# Multiple questions

macro economics test / quiz prep and need the explanation and answer to help me learn.

Requirements: Just the question

Econ 2020, ASSN-QUIZ#2

Debt, interest rates, and the velocity of money

Use the data sets posted in the DATA module in elearning to get data on bond interest rates, the Federal government’s debt, the CPI, M1, and GDP for the dates I’ve indicated. The files containing these data are, respectively, FREDDATAbondrates, FREDDATAgovdebt, FREDDATAcpi, FREDDATAm1, and FREDDATAgdp. Note that there are not data on M1 for the dates below. Use data for the first week of the year. Specifically, use M1 on 1/3/2000, 1/11/2010, and 1/6/2020.

Moody’s AAA bonds % Federal gov debt Fed debt as velocity of money

billions a % of GDP

1. 2000-01-01_____ 2._____ 3. ______ 4. ______

5. 2010-01-01_____ 6._____ 7. ______ 8.______

9. 2020-01-01_____ 10._____ 11.______ 12._____

From fred.stlouis.org get these data from Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (type CPI into the search bar and hit return; then click on the file and when the graph appears, click on “download” etc. The CPI for 1980-01-01 should be 78):

13. CPI 1990-01-01 __ 14. CPI 2000-01-01 __

15. CPI 2010-01-01 __ 16. CPI 2020-01-01 __

Use these data to calculate the annual inflation rate over three 10 year periods: 1990-2000, 2000-2010, 2010-2020. Follow the instructions I gave you in assignment #1. Note that now you divide by 10, NOT 20.

17. 01/01/1990 to 01/01/2000 ___ 18. 01/01/2000 to 01/01/2010 ___

19. 01/01/2010 to 01/01/2020 ___

20. Do this data suggest that interest rates go up as the government’s debt goes up?

21. Why do you answer question #20 this way?

22. What can you infer about the relationship between government debt and interest rates

from these data?

23. Do your calculations support the hypothesis that the velocity of money is a constant?

Compare the three inflation rates you calculated to interest rates in 2000, 2010, and 2020. Compare those inflation rates to velocity in 2000, 2010, and 2020.

24. What kind of relationship between inflation and interest rates do these data and your

calculations suggest?

25. What kind of relationship between inflation and the velocity of money do these data

and your calculations suggest?

Go to the website bea.gov. Click on “Data,” and then on “by Topic.” Under the heading “Gross Domestic Product,” click on “Gross Domestic Product.” Scroll down and click on “Interactive Data.” Then click on “GDP and the National Income and Product Account (NIPA) Historical Tables.” Click on “Begin using the data…” and then click on “SECTION 2 – PERSONAL INCOME AND OUTLAYS.” Open Table 2.1 and get these data:

1. Disposable personal income 1999 _______

2. Disposable personal income 2019 _______

3. Personal consumption expenditures 1999 ________

4. Personal consumption expenditures 2019 ________

Use these data to estimate the U.S. economy’s marginal propensity to consume. That estimate would be 5. _________ divided by 6. _________. That is, this estimate of the marginal propensity to consume is 7. _________.

(This question will appear on the quiz as “What is the amount for question #5?” etc.)

8. If that’s the MPC, then the exogenous expenditure multiplier would be ________.

What you’ve calculated is a theoretical limit, i.e. the multiplier can’t be greater than that. So in what follows, let’s suppose the actual multiplier is 1/2 the value in 8. Congress recently passed the Infrastructure Investment and Jobs Act. This act authorizes spending $1.2 trillion on roads, bridges, the electrical grid, etc. – infrastructure – over 10 years. Suppose that 10% of this amount is spent each year, and that the exogenous spending multiplier is one half the value that you calculated (1/2 the correct answer to 8.).

9. How much would the act increase GDP each year? _____

Spending on goods will equal prices times quantities purchased. Quantities purchased must equal quantities produced. If we apply a little calculus to this equation, we come to this conclusion:

% change in spending = % change in prices + % change in production

Suppose that the percentage change in prices due to the act is 1/2 the percentage change in spending (so it also causes production to increase, which is the point of the act).

10. Under this assumption, what will the percentage increase in prices due to the act be? ____

Note: the percentage change in spending caused by the act = the answer to 9. divided by GDP in 2020. That value is in Table 1.1.5, in SECTION 1 – DOMESTIC PRODUCT AND INCOME.

Some argue that an increase in government spending will increase the inflation rate. Consider the following scenario. Over a five year period prices are

100, 103, 106.1, 109.3, 112.61)

But suppose that if the government spends x $ more than it was spending starting in year 1, then over that 5 year period prices would be

102, 105.1, 108.2, 111.5, 114.82)

Well, the fact that the government is spending x $ more in each of these five years than it was spending previously increases prices in each year. So

11. What’s the percentage increase in prices from year 1 to year 5 if 1)?

and

12. What’s the percentage increase in prices from year 1 to year 5 if 2)?

13. What conclusion does this lead us to, regarding the effect of an increase in government

spending on the inflation rate?