1) Suppose the government increases spending to fund tuition assistance for qualified college students. Which of the following is likely to result?

A) Automatic stabilizers will increase the concretionary impact of the decrease in aggregate demand.

B) Automatic stabilizers will decrease the contractionary impact of the increase in aggregate demand

C) Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand

D) Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand

2) In the long run, wages and prices are considered to be:

A) sticky

B) Constant

C) flexible

D) Irrelevant

1.

An increased interest rate will cause residential and business investment spending to______, leading to______in the quantity of output demanded in the economy.

1. decrease; increase

2. decrease; decrease

3. increase; decrease

4. increase; increase

2.

Which of the following statements about aggregate supply is correct?

1. All of the above

2. Shifts in aggregate supply can cause stagflation

3. Shifts in aggregate supply can cause a recession

4. Shifts in aggregate supply can cause a fall in output and a rise in prices

3.

The new classical misperceptions theory states that:

1. changes in the overall price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve

2. changes in the relative price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

3. changes in the overall price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

4. changes in the relative price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve

4.

Out of the following list, choose the item that would be included in the expenditure approach to calculating GDP

1. the purchase of 30 litres of petrol for your car

2. a $200 cheque from your Uncle Arthur

3. an unemployment cheque from the Government to R. Smith

4. the cost of the second-hand mountain bike you bought from your flatmate

5.

If a minimum wage law is passed imposing a price floor above the equilibrium price of unskilled labor and employers increasingly used efficiency wages, it would ___ structural unemployment and ____ the natural rate of unemployment:

1. Increase; not change

2. Do none of the above

3. Increase; increase

4. Not change, increase

6.

Fill up the blanks by typing in your answer. Do not type in the quotation mark "".

Applying the aggregate demand/aggregate supply model, describe the impact of the following event on GDP and prices in the short run:

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment, in teh short run,

Blank 1 (type in "AD" or "AS") will shift to the Blank 2 (type in "right" or "left").

Output will Blank 3 (type in "increase" or "decrease") and price will Blank 4 (type in "increase" or "decrease").

Sally is tracking her spending. Every day for n days, Sally tracks the exact amount of dollars he spends that day, which is a nonnegative real number but not necessarily an integer. For positive integers i ≤ n, he spends xi dollars on day i. For example, on day 1, he spends x1 dollars. At the end of the n days, he calculates the average daily amount he spends on his food to be averagex = (x1 + x2 + · · · + xn)/n.

a) Prove that on at least one of the n days, Jarett paid at least averagex dollars.
(b) Prove that on fewer than half of the n days, Jarett paid strictly more than 2averagex dollars.

Consider a government spending program you have read about in the news or research one online. In a well-composed post, explain the opportunity cost of that government decision. What was the next best alternative in your opinion? Describe how “scarcity” factors into the decision process. (Remember that all things are scarce.)

Suppose that the following equations govern planned spending in the US:
C = 500 + 0.75(Y-T)
T = 0.2Y – 800
I = 3000 – 64000r
G = 3200
NX = 1000 – 10e (e =“trade weighted” real ex. rate. As always, increase in e = $ appreciation)
NFO = 500 – 60000(r – r
FOR)
r
FOR = 3%
a) Explain how NFO responds to an increase in the Home interest rate, and an increase
r
FOR, based on the equation. What economics story does this coefficient represent?
b) We’re going to look at an increase in the home interest rate from 2.5% to 3%. First,
let’s take a look at the new international piece of the model. Calculate NFO, NX,
and the exchange rate for each value of the interest rate. Based on these numbers,
draw the NFO=NX graph for the interest rate increase, and talk through the
economics: how the change in interest rates changes NFO, and how that leads to
changes in the exchange rate and NX.
c) Now, combine the equations above to find an expression for AE, then impose the
Y=AE expression to derive the IS curve. As in lecture, work with AE = C + I + G
+NFO to end up with Y=f(r). Use your IS curve to calculate the level of short-run
GDP for the original interest rate of 2.5%, and the new interest rate of 3%.
d) Use the multiplier math framework (Final Chg GDP = Multiplier x Initial Chg in
Spending) to explain this change in GDP? The change in NX from part b is part of
this story, but don’t forget about our pre-PS5 domestic interest rate story – where
else does r show up?
e) It is often said that “monetary policy is stronger in an open economy.” Explain this
statement based on the “domestic” and “international” changes in GDP from part
d). I don’t just want the numbers side of things – what is the underlying economics
story for why monetary policy is more effective when the economy has an
international sector?

