Real rate of return on investment

Assignment Help Macroeconomics
Reference no: EM13862231

1) A) Why do economists refer to the economy as "fully employed" even when there is measured unemployment as high as 5% -5.5%?  (Hint: begin your answer with a definition of full employment and then compare with the concept of natural rate of unemployment (NAIRU); what is it and why? and what types of unemployment are they and how). How do you relate the most recent US unemployment rate (Look for Sep 2015 data on unemployment rate in www.bls.gov) to your conclusion of this question? In your conclusion, you need to indicate if the US economy is currently in a state of full employment? Why or why not?

B) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate (NAIRU)? Explain your answer in a few sentences. What state of business cycles (such as recession, trough, recovery or boom) does the current US economy face, and why?

C) Draw an AS/AD diagram illustrating your answer to part (B) That is, draw an AS/AD diagram which shows what happens if strong growth in AD has pushed actual RGDP to a level above potential (full employment) RGDP. Be sure to label all lines and axes in your diagram clearly.

2) A) Suppose Jean Splicer, an investor, buys $100,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for $108,000. If the value of the CPI at the date of Jean's purchase was 160, and rose by the sale date one year later to 168, what was her real rate of return on this investment?

B) Why is it appropriate to use the CPI instead of the Gross Domestic Product Deflator in calculating the "real" rate of return in this example?

3) A) Suppose that as the economic recovery strengthened consumer expectations of annual inflation increased from 2% to 3.5 % and, at the same time, the expected real rate of return required to equate investor demand to the existing supply of 1 year Treasury notes increased from 1% to 1.5%.  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? (Give a numerical answer if possible) Explain your reasoning.

 B) Draw a supply/demand diagram of the US Treasury bond market to illustrate the effects on it of the developments cited in part A. Label your diagram clearly!

4) Use the data in the Table to answer the questions asked in 4a and 4b on each of the 3 variables for the US economy:

a. Calculate the changes in inflation rates, unemployment rates and the RGDP growth rates for the years from Year 2007 through 2014 and show them in a new column next to each of the values of the three variables (a template of the table is given below).  5 pts

Year

Real GDP

RGDP growth rate in %

Unemployment Rate

Change in U rate in %

CPI Indices

Inflation rate in %

2006

14,613.8

-

4.6%

-

201.6

-

2007

14,873.7

?

4.6%

?

207.3

?

2008

14,830.4

?

5.8%

?

215.3

?

2009

14,418.7

?

9.3%

?

214.53

?

2010

14,783.8

?

9.6%

?

218.05

?

2011

15,020.6

?

8.9%

?

224.93

?

2012

15,369.2

?

8.1%

?

229.59

?

2013

15,710.3

?

7.4%

?

232.96

?

2014

16,089.8

?

6.2

?

236.74

?

Source: for CPI and U-Rate date: www.bls.gov; For RGDP data: www.bea.gov

b. Based on those calculations, briefly describe the overall economic performance over the last 8 years  (2007-2014) and critically predict about these three macroeconomic variables for 2015-16.

Hint: While predicting the trend for 2015-16 (based on the growth rates and trend you estimated in the table above), it is imperative to observe the most recent data on these three variables.                             

5) Since Fall of 2013, the price of oil has shown a steady decline as continued increase of global oil production that has far exceeded the rising demand for oil. Accordingly, many analysts in the energy field have had predicted the likelihood of further decline in oil price in the US market as the US continues to expand its domestic oil production with a long term objective of becoming even net exporter of oil by Y2030. Given that prediction of falling global demand for petroleum oil and rising supply of oil caused significant decline of oil price to come down to as low as $40 per barrel in Aug 2015 from its price of o $90 in Aug 2014. The most recent price of oil has further declined even below $40 per barrel, with a modest rate of volatility.

Given the significant trend of declining oil price and expected independence of oil production by US in coming decade, draw an AS/AD diagram of macroeconomics model (not the oil market itself), explaining the effect on the US macro-economy of expected decline in oil price in 2015 and beyond. In your explanation in words with the help of the diagram, you must clearly explain the connection between changes in oil price and the fluctuations in macroeconomic fundamentals in the US economy. Then show the impact of continuous fall in oil price on the US economy by using the same AD-AS model during the recovery period of the economy from its great recession of 2008.

Finally, explain why sharp decline in oil prices might not necessarily have positive or negative impact on the US equity markets (stock market) even at the current trend of declining but volatile oil prices.

Note: Keep in mind that the oil price is not the same as the price level in macroeconomics diagrams, even though the changes in oil price directly and indirectly affect the general price level (such as CPI and GDPD). You do not necessarily need to draw the diagram for oil market to answer this question.  But drawing of macroeconomic model of AD-AS behavior impacted by the changes in oil price is required to substantiate your answer.

6) Which of the following fiscal policy changes would have a larger overall negative impact on AD and RGDP? Explain your answer in a paragraph or two with credible logics and analysis.  Hint: Read my lecture notes on multiplier effects and also Ch. 9 in the textbook of Baumol and Blinder.

A) A program of tax hike, distributed uniformly across the households earning over $300K annually filing tax returns, amounting to $85 billion in total tax hikes.

Alternatively,

B) An $85 billion sequester (called automatic federal government spending cut) that went into effect on March 1, 2013. This was an across-the-board spending cut in federal government's various existing programs and services, including maintenance of major infrastructures and aviation traffic control systems.

Note: You may also use the AD-AS diagram as part of your analysis, but not required. However, explaining the answer with the concept of multiplier effects for these two alternative options is the right way to address this question.  

Reference no: EM13862231

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