases economic well-being because workers’ incomes fall (the income side),
and there are fewer goods for people to buy (the expenditure side).
e) Real GDP is likely to fall, as firms shift toward production methods that produce
fewer goods but emit less pollution. Economic well-being, however, may rise. The
economy now produces less measured output but more clean air; clean air is not
traded in markets and, thus, does not show up in measured GDP, but is
nevertheless a good that people value.
f) Real GDP rises because the high-school students go from an activity in which
they are not producing market goods and services to one in which they are.
Economic well-being, however, may decrease. In ideal national accounts,
attending school would show up as investment because it presumably increases
the future productivity of the worker. Actual national accounts do not measure
this type of investment. Note also that future GDP may be lower than it would be
if the students stayed in school, since the future work force will be less educated.
g) Measured real GDP falls because fathers spend less time producing market
goods and services. The actual production of goods and services need not have
fallen, however. Measured production (what the fathers are paid to do) falls, but
unmeasured production of child-rearing services rises.

CHAPTER 3
Review questions:
Q8: When the government raises taxes, families have less money to spend. Tax
increases result in a drop in consumption.
Increased taxes, which resulted in a drop in spending, must be followed by a rise in
investment, but this requires lowering interest rates as well. As taxes are raised,
consumption falls, resulting in a drop in output/income. The demand for money is
reduced as income falls. When the supply of money is fixed, the interest rate must fall in
order to preserve equilibrium by increasing the demand for money.
Therefore there is fall in consumption and interest rates followed by increase in
investment due to increase in taxes. Increase in taxes lead to fall in consumption.

PROBLEMS:

Q10: Solution:
a.). In this economy, compute private savings, public savings, and national savings.
National savings=Y−C−G
=5000-(250+0.75(5000-1000) ) -1000 = 750

Private savings=Y−T−C
=5000-1000-(250+0.75(5000-1000) ) = 750

Public savings=T−G
=1000-1000 = 0

b.). Find the equilibrium interest rate:

Find Total Savings (S):

S=Private saving+Public saving

=750+0 = 750
S=I
750=1000-50r
50r = 1000-750
50r=250
r=250/50 = 5
The equilibrium interest rate (r) =5

c.). Now suppose that G rises to 1,250. Compute private saving, public saving,
and national saving.
National savings=Y−C−G
=5000-(250+0.75(5000-1000) ) -1250 = 500
Private savings=Y−T−C
=5000-1000-(250+0.75(5000-1000) ) = 750

Public savings=T−G
=1000−1250=−250
d.). Find the new equilibrium interest rate:
Total Savings(S)=Private savings +Public savings
=750+(−250)=500
S=I
500 = 1000 -50r
50r=1000-500
50r=500

r= 500/50 = 10
The new equilibrium interest rate = 10

Q11:
To find what happens to investment if we increase taxes and government spending
equally, we use the national income accounts identity. National saving is equal to
private plus public saving.
=[Y – T – C(Y – T)] + [T – G]
We should note that Marginal propensity to consume (MPC) multiplied by the change in
disposable income, equals the change in consumption as shown below.
∆National saving = [– ∆T – (MPC × (– ∆T))] + [∆T – ∆G]
= [– ∆T + (MPC × ∆T)] + 0
= (MPC – 1) ∆T. Remember that ∆T = ∆G.
However, the effect on savings of an equal increment in T and G rest on size of
marginal propensity to consume. When MPC is closer to 1 the fall in saving is smaller.
For instance, assume MPC is equal to 1, then the decrease in consumption equals the
increase in government purchases and the national savings remain unchanged. When
the MPC is close to 0 the impact on savings is greater. Therefore, the national savings
should fall due to an equal increase in taxes and government spending. The decrease
in savings means that a shift to the left by the supply of loanable funds curve.
Investment falls and real interest rate rises.
Q12:
1.

When the government decides to provide a tax credit for business investment then
it will provide an incentive to the investors to invest more for business purposes
due to higher net Returns and therefore leading to a rightward shift in the demand
curve for business investment.
2.
Such economic policy by the government is expected to result in a rightward shift in
the demand curve for loanable funds and therefore leading to a fall in the
equilibrium interest rate level accompanied by an increase in the equilibrium
amount of loanable funds in the economy.

3.
In comparison to the initial state of the economy in comparison to the alteration
bought by the government economic decision, the total quantity of investment
(business investment) is higher in the latter case in comparison to the former.

Q13: