EC202AF Boston College Problem Set Intermediate Macroeconomics Answer Complete problem using data provided below year,deficit,g,yield 1729,-0.7,,3.24 1730,

EC202AF Boston College Problem Set Intermediate Macroeconomics Answer Complete problem using data provided below year,deficit,g,yield
1729,-0.7,,3.24
1730,-0.9,,3.3
1731,-0.9,,3.12
1732,-1,,3.03
1733,-0.6,,3.09
1734,0.9,,3.19
1735,0.2,,3.19
1736,-0.2,,2.86
1737,-1.1,,2.83
1738,-1.1,,2.86
1739,-0.4,,3.06
1740,0.7,,3
1741,1.5,,3.03
1742,2.3,,3
1743,2.8,,2.97
1744,3.1,,3.24
1745,3.1,,3.53
1746,4.1,,3.41
1747,4.8,,3.66
1748,5,,3.41
1749,3.9,,2.97
1750,-0.4,,3
1751,-0.5,,3.03
1752,-0.3,,2.86
1753,-1.2,,2.87
1754,-0.6,,2.9
1755,0.8,,3.13
1756,2.7,,3.36
1757,3.2,,3.34
1758,4.9,,3.25
1759,6.9,,3.63
1760,8.3,,3.68
1761,9.7,,3.92
1762,8.6,,3.97
1763,5,,3.36
1764,0.5,,3.53
1765,0.7,,3.37
1766,0,,3.36
1767,-0.3,,3.37
1768,-0.9,,3.3
1769,-1.1,,3.39
1770,-0.7,,3.62
1771,-0.5,,3.44
1772,-0.3,,3.39
1773,-0.5,,3.46
1774,-0.7,,3.4
1775,0.2,,3.38
1776,2.5,,3.56
1777,3.1,,3.83
1778,4.5,,4.71
1779,5.7,,4.88
1780,7,,4.9
1781,7.5,,5.12
1782,8.1,,5.15
1783,6.3,,4.72
1784,6.5,,5.08
1785,4.9,,4.94
1786,0.6,,4.07
1787,-0.5,,4.01
1788,-0.3,,4
1789,-0.3,,3.91
1790,-0.2,,3.89
1791,-0.4,,3.68
1792,-0.4,,3.33
1793,1.8,,3.96
1794,6.3,,4.44
1795,8.6,,4.52
1796,10.5,,4.82
1797,12.8,,5.76
1798,7.2,,5.93
1799,4.9,,5.09
1800,5.8,,4.7
1801,6.4,,4.9
1802,3.8,,4.23
1803,3,,5.08
1804,3.3,,5.25
1805,4,,5.07
1806,3.1,,4.89
1807,1.9,,4.77
1808,2.2,,4.52
1809,2.6,,4.38
1810,1.6,,4.41
1811,3.3,,4.67
1812,4.8,,5.01
1813,6.7,,5.05
1814,6.7,,4.52
1815,3.8,,5.04
1816,0.4,,4.81
1817,0.2,,3.99
1818,-0.4,,3.85
1819,-0.1,,4.19
1820,-0.3,,4.38
1821,-0.7,,4
1822,-0.8,,3.76
1823,-0.9,,3.78
1824,-0.8,,3.21
1825,-0.6,,3.39
1826,0.2,,3.81
1827,0.2,,3.58
1828,-0.6,,3.51
1829,-0.3,,3.39
1830,-0.5,13.7,3.39
1831,0.2,13.3,3.72
1832,-0.1,13.7,3.61
1833,-0.3,13.5,3.43
1834,-0.3,12.6,3.33
1835,2.8,11.9,3.32
1836,0.2,11.6,3.35
1837,0.1,12.1,3.31
1838,0.1,12,3.23
1839,0.3,12.1,3.29
1840,0.3,13.2,3.35 EC 202A,F – Fall 2019
Problem Set 3
Due 9/30/19 by 11:59pm on learn.bu.edu.
Instructions: If you get stuck or have questions, which is normal, be sure to reach out through Piazza
(http://bit.ly/ec202pz) or office hours. We’re here to help! You should solve these problems on paper,
showing your work where applicable. Blackboard will ask you to enter answers for each question and
upload scans of your work on paper at the end of the form.
Part I:
1. Assume that the production function is Cobb–Douglas with parameter ?? = 0.3. If capital and labor are
paid their marginal products, they receive the shares of income:
A) 0.3 and 0.3.
B) 0.7 and 0.7.
C) 0.3 and 0.7.
D) 0.7 and 0.3.
2. In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion
rise in government spending would ______. (Hint: draw a diagram)
A) crowd out exactly $10 billion of investment.
