ECO 201 -- Assignments - Principles of Macroeconomics -

Web Assignment # 2 - Due on Monday, November 24
Your Name: ________________________

National Budget Simulation

Introduction:

The new President of the United States has been elected on the promise of fiscal responsibility. He has promised the voters he will not raise taxes, and he will not reduce Social Security or Medicare. He has promised interest groups that he will not reduce Commerce Department spending. By law he cannot reduce the net interest paid on the debt. The President's budget is projected to leave the country with a $230 billion surplus, and he promises not to allow a deficit, unless the U.S. faces a recession or war.

Suddenly, the United States is subject to military attack -- a turn of events not anticipated in the current budget. At the same time, a lingering recession reduces the government's tax revenues and forces the government to increase its spending on unemployment benefits, welfare, housing assistance, food stamps, and other need-based programs. Because of the increased spending and reduced revenues, the nation falls into a projected deficit of nearly $185 billion.

Then Congress passes legislation to increase military spending by 20 percent, to pay for increased security within the U.S. and to pay for a prolonged military response against the attacking country and other potential threats. The President signs this bill into law, increasing the projected deficit to nearly $254 billion.

The President is committed to keeping his campaign promises, in order to maintain support for his reelection. He must protect the programs he promised to protect, and he cannot raise taxes, so he must cut spending on other programs to stay within his new guideline to keep the deficit below $150 billion. The President turns to you, his trusted economic advisor, for help. (Note: While some events in this scenario reflect actual events, others are hypothetical for the purposes of this exercise. Budget figures are actual White House projections of 2002 spending and revenues as of September 2002).

Process:

1. Follow this link to the NCEE National Budget Simulation.

2. To represent the 20 percent increase in military spending, the spending levels have automatically been changed. You can see how this affects the total spending at the bottom of the column.

3. Scroll to the bottom of the page to see the effect of the increase in military spending on the "New Surplus" (a negative surplus is a deficit). Remember that you need to get this figure below $150 billion. Make note of the relative amounts of the budget spent on each area listed in the table, so that you can decide where cuts might be effective to reduce the deficit.

4. Now begin cutting the program budgets as a tradeoff for the increased defense spending. Remember, for political reasons or by law, you cannot make any changes in these areas: Commerce and housing credit, Medicare, Social Security, Net interest, Allowances, and Undistributed offsetting receipts. You can click on the names of the spending areas to see the programs in the respective spending areas.

5. Keep cutting programs until you have reached your $150 billion deficit limit. Hint: You will have to cut most programs by at least 10 percent to reach your target. When cutting programs, keep in mind that program cuts could seriously affect citizens’ daily lives. Also keep in mind people who may be so angered by program cuts that they will take action to prevent the President’s reelection.

Note:

You may be tempted to quickly reach deficit limits by making extreme cuts or even eliminating entire programs. You should consider the real-life ramifications of such cuts, and realize that even 10 percent cuts in many programs will have serious consequences.

Conclusion:

When you have reached your target, print out your results. Consider which programs you have cut, to help you answer the reflection questions on the Worksheet. When you are finished with the lesson, hand in the paper that you printed along with this worksheet.

Assessment Activity:

You should now write an explanation of the decisions that you made and the justifications for those decisions. If you have individually completed the activity, with your classmates you can discuss the decisions and justifications. Also hand in the printout of the "Your New Budget" page as a way to assess your decision-making skills in this activity.

Assignment # 1 - PPC or PPF

Homework #1: Opportunity Cost, Factors of Production, Rationality

Answer the following questions using the data below. You may choose to use graph paper and/or a spreadsheet program (e.g. EXCEL) if you prefer.

Problem 1. (All quantities are in millions.)

a. Graph the production possibility curve above.
b. Calculate the opportunity cost of producing the second 20 million hamburgers. (Show your work.)
c. Calculate the opportunity cost of producing the last 20 million hamburgers. (Show your work.)
d. Does this economy exhibit constant or increasing opportunity cost? How do you know?

Problem 2. Determine which category of resource (land, labor, capital, or entrepreneurship) to which each of the following belongs:

a. A taxicab (not the taxi driver)
b. A forest
c. An individual explaining a new way to market products on the Internet.
d. One hour of personal finance counseling.

Problem 3. Write a paragraph (or more) in your own words stating whether you agree or disagree with the following statement and explain why or why not. Use proper spelling and grammar. (-1 point for each obvious spelling or grammar error.)

Since higher education has many benefits (higher lifetime pay, less likely to become unemployed, etc.) and those benefits increase with higher levels of education, it is irrational for someone not to pursue the highest possible level of education, i.e. a Ph.D. in Economics, Psychology, or some other discipline.?

Assignment Due:

Homework Assignment # 2: Production Possibility Curves

On a separate page, answer the following questions using the data below. You may choose to use graph paper and/or a spreadsheet program (e.g. EXCEL) if you prefer. Beer is measured in millions of bottles and pizza is measured in thousands of tons.

a. Graph the production possibility curve above.

b. Calculate the opportunity cost of producing one thousand tons of pizza. Show your work.

c. Calculate the opportunity cost of producing one million bottles of beer. Show your work.

d. Suppose the economy above produced 15 million bottles of beers and 4 thousand tons of pizzas. Graph this point on your graph in a. above. Label it Point G. Characterize this Point: Does Point G represent an efficient, an inefficient, or an unattainable level of production.

