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Problem Set 3

Econ 20A

Due date: March 17

1) Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if

a)   a reduction in military spending moves the government’s budget from deficit into surplus.

b)  the government raises its tax on corporate profits. Other tax changes also are made, such that the government’s deficit remains unchanged.

c)   a rise in life span of Americans.

2) This year the government has bought $100 billion of its own bonds issued over past years; the government’s net tax income has also increased by $50 billion. How much has the government

spending changed over the year?

3) The Washington Post article titled "Economists finally have a good excuse for being wrong" writes:

"[A] Consider the 1990s. President Bill Clinton believed that federal deficits were too high and   were crowding out private investment. [B] The Treasury Department worked with a Republican  Congress on a package of fiscal consolidation. Real interest rates fell, and the economy boomed"

Use graphs representing the market for loanable funds to discuss [A] and [B].

4) Pacific Gas & Electric wants to build a new power plant that will generate $800 million in ten years. The plant costs $400 million to build. Should PG&E build the plant if:

a)   Interest rate is 4%? Why?

b)  Interest rate is 8%? Why?

5) The table below uses data for the year 2003 provided by the Bureau of Labor Statistics and adjusted to be comparable to U.S. data. All values are in thousands. Fill in the blank entries in the table.

 

 

Country

 

Adult        Population

 

Labor

Force

 

 

Employed

 

 

Unemployed

 

Unemployment Rate

Labor-Force Participation Rate

Japan

109,474

 

62,510

3,500

 

 

France

 

26,870

 

2,577

 

57.41

Germany

70,159

39,591

 

 

9.69

 

6) Decide whether each of the following are frictional, structural, or cyclical unemployment:

a)   The economy gets worse, so General Motors shuts down a factory for four months, laying off workers.

b)  General Motors lays off 5,000 workers and replaces them with robots. The workers start looking for jobs outside the auto industry.

c)  About 10 workers per month at a General Motors plant quit their jobs because they want to live in another town. They start searching for work in the new town.

7) When the following events happen, does the unemployment rate rise, fall, or stay the same?

a)  Workers are laid off and start looking for work.

b)  People without jobs who are looking for work find work.

c)  People without jobs who are looking for work give up and stop looking.

d)  People without jobs who are not looking for work become encouraged and decide to start looking for work.

e)  People without jobs who are not looking for work take a job immediately.

8) It is sometimes said that the official unemployment statistic undercounts unemployment rates  because it doesn’t count discouraged workers, defined as workers who have given up looking for work but who would take a job if one were offered to them. In addition to the official unemployment rate the Bureau of Labor Statistics (BLS) also tracks a rate that does include discouraged workers, defined as people who say they want a job and who have looked for a job   in the last year but not in the last month. In fact, the BLS defines six different measures of unemployment called U1 through U6. The official unemployment rate is the U3 Rate. U1 and U2 are more strict definitions of unemployment. With the U1 rate a person has to be without a job     for 15 weeks or more before they count as unemployed. U4, U5, and U6 are less strict definitions. For example, U4 is the rate that includes discouraged workers.

Using the FRED economic database (https://fred.stlouisfed.org/), let’s graph all six rates. Start with the civilian unemployment rate—also known as the U3 Rate. Then click Edit Graph followed by Add Line. Search for the U1Rate (all one word) then follow the same procedure to add the U2Rate, U4Rate, U5Rate and U6Rate.

a)   In 2010 what was the highest unemployment rate by any of the BLS’s definitions? At this same time what was the lowest unemployment rate by any of the BLS’s definitions? Were any of the BLS’s definitions wrong?

b)  What can you say about how the rates move together? Does it matter much which rate of unemployment you use to describe the labor market?