## ECONOMICS ASSIGNMENT 2017

ECONOMICS ASSIGNMENT 2017

1) The Economy cannot be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and explain your answer in a paragraph.

2A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the “full employment” unemployment rate and
remained at that low level for a year or longer? Explain your answer in a few sentences.

B) Draw an AS/AD diagram illustrating your answer to part (A). Be sure to label all lines and axes in your diagram clearly.

3) A) Suppose Jean Splicer, an investor, buys \$300,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for
\$315,000. Assume the value of the CPI at the date of Jean’s purchase was 180 and rose by the sale date one year later to 190 while the value of the GDP Deflator was
120 at the time of her purchase and rose to 125 by the date she sold her shares. What was Jean’s real rate of return on this investment?

B) Explain why you used either the CPI data or the GDPD data in your answer to part A.

4) A) Suppose that several months of data showed the CPI increasing at a 4.5% annual rate due largely to increases in the price of energy and food related commodities
following several years when the CPI only increased by 1% per year. Suppose this increase causes investor expectations of annual inflation to also increase from 1% to
4.5%. Assume, at the same time that fears of higher inflation creates concerns that rising interest rates will derail the economic recovery and lead to another
recession. Assume the resulting increase in risk aversion among investors drives the expected real rate of return required to equate investor demand to the existing
supply of 1 year Treasury notes down to 0.5 % from 2%. What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these
changes in inflation expectations and required real yields occurred? (Give a numerical answer if possible) Explain your reasoning.

B) Draw a supply/demand diagram of the US Treasury bond market to illustrate the effects on it of the developments cited in part A. (Note: you do not have to include
the exact numerical price before and after the change in expectations.) Label your diagram clearly!

5) Between mid 2008 and mid 2009 measured RGDP in the economy fell by 3.8% as the US economy sank into a recession. Over that same time period total employment in
terms of hours worked declined by 7% and the unemployment rate rose sharply from 5.8% to 9.4%

What can you infer from this data about the rate of labor productivity growth in the US economy during this period? If possible give a numerical answer, but in any