Suppose the labor force of this economy increased in size. The new production possibilities curve is:

e. Graph the new production possibility curve on the same graph. What is the new opportunity cost of producing pizza (show your work). Has the opportunity cost increased, decreased or stayed the same?

Homework Assignment # 3 - Comparative Advantage

In class, we learned about the law of comparative advantage, a model which can be used to model international trade. Answer the following questions using the information provided below. All units of measure (of barrels of oil or autos) are reported in millions per year.

Questions:

1) Draw the production possibilities curves for Canada and Mexico (on separate graphs). Which country or countries exhibits constant opportunity cost, if any?

2) Suppose Canada chooses to produce at point C and Mexico at point I. What is the total amount of autos and the total amount of oil produced by the two countries?

3) Which country has the absolute advantage in oil production? In autos?
Calculate the opportunity cost of producing 1 m. barrels of oil in each country. Which country has the comparative advantage in oil production?

4) If each country specializes (complete specialization) based on comparative advantage, what is the total amount of autos and oil produced by the two countries?

5) After complete specialization, both countries agree to this trade: 160 m. barrels of oil from Canada for 120 m. autos from Mexico. What is the post-trade distribution of autos and oil, i.e. how much autos and oil will Canada and Mexico have at the end? Illustrate the post-trade results on the graphs from Question 1.

Homework Due:

Homework # 4 - In-class activity - S & D

Read the chapter on Supply and Demand in the textbook and answer each question in a paragraph using complete sentences. You will be graded on how well you exhibit an understanding of the economics of supply and demand. Spelling and grammar will also be taken in to account.

Problem 1 (5 points)
Economics textbooks typically say that the purpose of advertising is to provide the consumer with information, to shift demand curves outward and make markets work better. To some extent advertising serves that function. A lot of advertising, though, contains half-truths designed to lure the customer. A radio ad for a medical practice that performs laser eye surgery claimed "Our doctors are trained at Princeton, Harvard, and Johns Hopkins." No doubt some of the docs did attend Harvard or Johns Hopkins medical schools, but since Princeton does not have a medical school, the fact that a doctor got a non-medical degree there tells me nothing how competent that doctor is. This is not quite false advertising, but it is not providing any useful information.
Question: If you were constructing an ad campaign for this laser-surgery clinic, how would you try to "sell" the services of its doctors without providing misleading information?

Problem 2 (5 points)
I watch the TV show Law & Order quite a bit. A rerun of Law and Order involved gang warfare in Manhattan. A New Jersey gang had been encroaching on the turf of a Manhattan gang's drug-selling operation. A number of murder victims had been found: people who did not seem like gang members. It turned out that the victims had formerly been customers of the Manhattan gang but had begun buying from the New Jersey gang. The murders were designed to scare other customers away from buying from the New Jerseyites and back to buying from the Manhattan gang to shift demand curves in the two markets.

Question: Why did the Manhattan believe this tactic would achieve change the demand for their product? What else might shift a consumer's demand curve for drugs sold by a particular gang? (Remember public advertising is illegal.)

Homework # 5 - S & D

Problem 1
How do you think each of the following affected the world price of oil? Draw a supply and demand diagram illustrating the change in equilibrium price and quantity for each of the following:
a) Tax credits were offered for expenditures on home insulation.
b) The Alaskan oil pipeline was completed.
c) Oil was discovered in Mexico and the North Sea.
d) Less fuel efficient sport utility vehicles and minivans became popular.
e) The use of nuclear power decreased while electricity needs have continued to grow.

Problem 2
What will happen to the equilibrium price and quantity in the U.S. market for cigarettes if the following event occurs? Draw a supply and demand diagram illustrating the change in equilibrium price and quantity for each of the following:
a) A cure for lung cancer is found.
b) A fertilizer that increases the yield per acre of tobacco is discovered.
c) The price of cigars increases substantially.
d) There is a substantial increase in the price of matches and lighter fluid.
e) Wages increase substantially for farm workers who grow tobacco.

Homework #6: Macroeconomic Indicators

1. Indicate whether each of the following would be considered frictional, structural, seasonal or cyclical unemployment.
a) A UPS employee who is hired for the Christmas season and laid off after Christmas.
b) A worker who is laid off due to a decline in aggregate demand throughout the economy, i.e. a recession.
c) A worker in the typewriter manufacturing industry who becomes unemployed as the increased popularity of personal computers reduces the demand for typewriters.
d) A new college graduate who got a late start in the job market and is looking for employment during the summer after graduation.

2. Answer the following questions regarding GDP.
a) GDP in 1981 was $2.96 trillion. It grew to $3.07 trillion in 1982, yet the quantity of output actually decreased. How is this possible?
b) Suppose you hired a friend to type a paper, who reported the income to the IRS (and therefore was included in GDP). If you had done the same job yourself, GDP would not have been higher, even though the amount of economic activity (1 typed paper) would have been identical. Explain why this occurs and what this implies about the usefulness of GDP as a measure of output.

3. If actual inflation is more than expected inflation, which party loses purchasing power in the following situations?
a) A bank lends money to a corporation at a fixed interest rate. (Bank or Corporation?)
b) A worker receives a pay increase from the firm based on the expected rate of inflation. (Assume firm raises the prices of its products at the rate of actual inflation.)
(Worker or Firm?)

4. Indicate whether the following statement is true, false, or uncertain and explain why:
a) Value-added taxes affect the economy much like sales taxes.
b) The unemployment rate is considered a Leading Indicator of economic activity, as defined in the chapter.

Last updated November 17, 2003

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