ECONOMICS 202D: Introduction to Macroeconomics

 

marked on a scale of 500 points possible. Please provide comprehensive answers to each of the first four questions

given below; then you have your choice of any two of questions five through eleven. Generally speaking, your goal is to

demonstrate that you have thoughtfully and logically considered the materials which we have studied, both in the readings

and the classroom discussion.

NUMBER ONE {85 points}. Consider the USA macroeconomic data provided below. Describe the state of the macroeconomy in

terms of the business cycle for the period from 1996 to 1999.
[Source: Economic Report of the President 2003; Tables B-2, B-35, B-63].
real GDP real GDP inflation unemployment
growth rate rate (%) rate (%)
(1996 dollars) (%) (CPI-U) (civilian labor force)
1995 $7.544 trillion +2.67% 2.8% 5.6%
1996 $7.813 trillion ? 3.0% 5.4%
1997 $8.160 trillion ? 2.3% 4.9%
1998 $8.509 trillion ? 1.6% 4.5%
1999 $8.859 trillion ? 2.2% 4.2%

NUMBER TWO {85 points}. Imagine a hypothesized macroeconomy that begins in its long-run equilibrium position.
Use the Aggregate Demand – Aggregate Supply model to describe in the abstract, the business cycle movements this

economy would experience if:
(A) there were a large exogenous decrease in Aggregate Demand.
(B) there were a large exogenous decrease in Long-Run Aggregate Supply.
(C) both (A) and (B) were to occur simultaneously.
Does this model describe the US recession of 2008-2009? Which of the threes variants (A), (B), or (C) is the most

likely correct scenario? Explain.

NUMBER THREE {85 points}. Is Nigeria a rich nation or a poor nation? Based upon it’s macroeconomic statistics, would

you say Nigeria is performing better, worse, or same as a comparable nation? What would be an appropriate nation for

comparison? Explain. What are the key elements in the natural resource endowment and in the social-political-economic

institutions which explain the macroeconomic position of Nigeria and of the performance of Nigera’smacroeconomy?

ECONOMIC STATISTICS FOR NIGERIA (2014 est)

total GDP (in Purchasing Power Parity) = $1,058 b. – – – ranked 21st largest in the world (out of 230 nations ranked)
(up from $989 b. in 2013)

GDP per capita = $6,100 – – – ranked 160th highest in world (159 out of total of 230 nations)
(up from $5,800 in 2013)

real GDP growth rate = +7.0% – – – ranked 19th highest in world (out of 222 nations)
(up from +5.4% in 2013)

Unemployment Rate = 23.9% (2011 estimate) – – – ranked 171st lowest in world (out of 204 nations)

Inflation Rate = 8.3% – – – no ranking available
(down from 8.5% in 2013)

Distribution of family income – Gini index = 43.7 (in 2003) – – – ranked 47th most unequal in the world (out of 141

nations)
(down from 50.6 in 1997)

Government Budget surplus (+) or deficit (-) =
-2.0% of GDP – – – ranked 149th lowest surplus out of 215 nations)
{note: revenues of $22.77 b. minus expenditures of $34.62 b. = deficit of $11.85 b.}

Public Debt = 11.7% of GDP – – – ranked149th highest in world (out of 164 nations)
(up from 10.5% in 2013)

Exports = $93.01 b. – – – ranked 43rd largest in world (out of 223 nations)
(down from $96.74 b. in 2013)

Imports = $52.59 b. – – – ranked 54th largest in world (out of 223 nations)
(up from $51.38 b. in 2013)

Population below poverty line = 70.0% (in 2010)
poverty line standard is set by Indian government

[source: CIA WORLD FACTBOOK: www.cia.gov]

worldwide median values in 2014:

total GDP (in Purchasing Power Parity) = $34.48 b. (Laos – – – ranked 116th largest out of 230 nations)

GDP per capita = $12,700 (South Africa – – – ranked 115th highest out of 230 nations)

real GDP growth rate = +3.0% (Jordan – – – ranked 112th highest out of 222 nations)

Unemployment Rate = 8.8% (Ukraine – – – ranked 103rd lowest out of 204 nations)

Inflation Rate = no ranking available

Distribution of family income –
Gini index = 38.0(Serbia in 2013 – – – ranked 71st most unequal out of 141 nations)

Government Budget surplus (+) or deficit (-) = -2.8% of GDP (United States of America – – – ranked 108th lowest surplus

out of 215 nations)
{note: revenues of $3,029 b. minus expenditures of $3,520 b. = deficit of $491 b.}

Public Debt = 44.3% of GDP (Honduras – – – ranked83rd highest out of 164 nations)

Exports = $5.67 b. (Cuba – – – ranked 112th largest out of 223 nations)

Imports = $8.081 b. (Zambia – – – ranked 111th largest out of 223 nations)

 

NUMBER FOUR {85 points}.Consider the recent report “The Employment Situation – April 2015” – released Friday 5-8-15) by

the U.S. Department of Labor:
http://www.bls.gov/news.release/pdf/empsit.pdf
According to the Bureau of Labor Statistics, the national unemployment rate“was essentially unchanged at

5.4percent”from March to April 2015. Where does this information place the performance of the U.S. macroeconomy? From

these basic unemployment rate figures can we be confident that the economy has fully recovered from the recession of

2008-2009 and is moving towards a prosperous expansion? What figures in the report (or that you can find elsewhere)

might provide the basis for an argument to the contrary? Explain.