B) crowd out between zero and $10 billion of investment.
C) not crowd out any investment.
D) crowd out more than $10 billion of investment.
3. People use money as a unit of account when they:
A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.
4. People use money as a store of value when they:
A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.
5. People use money as a medium of exchange when they:
A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.
6. Payment is deferred by using _______, but immediate access to funds occurs when using ______.
A) currency; demand deposits
B) credit cards; debit cards
C) demand deposits; savings deposits
D) debit cards; credit cards
7. All of the following assets are included in M1 except:
A) currency.
B) demand deposits.
C) traveler’s checks.
D) money market deposit accounts.
8. If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank
deposits equal $500 billion, then the money supply equals:
A) $100 billion.
B) $150 billion.
C) $600 billion.
D) $650 billion.
9. High-powered money is another name for:
A) currency.
B) demand deposits.
C) the monetary base.
D) M2.
10. In the United States, bank reserves consist of:
A) currency and demand deposits.
B) vault cash and deposits at the Federal Reserve.
C) gold deposits at the Federal Reserve.
D) the money supply.
11. If the currency–deposit ratio equals 0.5 and the reserve–deposit ratio equals 0.1, then the money
multiplier equals:
A) 0.6.
B) 1.67.
C) 2.0.
D) 2.5.
12. The currency–deposit ratio is determined by:
A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).
13. The central bank in the United States is the:
A) Bank of America.
B) U.S. Treasury.
C) The People’s Bank of America
D) Federal Reserve.
14. When the Fed makes an open-market sale, it:
A) increases the money multiplier (m).
B) increases the currency–deposit ratio (cr).
C) increases the monetary base (B).
D) decreases the monetary base (B).
15. If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____
excess reserves, which will _____ the money multiplier.
A) more; increase
B) more; decrease
C) fewer; increase
D) fewer; decrease
16. The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in
a large increase in the monetary base that was partially offset by:
A) a significant increase in the reserve–deposit ratio.
B) a significant decrease in the reserve–deposit ratio.
C) open-market purchases.
D) open-market sales.
Part II
17. Great Depression Case Study
The table below, reproduced from the textbook, shows data on the behavior of the money supply during
the onset of the Great Depression. Fill in the empty cells for parts (a)-(g)
August 1929
March 1933
Money Supply
26.5
19.0
Currency
3.9
5.5
Deposits
22.6
(e)
Monetary Base
(a)
8.4
Reserves
3.2
2.9
Money multiplier
(b)
(f)
Reserve-Deposit ratio
(c)
(g)
Currency-Deposit ratio
(d)
0.41
Real GDP
1.109
0.817
Nominal GDP
56.24
31.78
i. What was the price level in August 1929? (hint: there are several measures for the price level such but
there is only one that you can calculate using these data)
j. What was the price level in March 1933?
k. Calculate inflation during this period. Give your answer as a percent change for the entire period, not
adjust to a per-year rate. Also give the answer as a decimal so -5% would be -0.05.
18. Testing loanable funds. We discussed the problems with identification of the loanable funds model
in class. Remind yourself of why you should not make a scatterplot of investment against interest rates
and connect the dots as if that is the investment demand curve. What do the dots actually represent?
Suppose the government decides to run a large deficit. Draw a loanable funds diagram to illustrate how
this will impact the interest rate. Without referencing the diagram, explain the economics of why the
interest rate changes the way it does.
i. What happens to the interest rate when the government runs a large deficit?
a. rises
b. falls
c. stays the same
For this part you will analyze some data. You can do this in any program you want but if you’re new to
working with data I suggest plot.ly/create, a web applet.
1) Download the data from Blackboard and save it on your computer as uk_data.csv
2) Go to plot.ly/create and register for an account
3) Click on
at the top of the page and upload uk_data.csv
Explore the data to ensure you have all the years from 1729 to 1840 (inclusive) and the variables year,
deficit, g, yield, and inflation. You will only have data for g from 1830 and later. Some background on
each variable is listed in the table below.
variable
year
units
n/a
deficit
percentage points
g
percentage points
yield
percentage points
details
year for which the data was
collected
G – T divided by total
income in the U.K.; positive
numbers mean the
government needed to
borrow
government spending as a
fraction of total spending in
the economy
interest rate the U.K.
government pays to borrow
money
Look at the numbers for the variables to ensure they make sense. You can sort them for largest to
smaller or smallest to larger to help inspect if they are reasonable.
ii. How many years had a negative number for the yield? (not to turn in: does that answer make sense?)
iii. How many years have a deficit larger than 50? (not to turn in: does that make sense?)
