FRED ACCOUNT: [email protected] PASSWORD: Qkrtkdgus1!

1. You graduate from GWU and are immediately hired for prowess in economics. The starting

salary is $75,000. Suppose your money demand function is given by:

MD ? PY ? 0.35?i?

a) What is your demand for money when the interest rate is 4% and at 6%?

b) How does the interest rate affect your demand for money?

c) Suppose the interest rate is 10% and your income goes up by 20%. What happens to your

demand for money?

d) Suppose the interest rate is 5% and your income goes up by 20%. What happens to your

demand for money?

e) Summarize the effect of income on money demand in percentage terms. How does this

effect depend on the interest rate?

2. Given each of the economic scenarios below – explain intuitively (or schematically) and show

graphically the combination of monetary and fiscal policies to meet government’s objectives.

Assume Foggy Bottom FED’s monetary policy uses interest rate targeting.

a. Increase real GDP (output) without changing the interest rate target. In your answer include

the impacts on investment demand.

b. Fiscal conservatism is rampant in the Foggy Bottom Republic. The previous administration

had been running budget deficits. The new administration has promised to 1) reduce government

budget deficits 2) without having any impact on GDP and employment. How can this be

accomplished? What is the role for the Foggy Bottom FED’s monetary policy in achieving the

two promises here?

3. In Chapter 3, the goods market equilibrium, the paradox of thrift or savings is first discussed

a. Explain the paradox from the goods market equilibrium perspective.

b. True, False, Uncertain, Explain (intuitively and graphically) Does paradox of thrift result still

hold true when in the IS-LM framework? Use the case where consumer confidence is falling.

How might this affect private savings and investment spending? Hint: your answer can be

motivated in part by the D

I ? SN identity.

4. Data Section – Answer the whole question parts a., b., and c.

This question looks at alternative measures for real rates of growth in the US economy. Go to the

FRED website at the St. Louis Federal Reserve.

FRED Graph Hints or use

You can edit the data, add or delete series, and format your graph to improve the presentation.

When working with macroeconomic data, I always recommend using recession or business cycle

indicators in the background for countries. If are satisfied with your graph you can save it to your

FRED account in graphs or your Dashboard. This enables you to revisit the graph for further

editing and or calling up the graph later. The latter is a very nice feature, because the data will be

updated, you can see if there have been changes, and use in writing regular reports or different

reports. That is a real time savor and efficient way to focus on analysis rather than making and

re-making graphs.

DOWNLOAD

5 Options with Download 1) Excel (data), CSV data, Image (graph), PowerPoint (graph), and

PDF (graph). The first two options allow you to work with your data outside of FRED in

spreadsheets and statistical software. The last three can be used to put your graph in a report,

document, or presentation.

a. Work with on FRED or Download the following monthly series into Excel, Statistical

Software, or data management software from Jan 2003 to the most recent observation

available.

10-Year Treasury Constant Maturity Rate

Percent, Monthly, Not Seasonally Adjusted, Vintage:

CurrentApr 1953 to Aug 2017 (2017-09-01)

10-Year Treasury Inflation-Indexed Security,

Constant Maturity

Percent, Monthly, Not Seasonally Adjusted, Vintage:

CurrentJan 2003 to Aug 2017 (2017-09-01)

5-Year Treasury Constant Maturity Rate

Percent, Monthly, Not Seasonally Adjusted, Vintage:

CurrentApr 1953 to Aug 2017 (2017-09-01)

5-Year Treasury Inflation-Indexed Security,

Constant Maturity

Percent, Monthly, Not Seasonally Adjusted, Vintage:

CurrentJan 2003 to Aug 2017 (2017-09-01)

i. Produce graphs of the two pairs and construct the spread for the two pairs in a

single graph. Save and name the two graphs.

ii. Calculate the spread between the 5-year constant maturity series and the 10-

year constant maturity series respectively. Graph them individually or in the

same graph. Save and name the two graphs.

iii. Use the Fisher equation/relationship to explain what the two spread series

imply. Explain why the pair of 10-year and 5-year constant maturity rates

might be indicators of real growth. Hint: The read the information below your

graphs.

iv. Discuss the series properties and relationship between the two 5-year and 10-

year series in levels, and the calculated spread for the 5-year and 10-year

series. For example: what is the average, the range, are there trends, changes

in the average level or breaks in the rates over time?

v. Are the time series properties for the two spread series similar? If they appear

to be similar, is this consistent, why or why not?

b. Work with on FRED or Download the following monthly series into Excel, Statistical

Software, or data management software from Jan 2003 to the most recent available.

Real gross domestic product per capita

Chained 2009 Dollars, Quarterly, Seasonally Adjusted Annual Rate,

Vintage: CurrentQ1 1947 to Q2 2017 (2017-08-30)

Real Potential Gross Domestic Product

Billions of Chained 2009 Dollars, Quarterly, Not Seasonally

Adjusted, Vintage: CurrentQ1 1949 to Q4 2027 (2017-08-08)

The conventional measures of Potential Real GDP and the Natural Rate of

Unemployment or NAIRU are constructed by the U.S. Congressional Budget Office.

For further information on these two series see the CBO website. You can download

the data and understand what they mean and how they are calculated into an Excel

Workbook. There is a pdf file link as well.

i. Produce a graph with both series in it. Make sure the Recession Period

Shading is in the background. Save and name the graph.

ii. Calculate the annual growth rates of Potential Real GDP to Real GDP. Save

and name the graph.

iii. Calculate two series: the difference between Potential Real GDP to Real GDP

and the ratio of Real GDP to Potential Real GDP. (Make sure you give them

different names.)

iv. Next, graph the calculated series in a graph by itself or put into the first graph

with the calculated series shown on the right hand axis. Save and name the

graph.

v. Discuss the series properties and relationship between the two series in levels,

their annual growth rates, their difference, and ratio. (I recommend that you

download the data series into a spreadsheet. This will help to calculate

summary statistics for the full sample and sub-samples.) For example: what is

the average, the range, are there trends, changes in the average level or breaks

in the rates over time? Also, comment on the pros and cons of using the

differenced series and ratio series in analyzing an economies performance

c. True, False, Uncertain, Explain. The two spread series calculated in part a) and the

growth rate series in part b) are closely related theoretically not just statistically.

(Hint: look at the four series graphically since January 2003. Also, the series in part

a) at the monthly frequency and b) at the quarterly frequency. In answering the

question convert or think in terms of the monthly series to a quarterly frequency. e.g.

Jan-Feb-Mar are the first quarter.

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