YOUR CHOICE OFANY TWO OF THESE:

NUMBERFIVE {80 points}. In the period preceding the 1960 Presidential election, the economy was performing sluggishly.

In one of the closest elections in U.S. history, the Democratic John Kennedy defeated the Republican, sitting

Vice-President Richard Nixon. Following the election, the economy seemed to gather momentum. Yet in March 1962 the

stock market experienced a major correction. Policy advisors surrounding the President urged that legislation be enacted

providing a significant tax cut, with cuts in corporate tax rates and reductions in the overall progressivity of the

income tax schedules. These “Kennedy Tax Cuts,” enacted prior to the 1962 Congressional elections, provided a major

stimulus to the U.S. macroeconomy and began one of the longest periods of sustained real economic growth in the twentieth

century.
Use the Aggregate Demand – Aggregate Supply model to describe the business cycle the U.S. macroeconomy has

experienced during the early to middle 1960s.
NUMBER SIX {80 points}. What caused the recession of 2008? Examining some macroeconomic statistics describing the

current situation of the U.S. economy, in your estimation, have we recovered from the 2008-2009 downturn, and are we in

an expansionary phase towards new times of prosperity?
Prominent Keynesian economists, both inside and outside of official government positions, advocate using aggressive

monetary and fiscal policies to “re-flate” (i.e. eliminate “deflation”) the sluggish economy. Would such policies be

wise and effective? Explain.
NUMBERSEVEN {80points}. Following his 1976 victory over Nixon’s successor Gerald Ford [REP-Michigan], Jimmy Carter

[DEM-Georgia] inherited an economy with relatively high unemployment and inflation problems. President Carter’s economic

advisors recommended a number of Keynesian remedies, and for a few years things looked to be improving. But in 1979, the

malaise of the mid-1970s had become “stagflation.” A militant U.S. Congress asserted its authority against the

President, while a number of foreign policy crises added to America’s woes. In an effort to control inflation, Paul

Volcker was appointed Chair of the Federal Reserve Board of Governors. Things did not look good for the President as he

sought re-election against his opponent former movie actor and California Governor Ronald Reagan.
Use the Aggregate Demand – Aggregate Supply model to describe the business cycle the U.S. macroeconomy has experienced

during the late 1970s and into 1980.
NUMBEREIGHT {80 points}. In class we discussed the average length of time of business cycles in recent U.S.

macroeconomic history as presented by the NBER. For the postwar era (since 1945), the NBER reports that the average

length of time from Trough to Peak (the expansionary phase) is 58 months, and the average length of time from Peak to

Trough is 11 months. Our slightly improved calculations on the NBER data indicated:
Trough Peak to
to Peak Trough
mean 58.4 months 11.1 months
median 39 months 10 months
standard deviation 28.7 months 3.0 months

Discuss the idea of calculating the average length of timing (the “periodicity”) of business cycles. To what extent

is the business cycle periodic? The NBER dates the last Trough as June 2009, after which the economy was officially “in

expansion.” Is this information useful in predicting when the next Peak will occur?, the next Trough?, etc. how long

these current phases will last? Explain. Suggest how the macroeconomic “business cycle” idea might be improved.
NUMBER NINE {80 points}.Consider the recent macroeconomic history of the USA. It would appear that, in spite of the

aggressive expansionary pace of monetary policy, the economy has evidenced only a sluggish recovery. Does the Quantity

Theory of Money and the Equation of Exchange provide any insight into the current ongoing US macroeconomic doldrums (if

that is what they are)? Or, is this theory largely broken and ineffective at explaining inflation and real economic

growth? Explain. [Sources: bls.gov and bea.gov. and FRED.gov]
realGDP Money supply
growth Inflation (M2) growth
rate rate rate

2007 +1.778% +2.85% +5.670%
2008 -0.0291% +3.84% +10.300%
2009 -2.776% -0.36% +2.258%
2010 +2.532% +1.64% +4.479%
2011 +1.602% +3.16% +10.203%
2012 +2.321% +2.07% +7.587%
2013 +2.219% +1.46% +5.603%
2014 +2.387% +1.62% +6.010%
2015 -1.38%*
*projected

NUMBER TEN {80 points}.Discuss the use of aggressive expansionary fiscal policy to stimulate the macroeconomy. When does

this type of policy move work the most effectively? Under what conditions – both in terms of macroeconomic fundamentals

and in terms of political institutions – is an expansionary fiscal policy likely to yield counterproductive and even

destructive results? Describe these negative outcomes and why they create long-run problems for society. Should

Congress admit that it is addicted to irresponsible over-spending and turn its legal political authority for making big

new discretionary fiscal policy moves over to an independent Federal Budget Authority?

ESSAY ELEVEN {80 points}. Speculate as to how the U.S. macroeconomy will perform over a time horizon of the next two to

five years. Use the Aggregate Demand – Aggregate Supply model to describe what business cycle movements you see

developing over this time. What structural shifts or shocks, either predicted or unforeseen, will be the most important

factors underlying the U.S. business cycle over the next five years? The United States will be having a Presidential

election in 2016, will this have any impact on the performance of the economy? Explain.

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