Homework Essay

1. The Bureau of Labor Statistics announced that in April 2010, of all adult Americans, 139,455,000 were employed, 15,260,000 were unemployed, and 82,614,000 were not in the labor force. Use this information to calculate:

a. the adult population = employed+unemployed+not in the labor force=237329000 b. the labor force = employed+unemployed=154715000
c. the labor-force participation rate = (labor force/adult population) x 100= 65.2% d. the unemployment rate = (unemployed/labor force) x 100= 9.9%

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2. Go to the website of the Bureau of Labor Statistics (http://www.bls.gov). What is the national unemployment rate right now? Find the unemployment rate for the demographic group that best fits a description of you (for example, based on age, sex, and race).

Is it higher or lower than the national average? Why do you think this is so?

National unemployment rate right now is 7.3

Unemployment rate for the demographic group that best fits a description of me: Adult men (20 years and over) is 7.0 and this rate is lower than National unemployment rate.

The reason of 20 years and over unemployment rate is lower than National unemployment rate: because 20 years and over group does not cover all nation.

There are also another people at between 16 and 20 years old labor force.

4. Economists use labor-market data to evaluate how well an economy is using its most valuable resource—its people. Two closely watched statistics are the unemployment rate and the employment-population ratio. Explain what happens to each of these in the following scenarios. In your opinion, which statistic is the more meaningful gauge of how well the economy is doing?

a. An auto company goes bankrupt and lays off its workers, who immediately start looking for new jobs. Employment-population ratio will fall and unemployment rate will rise. b. After an unsuccessful search, some of the
laid-off workers quit looking for new jobs. Unemployment rate will fall and the employment-population ratio will keep same. c. Numerous students graduate from college but cannot find work. Unemployment rate will rise and employment-population ratio will keep same. d. Numerous students graduate from college and immediately begin new jobs. Unemployment rate will fall and the employment-population ratio will rise. e. A stock market boom induces newly enriched 60-year-old workers to take early retirement. Unemployment rate will rise and employment-population ratio will fall. f. Advances in healthcare prolong the life of many retirees. Advances in health care that prolong the life of retirees will not affect unemployment rate and will lower the employment-population ratio.

Chapter 11: The Monetary System

8. Suppose that the T-account for First National Bank is as follows:

Assets
Reserves $100,000
Loans 400,000

Liabilities
Deposits $500,000

a. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold? (500,000*0.05)=25,000$
Current Reserves= $100,000
So Answer is (100,000-25,000)=75,000$

b. Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economy’s money supply increase? Money multiplier is 1/(0.05) = 20

If First National lends out its excess reserves of 75,000$, the money supply will eventually increase by (75,000*20) = 1,500,000$

9. Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves.

a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s reserves and money supply? Money multiplier is 1/(0.1) = 10
If the Fed sells 1M$ of bonds, reserves will decline by 1M$ and the money supply will contract by 10*1M$ = 10M$

b. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions? Banks wish to hold excess reserves. Because they need to hold the reserves for paying other banks for customers’ transactions, cashing paychecks, making changes, etc… Result of these actions shows that there is no effect on the money supply and the money multiplier does not change.

10. Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier? What is the money supply?

Money multiplier is 1/(0.10) = 10.
Money supply is 10*(100 billion $) = 1,000 billion $
b. If the Fed now raises required reserves to 20 percent of deposits, what are the changes in reserves and in the money supply? Money multiplier declines to 1/(0.20) = 5
Money supply would decline to $500 billion. So, Reserves would be unchanged.

Chapter 12: Money Growth and Inflation
6. Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2010, the price of beans was $1, and the price of rice was $3.

a. Suppose that in 2011 the price of beans was $2 and the price of rice was $6. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita? Inflation is 100%

Cost of the market basket is NOW 3+1= 4$ and becomes 6+2= 8$ in the SECOND year Rate of inflation is (8$−4$)/4$*100% = 100%
So farmers get a 100% increase in their incomes to go along with the 100% increase in prices, Because of that neither is affected by the change in prices.
b. Now suppose that in 2011 the price of beans was $2 and the price of rice was $4. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita? Assume that, Price of beans rises to 2$ and the price of rice rises to 4$ Then cost of the market basket in the second year will be 6$ So new inflation rate is (6$−4$)/4$*100% = 50%

