CWRU ECON 103: Principles of Macroeconomics

Problem Set #2

Due November 1st, 2021

I. GDP

Download data from https://fred.stlouisfed.org/ on the following series:

• Gross Domestic Product (GDP) Consumption

• Personal Consumption Durable Goods (PCDG) 

• Personal Consumption Non-Durable Good (PCND) 

• Personal Consumption Services (PCESV) Investment

• Private Nonresidential Fixed Investment (PNFI)

• Private Residential Fixed Investment (PRFI)

• Change in Private Inventories (CBI)

Net Exports

• Exports of Goods and Services (EXPGS)

• Imports of Goods and Services (IMPGS) Government Spending

• Federal Consumption Expenditures and Gross Investment (FGCE)

• State and Local Consumption and Gross Investment (SLCE)

Make sure all series are quarterly, seasonally adjusted annual rates, and in levels. If given the option, download the latest (and only the latest) vintage of the data. Make sure your data extend from 1947 through 2023.

1) Which of the listed components constitute the largest fraction of GDP in 2023?

2) What was the last quarter in which Net Exports contributed positively to GDP?

3) Calculate the quarterly percentage change in each component. Then calculate the standard deviation of these changes. Excluding CBI, what three components have been most volatile as measured by the standard deviation of the quarterly percentage change since 2000?

4) What quarter saw the greatest percentage decrease in GDP? What component(s) of GDP did not decline in this quarter?

II. Unemployment

This graph (from Blanchard and Katz 1992) shows that states that were adding many jobs (like NV and AZ) did not see materially lower unemployment rates. The paper further shows that these states did not have materially different labor force participation rates. How is this possible? Explain in 2-3 sentences, using precise definitions of the relevant economic terms.

III.  Growth 

(26)  The people of Country X save 10 percent of their income, and the people of Country Y save 20 percent of their income. If these respective saving rates persist forever, will one country or the other enjoy a higher rate of income growth forever?

IV. Market for Loanable Funds

Suppose the economy has net taxes, T, of $300 and that government spending, G, is equal to $300.

In this economy, investment is equal to savings. The demand curve for loanable funds by firms is:  

r = 10 – (1/200)*LF_D

where r is the interest rate and LF_D is the quantity of loanable funds demanded by firms for investment. The supply curve of loanable funds curve from savings (pLF_S) curve is given by the equation  

r = 2 + (1/200) pLF_S 

where pLF_S is the quantity of loanable funds supplied from savings. Total loanable funds supplied is pLFs + Government Savings (Sg =T-G).    

A. Calculate the initial value of government savings Sg

Final Answer __________________ 

B. Calculate the equilibrium interest rate:

Final Answer __________________ 

C. Calculate the equilibrium level of investment spending.  

Final Answer __________________ 

D. Suppose that government spending increases to $400, while net taxes remain at $300.

Is the government now running a budget deficit, a budget surplus, or a balanced budget?  

Final Answer __________________ 

E. Given the new supply curve, calculate the new equilibrium interest rate

Final Answer __________________ 

F. Calculate the new equilibrium level of private savings.  

Final Answer __________________