Macro models practice problems

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Macro models practice problems

• Get in to groups, grab boards and markers!

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Problem 1

• Hernandezs economy is in a severe recession.
• 1. Draw and label a model showing this (AD/AS).
• 2. In Hernandezland, the average person saves 50
  cents of every dollar they earn. Calculate the
  MPC and MPS of Hernandezland.
• 3. If the government were to contract an
  Hernandezland company to make 50 million dollars
  worth of uniforms, what would be the aggregate
  result on GDPr?
• 4. Draw that result and label it.
• 5. Draw a foreign exchange chart to show the
  effects.
• 6. What happens to Net Exports?

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Answers

• 1. Equilibrium to Left of LRAS
• 2. MPC .5
• MPS .5
• 3. 1/(1-.5) 2 x 50m 100m ?GDPr
• 4. AD ?
• 5. D ? or S?
• 6. Exports ?
• Imports ?

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Problem 2

• Biggslands economy is dealing with severe
  inflationary pressures due to an unchecked
  expansionary period.
• 1. Draw and label this model.
• 2. Biggsland citizens spend about 90 percent of
  all new money they earn. What are their MPC and
  MPS?
• 3. The wise and wonderful Biggs institutes a new
  tax on citizens that collects 150 million
  dollars. What was the impact of this tax?
• 4. Draw that result.

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Problem 2 Answers

• 1. AD/AS at Inflation, then reduces AD to Full
  Employment
• 2. MPC .90 MPS .10
• 3. Tax Multiplier -9
• 150M x -9 -1350M
• GDPr will reduce by 1350M.

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Problem 3

• Livingstonia is at long run equilibrium.
  Livingstonias MPC is 0.75
• 1. Draw and label a graph showing this.
• 2. Livingston goes to war with their neighbor
  Hernandez. This conflict leads to the government
  spending 10 billion dollars on local defense
  funding. What total impact would this have on
  Livingstonias economy?
• 3. Draw that impact.
• 4. How would this affect Net Exports, and Foreign
  Exchange rates?

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Problem 3 Answers

• 1. AD/AS at Full Employment, then increases in AD
  cause Inflation.
• 2. Spending Multiplier 4
• 10B x 4 40B Increase in GDPr
• 4. Net Exports Decreases,
• Exchange Rates Depreciate

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Problem 4

• Livingstonia goes to war with Hernandezland. This
  conflict leads to an Inflationary Gap of 500B.
• 1. Draw and label a graph showing this.
• 2. How much should the Government cut spending by
  to close the gap? MPC is at .50
• 3. Draw that impact.
• 4. Livingstonia taxes 50 billion dollars to pay
  for the war, what would be the net change to
  GDPr?

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Problem 4 Answers

• 1. Equilibrium to the right of LRAS
• 2. If MPC .50, then the Spending Multiplier
  would be 2.
• 500B / 2 250B worth of spending cuts
• 3. AD should reduce to Equilibrium
• 4. 50B Tax increase 50B reduction in GDPr.

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Board Problem Part 1

• Hernandez is having issues with a severe
  recession and the wise advisors to the great
  Hernandez met to advise him on a path solving
  this problem. Hernandez has a balanced budget.
• 1. Draw a model describing this situation.
• 2. Secretary of Defense, Ms. George, suggested to
  Hernandez an increase in military spending
  without a change in taxes would draw Hernandez
  out of its funk, and expand her iron fist of
  control.
• Show how this would impact the aggregate model
• Show how this would change the loanable funds and
  investment market.

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Answers

• AD ?
• Dlf ?
• IG ?

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Board Problem Part 2

• Hernandez is having issues with a severe
  recession and the wise advisors to the great
  Hernandez met to advise him on a path solving
  this problem. Hernandez has a balanced budget.
• 3. Secretary of Defense, Ms. George, suggested to
  Hernandez a massive tax cut to try to inspire
  greater consumption (on fire arms for her private
  army).
• Show how this would impact the aggregate model
• Show how would this change the loanable funds
  market and investment.

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Board Problem Part 3

• Hernandez is having issues with a severe
  recession and the wise advisors to the great
  Hernandez met to advise him on a path solving
  this problem. Hernandez has a balanced budget.
• 4. Secretary of Defense George suggested to
  Hernandez that the best course of action is to
  allow the economy to self correct over time.
• Show how this would impact the aggregate model

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MORE PRACTICE! YAY!

• The nation of Hernandez has been in a severe
  inflationary gap for the last several years due
  to increased aggregate demand. The vicious and
  uncaring Hernandez is contemplating his options
  for solving this issue.
• 1. Draw and label a model showing this
• Solution 1 Notably raise taxes to reign in his
  citizenry's spending.
• 2. Draw how this would impact the model
• 3. What kind of policy is this?
  Expansionary/Contractionary? Discretionary/Automat
  ic?

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MORE PRACTICE! YAY!

• The nation of Hernandez has been in a severe
  inflationary gap for the last several years due
  to increased aggregate demand. The vicious and
  uncaring Hernandez is contemplating his options
  for solving this issue.
• Solution 2 Notably cut government spending
  programs.
• 1. Draw how this would impact the model
• 2. What kind of policy is this?
  Expansionary/Contractionary? Discretionary/Automat
  ic?
• How would this affect Net Exports, and Foreign
  Exchange Rates?

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MORE PRACTICE! YAY!

• The nation of Hernandez has been in a severe
  inflationary gap for the last several years due
  to increased aggregate demand. The vicious and
  uncaring Hernandez is contemplating his options
  for solving this issue.
• Solution 3 Do absolutely nothing, perhaps buy a
  lot of sunscreen and take a vacation in Tahiti.
• 1. Draw how this would impact the model
• 2. What kind of policy is this?
  Discretionary/Automatic?

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MORE PRACTICE! YAY!

• The nation of Hernandez has been in a severe
  inflationary gap for the last several years due
  to increased aggregate demand. The vicious and
  uncaring Hernandez is contemplating his options
  for solving this issue.
• Solution 3 Allow the progressive tax rates that
  affect rising income to reduce the citizenrys
  spending habits.
• 1. Draw how this would impact the model
• 2. What kind of policy is this?
  Expansionary/Contractionary? Discretionary/Automat
  ic?