1. (20 points) Your task in this problem is to construct national product and income accounts...

Transcription

1 Economics 54a, Sping 2005 Intemediate Macoeconomics MIDTERM EXAMINATION: Answe Key. (20 s) You task in this poblem is to constuct national poduct and income accounts... ANSWER:Table shows how to calculate GDP fo each of these counties. The cucial elements to know ae that GDP = C +G+I +NX, that I = 0 since fims use up all the intemediate goods they buy and sell all the output they poduce, that consumption consists of consumption of national AND foeign goods, that S = Y C G, and that GNP = GDP + NF P. Table : Income and Poduct Accounts US Steel USAuto JapanAuto Wages 500 to Ameicans 4000 to Ameican 2500 to Japanese Inputs 2000 fom USSteel 4000 fom USSteel Capital Puchases Depeciation Poduction Sales 4000 to JapanAuto 5500 to US 5000 to US 2000 to USAuto 000 to Japan 3500 to Japan to USGov 000 to JapanGov Pofits US Expenditue Appoach Consumption Investment Govenment Net Expots US GDP 2000 Japan Expenditue Appoach Consumption Investment Govenment Net Expots Japan GDP 5500 US: Income Appoach Total Wages Pofits Depeciation NFP US GDP 2000 Japan: Income Appoach Wages Pofits Depeciation NFP Japan GDP 5500 US Savings Identity Japan Savings Identity S (Y-C-G) 0 0 US GNP Japan GNP GNP=GDP+NFP 2000 GNP=GDP+NFP 5500

2 Note that in calculating GDP by the expenditue appoach you get C,G,I, and NX as its components an can the skip the income appoach calculations. Finally note that Net Facto Payments (NFP) ae zeo, not only because thee ae no wokes woking fo foeign copoations, but also because thee ae no foeign copoations woking in the US o Japan. Any payment to national factos not located domestically is counted in NFPs. 2. (a) (0 s) A consume lives fo two time peiods (today and tomoow) and consumes... ANSWER: The two conditions ae that C = C f and that C+ Cf = Y + Y f... Substitution leads to 2.C =.$ $0000 = Theefoe C = 5500/2. = This implies S = Y C = This means the consume boows today in view of a lage income tomoow. Figue 2a shows this gaphically. C f =Consumption tomoow 0000 Figue : Question 2a consumption endowment + 45 o line whee C=C f budget constaint slope is -P/P f = -/(/(+))= -(+) 5000 Boowing C =Consumption today (b) (0 s) Now conside a moe geneal situation in which the consume s income today... ANSWER: Algebaically this can be seen as follows: C + C + = Y + Y f + (2 + )C = ( + )Y + Y f f ( + )Y + Y C = (2 + ) S = Y C = Y f Y 2 + S > 0 Y f > Y 2

3 Theefoe, if futue output is lage than cuent output, savings will be negative, no matte what happens to the inteest ate. (As long as it does not go beyond -200% (!). This then implies that if the agent boows, he will keep boowing if the ate changes, and if he lends he will keep lending. Fom figue 2b it is easy to see that if the given inteest ate coesponds to ou agent boowing, a lage inteest ate will poduce the same esult. C f =Consumption tomoow 0000 Figue 2: Question 2b consumption endowment + 45 o line whee C=C f budget constaint slope is -P/P f = -/(/(+))= -(+) 5000 Boowing C =Consumption today 3. (20 s) Suppose that the intoduction of debit cads educes the eal demand fo money... ANSWER: In ou model, the eduction in the eal demand fo money (caused by the intoduction of debit cads) coesponds to a shift in the eal money demand function L(Y, + π e ). That is, fo any given level of Y,, and π e, eal money demand is now lowe. This shift has an effect in the assets maket only. Recall that fo the assets maket to be in equilibium, eal money supply must equal eal money demand: M = L(Y, + P πe ), o, in nominal tems: M = P L(Y, + π e ). Nominal money supply (M) is exogenous, so the pice level P needs to adjust to make this equilibium condition hold. Clealy, if L(Y, + π e ) falls, P must incease to estoe the equality. Output Y is not affected because Y is detemined entiely in the labo maket, and the change in eal money demand does not shift labo demand o labo supply. Similaly, is detemined entiely in the goods maket, and the change eal money demand does not shift desied saving o desied investment. Hence, Y and do not change, but P inceases. 4. (20 s) Suppose that thee is a tempoay incease in govenment spending. ANSWER: Now we need to analyze the effects of a tempoay incease in govenment spending G on output Y, the inteest ate, and the pice level P. As befoe, output is detemined entiely in the labo maket. The incease in G has no effect on eithe labo supply o labo demand, so equilibium employment 3

