Reference no: EM132460987
1. Recessions often are related to the fact that consumers consume less of many of the goods they typically consume. During a recession unemployment typically increases. Relate this behavior to the budget line and indifference curves that we studied.
2 (a) Assume you have $20,000 that you plan to spend on schooling and other goods (the composite good) during the year. $1 in tuition buys one unit of schooling and the composite good has a price of $1. Graph your budget constraint with consumption of schooling on the x-axis.
(b) Your parents call and say they want to help you pay for school this year and give you a check for $5,000. Draw your new budget constraint on your graph from part (
(c) Your parents start to worry about how you are going to spend the money they gave you. They tell you that they will give you $5,000 but it can only be spent on tuition. Draw your new budget constraint on your graph from part (a).
(d) Draw a set of indifference curves when your optimal consumption bundle would differ between part (b) and part (c).
(e) Draw a set of indifference curves when your optimal consumption bundle would not differ between part (b) and part (c).
(f) What could you tell your parents about your current consumption (in part a), that would reassure them that it is OK to give give you a check for $5000 rather than requiring that the money be spent entirely on tuition
3.You live in a world with two time periods. Your income is $100 in time period 1 and $150 in period 2.
(a) If the interest rate is 0.06 (6%), draw your intertemporal budget constraint with C1 on the x-axis. Draw a representative indifference curve showing your optimal consumption bundle of consumption in time 1 and in time 2 assuming that the optimal consumption bundle is to consume your entire period 1 income in period 1 and your entire period 2 income in period 2. Draw a big graph because you will need to use it for part (b). You will need to draw fairly steep indifference curves - that is indifference curves for a relatively impatient person.
(b) Now suppose interest rates decline to 0.03 (3%). Draw your new intertemporal budget constraint on your original graph. Pay close attention to where the budget constraint from part (a) and that from part (b) intersect. Draw your new optimal consumption bundle.
(c) Using your diagram, explain why the Federal Reserve Bank might lower interest rates during recessions in order to stimulate consumer demand. Hint: If you can't figure it out with a small change in interest rates, try drawing a very extreme change in interest rates.
4.To encourage communities to reduce emissions, Representative Pressley would like to propose that the federal government provide federal aid to cities to convert busses from gas to electric. There are two ideas circulating in her office.
- Proposal A - tied grants: This proposal would give each community a block grant of $250,000. The money could only be spent on converting busses from gas to electric.
- Proposal B - matching grants: This proposal would subsidize spending on bus conversion. For each dollar spent by local communities, the federal government would provide $0.50 of aid.
(a) Suppose that a typical city has a budget of $1,500,000 for upgrading busses and other spending. Draw a budget constraint for such a community showing their current choices (pre-policy) with spending on converting busses on the x-axis.
b) Add a second budget constraint depicting the community's options under proposal A. Be sure to clearly label all endpoints of each budget constraint.
(c) Add a third budget constraint depicting the community's options under proposal B. Once again, please clearly label all endpoints.
(d) The budget constraints from Proposal A and B intersect at $750,000 (you don't need to solve for this). What communities would benefit more from Proposal A than Proposal B? What communities would benefit more from