1. You win $10,000 in a lucky draw. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5% interest. What is the opportunity cost of spending the $10,000 now?

Two drivers – Joan and Rob – each drive up to a gas station. Before looking at the price, each places order. Joan says, “ I’d like 40 litres of gas.” Rob says, “I’d like $40 worth of gas.” What is each driver’s price elasticity of demand?

Suppose a government has been running large government deficits. In order to address these deficits, the government has decided to decrease its spending (G) and raise taxes (T). Using the complete Keynesian model, explain in as much detail as possible what will likely happen to the economy (including GDP, the interest rate, investment spending, any multiplier effects). Finally, under what conditions would GDP be less affected (e.g., high or low mpc, steep or flat money demand, steep or flat investment schedule)?

NFL-sponsored studies of the economic impact of the Super Bowl on host communities typically generate large numbers. They report the impact of the 1999 Super Bowl on the Miami area was $396 million. However, studies that compared January spending in six Super Bowl host cities to spending in those cities during a series of non Super Bowl years before and after the event found the net economic impact of a Super Bowl is virtually zero. EXPLAIN.

Further discuss how your answer may change for a Super Bowl in Seattle.

Suppose a government has been running large government deficits. In order to address these deficits, the government has decided to decrease its spending (G) and raise taxes (T). Using the complete Keynesian model, explain in as much detail as possible what will likely happen to the economy (including GDP, the interest rate, investment spending, any multiplier effects). Finally, under what conditions would GDP be less effected (e.g., high or low mpc, steep or flat money demand, steep or flat investment schedule)?

Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations? Imagine for a moment that you have two roommates, who each have opposing viewpoints on nearly everything, including politics and economics. Taylor is adamant that the best way to manage the economy is through tax changes, while Morgan insists that it’s better to adjust the economy through government spending. What would a Neoclassical economist say? What would a Keynesian economist say?

1. Suppose Country A is suffering from recession. The policy makers could increase the government spending to raise the output to end the recession. But such a policy could also cause a negative side effect on AD and therefore reduces the policy effectiveness. Explain.
2. Except raising government spending, adjusting interest rate might be an alternative. Recommend such an alternative policy to the government that is also suitable for the current situation of Country A. Illustrate one method that the government can use to change the interest rate, and to explain the way to which it helps to end the recession.

Suppose the U.S. Congress passes a budget which increases individual income

     taxes by $120 billion and increases infrastructure spending (airports, roads,

     bridges, etc.) by $50 billion. The increase in income taxes is concentrated at the top,

     so the tax increase causes personal consumption expenditures to fall by only $30

     billion. Use this information to answer the questions below. (20 pts)

            a. At constant interest rates (“other things equal”), what would these policy

                 changes do to national saving and domestic investment spending?

                        Change in S =

                        Change in I =

            b. Closed economy analysis: Assuming the U.S. financial system is closed to

                  international financial flows, draw an S/I diagram to illustrate the effect of

                  these policy changes on (1) U.S. interest rates and (2) the quantity of domestic

                  investment spending. Incorporate your numerical answers from part (a) into

                  your diagram.

-3-

            c. Open economy analysis: Now assume that the U.S. financial system is open

                 and that the U.S. is small enough in the global financial system that you can

                 ignore the effect of these policy changes on global interest rates. Draw an S/I

                 diagram to illustrate the effect of the policy changes on (1) U.S. net capital

                 flows and (2) domestic investment spending. When drawing your diagram,

                 assume that the U.S. would have had net capital inflow without the policy

                 changes.

1. What is the main difference between the Keynesian and Neoclassical approach to macro-equilibrium?

2. What are the corresponding Neoclassical and Keynesian policies to secure full employment equilibrium?

3. What are the components of aggregate spending? What are those components in a private closed economy?

4. What is disposable income?

5. Which is the main determinant of the consumption level? Describe the relationship.

6. What is Keynes’ ‘Fundamental psychological law’?

7. What is the marginal propensity to consume (MPC) and its formula? What is the marginal propensity to save (MPS) and its formula?

8. What is the slope of the consumption function?

9. What are the components and the equation of Keynes’ consumption equation?

10. Which are the main determinants of planned investment according to Keynes?

11. Describe the relationship between planned investment spending and the current income in the Keynes model. What is the shape of the investment curve?

12. Describe the relationship between government spending and the current income in the Keynes model.

13. Explain Keynes’ adjustment mechanism towards macro equilibrium when spending and output are not equal.

14. Define and illustrate graphically both the recessionary and the inflationary gap.

15. What is the condition for general equilibrium at full employment in Keynes’ model?

16. What is the inherent mechanism in Neoclassical theory that secures full employment macro-equilibrium? Does Keynesian theory have the same inherent mechanism?

Use the “Consumer Food” Database on “Excel Databses.xls”. As the researcher you are interested in predicting the annual food spending according to annual household income as well as a qualitative variable: location or region.

Link to data: https://drive.google.com/file/d/1YMYMy7H0sLRZJzXwFKMrANuAGxmp-z9I/view?usp=sharing

Please use excel and post step by step

Construct two regression models to predict annual food spending:

• Model 1: Food = b₀ + b₁Income + b₂Metro
• Model 2: Food = b₀ + b₁Income + b₂NE + b₃MW+ b₄S

NOTES:

• DO NOT: Print the data.
• DO: Only print the results of each model from Excel (i.e. Print the Summary Output, ANOVA, and Table of Coefficients from each model
• DO NOT: Include the residual output to turn in.

Must complete all the parts to this problem:

• PART 1: Output the results from Excel for Model 1.
• PART 2: Output the results from Excel for Model 2.
• PART 3: Write the model (estimated regression equation) using your output for Model 1. Then calculate the predicted annual food spending for a household outside the metro area that has $60,000 income.
• PART 4: Write the model using your output for Model 2. Then calculate the predicted annual food spending for a household that has a $35,000 income and is located in the South.

1. Fill in the blanks: Unemployment benefits act as an "automatic stabilizers" (at least from a Keynesian point of view) because they cause ___ to automatically go ___ when the economy starts to fall into a recession.

A) taxes ; up

B) government spending ; up

C) government spending ; down

D) taxes ; down

2. Fill in the blanks: Progressive taxation acts as an "automatic stabilizers" (at least from a Keynesian point of view) because it causes ___ to automatically go ___ when the economy starts to fall into a recession.

A) taxes ; up

B) government spending ; up

C) government spending ; down

D) taxes ; down

3. Discretionary fiscal policy may be subject to various lags. Which of the following best illustrates the "recognition" lag to discretionary fiscal policy?

A) Policymakers think a recession may be happening, but they decide not to take action until they are sure.

B) Policymakers are in the process of proposing policy measures to deal with a recession.

C) Policymakers agree to a policy, but it will be several months before the policy is implemented.

D) Policymakers implement a policy, but it will be several months before it starts working.

E) Policymakers implement a policy that works, but they don’t receive the recognition they deserve.

4) Fill in the blanks: A "recession" is a period of time when unemployment is ____, employment is ____, and GDP is ____.

A) high; low; low

B) low; high; low

C) low; low; high