Bob is better off because his dollar revenues increased 100% while inflation was only 50% Rita is worse off because inflation was 50% percent, so the prices of the goods she buys rose faster than the price of the rice that she sells, which rose only 33%

c. Finally, suppose that in 2011 the price of beans was $2 and the price of rice was $1.50. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita? Assume that Price of beans rises to 2$ and the price of rice falls to 1.50$ New cost of the market basket in the second year is 3.50$

New inflation rate is (3.5$−4$)/4$*100% = -12.5%
Bob is better off because his dollar revenue increased 100% while prices overall fell 12.5% Rita is worse off because inflation was -12.5%, so the prices of the goods she buys didn’t fall as fast as the price of the rice that she sells, which fell 50%.

d. What matters more to Bob and Rita—the overall inflation rate or the relative price of rice and beans? Relative price of rice and beans effects more to Bob and Rita than the overall inflation rate. If the price of the good that a person produces rises more than inflation, that person will be better off. If the price of the good a person produces rises less than inflation, that person will be worse off. 7. If the tax rate is 40 percent, compute the before tax real interest rate and the after-tax real interest rate in each of the following cases.

a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent. Before tax real interest rate; 10-5 =5
Nominal interest rate after tax; 10*(1- 0.40) = 6
Real interest rate after tax; 6-5 =1

b. The nominal interest rate is 6 percent, and the inflation rate is 2 percent. Before tax real interest rate; 6-2 = 4
Nominal interest rate after tax; 6*(1-0.40) = 3.6
Real interest rate after tax;3.6-2 = 1.6

c. The nominal interest rate is 4 percent, and the inflation rate is 1 percent. Before tax real interest rate; 4-1 =3
Nominal interest rate after tax; 4*(1-0.40) = 2.4
Real interest rate after tax;2.4 -1 = 1.4

12. Explain whether the following statements are true, false, or uncertain.

a. “Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.” This statement is FALSE.
Higher expected inflation means borrowers pay a higher nominal rate of interest, but it is the same real rate of interest, so borrowers are not worse off and lenders are not better off. Higher unexpected inflation, on the other hand, makes borrowers better off and lenders worse off.

b. “If prices change in a way that leaves the overall price level unchanged, then no one is made better or worse off.” This statement is FALSE.
Changes in relative prices can make some people better off and others worse off, even though the overall price level does not change.

c. “Inflation does not reduce the purchasing power of most workers.” This statement is TRUE. Most employees’ incomes keep up with inflation reasonably well.

Chapter 13Open Economy Macroeconomics – Basic Concepts

7. What is happening to the U.S. real exchange rate in each of the following situations? Explain.

a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad. Real exchange rate rises.

b. The U.S. nominal exchange rate is unchanged, but prices rise faster abroad than in the United States. Real exchange rate declines.

c. The U.S. nominal exchange rate declines, and prices are unchanged in the United States and abroad. Real exchange rate declines.

d. The U.S. nominal exchange rate declines, and prices rise faster abroad than in the United States. Real exchange rate declines.

10. A case study in the chapter analyzed purchasing power parity for several countries using the price of Big Macs. Here are data for a few more countries:

Country Price of a Big Mac Predicted Exchange Rate Actual Exchange Rate Chile 1,750 pesos _____ pesos/$ 549 pesos/$ Hungary 720 forints _____ forints/$ 199 forints/$ Czech Republic 67.9 korunas _____ korunas/$ 18.7 korunas/$ Brazil 8.03 real _____ real/$ 2.00 real/$ Canada 3.89 C$ _____ C$/$ 1.16 C$/$

a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall that the U.S. price of a Big Mac was $3.57.) Chile: 1,750/3.57 = 490.196 pesos/$
Hungary: 720/3.57 = 201.680 forint/$
Czech Republic: 67.9/3.57 = 19.019 koruna/$
Brazil: 8.03/3.57 = 2.249 real/$
Canada: 3.89/3.57 = 1.089 C$/$

b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian forint and the Canadian dollar? What is the actual exchange rate? Under purchasing-power parity, the exchange rate of the Hungarian forint to the Canadian dollar is 720 forints per Big Mac divided by 3.89 Canadian dollars per Big Mac equals 185.089 forints per Canadian dollar. The actual exchange rate is 199 forints per dollar divided by 1.16 Canadian dollars per dollar equals 171.551 forints per Canadian dollar.

c. How well does the theory of purchasing power parity explain exchange rates? The exchange rate predicted by the Big Mac index (185.089 forints per Canadian dollar) is somewhat close to the actual exchange rate of 171.551 forints per Canadian dollar.ф

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