To eliminate deficit spending and reduce public debt, some politicians and economists have proposed a Constitutional amendment requiring a balanced federal budget.

In your initial post to this discussion, respond to each of the following prompts based on what you’ve learned in this module about deficit and debt.

What present and future benefits might result from an amendment requiring that each year's budget be balanced?

What limitations or costs might result from such an amendment? Describe alternative legislation that might eliminate chronic deficits but have more desirable effects on the economy.

Automatic stabilizers are changes in taxes or government spending that decrease aggregate demand without requiring policymakers to act when the economy is in an expansionary boom that is causing inflation.

Select one:

True

False

If there is no change in the unemployment compensation program, then the total amount of benefits paid to participants in the program will fall during economic expansions and rise during recessions.

Select one:

True

False

Critics of stabilization policy argue that the policy can be a source of, instead of a cure for, economic fluctuations because the lags associated with a discretionary policy create the possibility that an expansionary fiscal policy is implemented when the economy has already adjusted on its own to the natural rate of output.

Select one:

True

False

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes the interest rate to rise, so aggregate demand shifts right.

Select one:

True

False

Automatic stabilizers tend to make the government’s budget move toward a deficit during recessions and toward a surplus during an economic expansion.

Select one:

True

False

Write recommendations for government fiscal policy (specific spending and taxation changes) that you feel would be best for the Canadian economy using your understanding of the economics concepts taught in the course. Use the following guidelines as you write your recommendations:

Give consideration to the impact your decisions would have on each of the economic indicators. Your discussion might consider some of the following topics: government debt and the budget surplus or deficit; the impact of these recommendations on government services; how Canadians will benefit from the recommended policies in the short term and in the long term; the multiplier effect; any potential problems with your recommendations. These are just some suggestions. Your argument should discuss several ways that your ideas will impact the economy. The recommendations you discuss could include several of these areas but you can use any relevant course concepts to justify your recommendations.

After months of study and spending $60,000 in researching its options, Black & Decker Company purchased and installed a made-to-order machine tool for fabricating parts for small appliances this morning. The machine cost $286,000. This afternoon, Square D Company offered a similar machine tool that will do exactly the same work, but costs only $176,000 and could be installed in less than two hours. There will be no differences in either revenues or operating costs between the machines. The only annual cash flow difference will be the income tax savings due to the depreciation tax shield.

Both machines will last for six years (don’t worry about the few hours that have elapsed). Black & Decker would depreciate either machine on a straight-line basis to a $15,000 salvage value for income tax purposes. However, each machine is expected to be worth $20,000 at the end of its useful life year. The relevant income tax rate is 40%, and Black & Decker earns sufficient income from its other operations so that it can utilize any annual operating losses or losses on disposal of equipment.

The after-tax discount rate, also known as the hurdle rate or MARR, is 16%.

Required:

Using after-tax cash flow analysis, determine the minimum resale value of the “old” machine tool (“old” because it was purchased this morning) that would justify Black & Decker’s purchase of the Square D machine tool at this time.

Hint: If Black & Decker could sell the “old” machine for $1,000,000 and buy the Square D machine, they would do it in a heartbeat. On the other hand, if they could sell the “old’ machine for only $1, they would not do it. Clearly, there is a selling price between $1 and $1,000,000 where it makes sense to sell the “old” machine -- find that value. If they sell the “old” machine, there will be income tax consequences at the time of the sale (time zero).