### Describe the economic rationale

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1) The Economy can't be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and illustrate your answer in a paragraph.

2) A) Why could you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate and remained at that low level for a year or longer? Illustrate your answer in a few sentences.

3) A) Consider Jean Splicer, an investor, buys \$300,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for \$315,000. Suppose the value of the CPI at the date of Jean's purchase was 180 and rose by the sale date one year later to 190 while the value of the GDP Deflator was 120 at the time of her purchase and rose to 125 by the date she sold her shares. What was Jean's real rate of return on this investment? 4pts

B) Describe why you used either the CPI data or the GDPD data in your answer to part A.

4) A) Consider that several months of data showed the CPI increasing at a 4.5% annual rate due largely to increases in the price of energy and food related commodities following years when the CPI only increased by 1% per year. Suppose this increase causes investor expectations of annual inflation to also increase from 1% to 4.5%. Assume, at the similar time that fears of higher inflation creates concerns that rising interest rates will derail the economic recovery and lead to another recession. Suppose the resulting increase in risk aversion among investors drives the expected real rate of return required to equate investor demand to the existing supply of 1 year Treasury notes down to 0.5 % from 2%. What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred?

B) Explain a supply/demand diagram of the US Treasury bond market to describe the effects on it of the developments cited in part A.

5) Between mid 2008 and mid 2009 measured RGDP in the economy fell by 3.8% as the US economy sank into a recession. Over that same time period total employment in terms of hours worked declined by 7% and the unemployment rate rose sharply from 5.8% to 9.4%

What can you infer from this data about the rate of labor productivity growth in the US economy during this period? If possible give a numerical answer, but in any case explain your answer in a few sentences.

6) The \$787 billion stimulus package, "American Recovery and Reinvestment Act" passed in Winter 2009 contained a mix of tax rebates, tax credits and increases in various transfer payments (such as extension of unemployment compensation). It also contained funding for a large number of infrastructure spending projects and some funding for scientific research. Most republican legislators voted against the proposed stimulus bill on the grounds that it should have contained more tax cuts and less infrastructure/research spending.

A) Briefly describe the economic rationale for enacting a large fiscal stimulus package, given the macroeconomic condition of the US economy four years ago.

B) Explain and contrast the "multiplier effects" on AD of each \$1 billion of tax cuts/transfer increases with the "multiplier effects" on AD of each \$1billion of increased infrastructure spending. (Which has the larger multiplier effect or are they both the same?) Assume in both cases that the lower tax rates and higher infrastructure expenditure levels would be phased in over a 2 year period and are assumed to continue indefinitely following that. (This answer is worth 6 points implying that some detail is required for full credit ).

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