4 and equilibium output ae unaffected. In the goods maket, desied saving is equal to S d = Y C d G. The incease in G has to be financed by eithe cuent taxes o futue taxes. Consumes will espond to the cuent o expected futue incease in taxes when making consumption-saving decisions, so C d will fall. Howeve, the incease in G is tempoay, so the decease in C d will be smalle, as consumes smooth the decease in consumption ove thei lifetime. As a esult, the incease in G is lage than the decease in C d, so desied saving deceases (fo any given inteest ate) and S d shifts to the left. Desied investment I d is not affected by the incease in G, so the left shift in S d inceases the inteest ate. This is shown in figue 4 w/p Figue 3: Question 4: An incease in G Labo Maket Goods Maket S=Y-C-G N D,N D I D,S D Finally, in the assets maket, eal money demand L(Y, + π e ) deceases, as a esult of the incease in and the fact that Y is unchanged. To see the effect on the pice level, conside again the equilibium equation M = P L(Y, + π e ). If M is fixed, and L(Y, + π e ) deceases, P must incease to estoe equality. If, howeve, the Fed wants to keep P unchanged, then it must decease M. Too see this, notice that if the ight-hand side of the equation deceases (as L(Y, + π e ) deceases), then the left-hand side must decease as well. That is, M needs to be educed. 5. (20 s) In the theoy of investment that we have developed... ANSWER: In this question we want to analyze the effects of a decease in τ (the effective tax ate on capital) on output Y, the inteest ate, and the pice level P. The fist effect of the decease in τ is a decease in the tax-adjusted use cost of capital, which is (+d)p k. Fims choose the optimal level of futue capital k τ by setting this tax-adjusted use cost of capital equal to the expected futue maginal poduct of capital, M P K(k) (which depends on futue capital k). Since (+d)p k deceases, M P K(k) must also decease, which equies an incease τ in k (since MP K(k) deceases as k inceases). Hence, fo any given level of, the desied level of futue capital, k, is now highe. To attain this highe level of capital IN THE FUTURE, fims want to invest moe TODAY (fo any given ). This causes a shift in the I d cuve to the ight. This is show in figue 5. 4

5 Figue 4: Question 5: An decease in output taxes Labo Maket Goods Maket w/p I: MPK=UCC) N D,N D I D,S D At this it is cucial to note that TODAY, the desied savings cuve S d DOES NOT SHIFT. Recall that S d = Y C d G. Output Y does not change TODAY because neithe labo demand no labo supply shift. Capital will incease in the futue, which will affect the Maginal Poduct of Labo, and hence labo demand, IN THE FUTURE, but it does not change TODAY. The question also states that taxes paid by consumes do not change, so labo supply and consumption do not change, eithe. Hence, S d does not shift, and the ightwad shift in I d inceases the inteest ate. So let us now conside the asset maket. We have seen that inceases, and Y does not change. Hence, eal money demand L(Y, + π e ) deceases, and as befoe, the pice level P must incease to estoe equilibium, so that the following equilibium condition continues to hold: M = P L(Y, + π e ). 5