OCC Unemployment and Federal Interest Rates Problem

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Obbqm

Economics

Orange Coast College

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I'm working on a macro economics multi-part question and need guidance to help me learn.

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6. What indicators should you use to track each of the following, and why? a. The overall size of the economy b. Labor market performance c. The future trajectory of economic activity d. Wages and benefits 2. In 2017, potential GDP was $18.17 trillion and real GDP was $18.05 trillion. In 2018, potential GDP was $18.51 trillion and real GDP was $18.56 trillion. Calculate the output gap for each year. How did the output gap change between 2017 and 2018? Did it become more positive or more negative? 2. Use the accompanying table to answer the following questions. Year Real GDP (trillions of $) Potential Output (trillions of $) 2014 $17.11 $17.38 2015 $17.46 $17.69 2016 $17.78 $17.99 2017 $18.22 $18.29 2018 $18.77 $18.65 a. Calculate the output gap for each year. b. What does it mean when the output gap is negative? What does it mean when it is positive? c. For each year, calculate how much the output gap changed. Compare this to the growth rate of actual output that year, less the growth rate of potential output. Learning Objective 17.2 Describe the common features of business cycles. بعمان ܒܢܫܫܕܕܢܝܢܫ indicators.. 4. Assuming the equilibrium unemployment rate is 5%, if actual output falls to 5 percentage points below potential output, how would you expect the unemployment rate to change? (Hint: Use Okun's rule of thumb.) 4. For each of the following illustrate how the IS curve will change with a graph. a. Poor numbers from several leading economic indicators cause businesses to become pessimistic about the future of the economy. b. The real interest rate falls, which causes consumption spending to rise. Learning Objective 18.3 Use the MP curve to summarize how the real interest rate is determined. 5. The federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%. a. Draw an MP curve. b. Determine the risk premium. Label it and the risk-free interest rate on your graph. c. Illustrate how the MP curve will change if the risk premium increased. Learning Objective 18.4 Forecast economic conditions and how they'll respond to monetary and fiscal policy. 6. Draw an IS-MP graph where the macroeconomic equilibrium is at a real interest rate of 6% and actual output is 10% below potential GDP. Use this graph to answer the following questions. a. You're a financial analyst at a regional bank. In a weekly staff meeting your department head asks your opinion on how Fed policy is going to change in the coming months. If the Fed wishes to close the output gap, how would it change the federal funds rate? Explain your reasoning using the graph. b. Another analyst in the meeting argues that it's time for the government to cut government purchases in an effort to increase GDP. Would this fiscal policy suggestion cause the output gap to close? Explain using your graph.
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1

Unemployment and Federal Interest rates
Student's Name
Institutional Affiliation
Course Name and Number
Instructor's Name
Date

2

2.
In 2017, potential GDP was $18.7 trillion and real GDP was $18.08 trillion. In 2018,
potential GDP $18.51 trillion and real GDP was $18.56 trillion. Calculate the output gap for
each year. How did the output gap change between 2017 and 2018? Did it become more
positive or more negative?

𝑂𝑢𝑡𝑝𝑢𝑡 𝐺𝐷𝑃 =

𝐴𝑐𝑡𝑢𝑎𝑙 𝐺𝐷𝑃 – 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐺𝐷𝑃
∗ 100%
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙

2017;(18.05 − 18.17)/18.17 ∗ 100% = −0.6604%
2018; 18.56 − 18.51)/18.51 ∗ 100% = 0.2701%
Output gap was more in 2018 from 2017, positive
6. What indicators should you use to track each of the following, and why?
a. The overall size of the economy – Real GDP
b. Labor market performance – Unemployment rate
c. The future trajectory of economic activity – Unemployment cost index
d. Wages and benefits – Consumer confidence

2. Use the accompanying table to answer the following questions.
Year
2014
2015
2016
2017
2018

Real GDP (trillions of $)
$17.11
$17.46
$17.78
$18.22
$18.77

Potential Output (trillions of $)
$17.38
$17.69
$17.99
$18.29
$18.65

a. Calculate the output gap for each year.
𝑂𝑢𝑡𝑝𝑢𝑡 𝐺𝐷𝑃 =
2014; (17.11 − 17.38)/17.38
2015; (17.46 − 17.69)/17.69
2016: (17....

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University of Virginia

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