Sort the data by year from earlier to latest then use plot.ly to make a line plot of deficit (y-axis) against
year (x-axis). There are seven periods listed below where the deficit spikes dramatically. Are you able to
see them on your line plot? Do some historical research and figure out what happened during those
periods that caused government spending to increase. 1
Period
1740-1748
1756-1763
1776-1785
1793-1815
Cause of deficit
iv. What happened during these periods?
a. installment of new king or queen
b. establishment of new colonies in Africa
c. wars and revolutions
d. creation of welfare programs (e.g. the National Health Service)
Economists often worry about reverse causation when conducting statistical research. Suppose interest
rates tend to be high when spending is high and low when deficits are low. This could be because high
deficits cause high interest rates, but it could also be evidence for the theory that high interest rates
cause high deficits. This is called reverse causality. Based on your research above you should be
confident that the years of high deficits are not caused by interest rates but instead by the noneconomic cause you identified above.
v. Plot yields, the interest rate on government borrowing, against year. You can put this plot side-by-side
with the plot of deficits against year from earlier. (I recommend putting them vertically side-by-side.)
You will upload this graph to Blackboard.
Write a short response of a few sentences summarizing whether this evidence supports our theory of
interest rates (loanable funds) or not. Blackboard should allow you to include your graph from the data
analysis along with your short response so include it for full credit.
19. “An island cannot rule a continent.” In the 18th century the most important factors of production
were labor and land but capital was also important. Suppose the production functions for America and
England had the Cobb-Douglas form
??(??, ??, ??) = ??1/3 ??1/3 ??1/3
where ?? is land.
You can either show using calculus that all the normal Cobb-Douglas properties like factor shares
determined by the exponents and the marginal products being proportional to the factor shares still
apply. This knowledge about how the Cobb-Douglas works will save you a lot of time when solving the
following problems.
There is also a small spike in 1835 but the cause is different from the other spikes. You might be interested to
look into the history of what happened but it is not required for this assignment.
1
Using the Cobb-Douglas properties, get an equation for the MPL in terms of ?? and ??.
i. The MPL equation is:
a. (1/3)(Y/L)
b. (2/3)(Y/L)
c. (1/3)(L/Y)
d. (1/3)(Y/Z)
Assume both England and America have ?? = 8. Plugging that value into the production function and
then your expression for production in for ?? you can write the MPL in terms of ?? and ??. Think about
whether your answer makes sense by asking how the MPL (and the real wage) vary as more people
move to the country and as more land becomes available.
ii. Use your equation to find the real wage when ?? = 1 and ?? = 8
England had a larger population than America in the late 18th century. England had around 4 million
residents while America had close to 2.5 million. Not all of them worked but just pretend they did. Also
you can use the values “4” and “2.5” in this problem and ignore that they are in millions. That doesn’t
change anything.
iii. Which country had more land in the 1750s? (You might need to get an old map of the U.S. It wasn’t
as big back then. You can search for “original 13 colonies.”)
a. England
b. America
c. I’m too lazy to search Google for a map
Suppose that the bigger country has ?? = 10 and the smaller country has ?? = 4.
iv. What is the real wage in America?
v. What is the real wage in England?
vi. Based on your calculations in the previous parts you should have found that the real wages are
different. If people seek out better economic opportunities to which country would people move based
on your calculations?
a. from America to England
b. from England to America
c. from England to Wales
d. from America to China
Ben Franklin, an American polymath, did some pioneering demographic/economic research in the 1750s
and found that the American population doubled every 25 years. You can think of the population growth
rate as being like interest and use our standard equation for calculating ??(??) from the initial amount ??0 .
vii. What was the population growth rate in America based on Franklin’s estimate?
viii. If the population was 2.5 million in 1775 then how big would it be in 1900 if the growth rate did not
change? _______ million.
20. News question. This question will be asked on each problem set. Find an article in a news source
that has something to do with economics, preferably macroeconomics, and paste the link into the short
response area along with a brief summary of the issue and what it has to do with economics. Did you
learn anything from it? Are any economic models or concepts relevant?
21. How long did this problem take to complete in hours? (Blackboard requires you give a numerical
answer so “it took about 15 minutes” would be marked wrong. It will also mark unreasonable answers
like 52 and -1 as wrong.)
22. Make scans of your work on these problems as a single PDF file using a library scanner or an app.
This tutorial (http://bit.ly/econscan) walks you through how to make high quality scans for free using
your phone. It is important that you check that the scans are legible since there is no point uploading
something that is illegible.

Purchase answer to see full
attachment