Name last 4 PSU ID Section 001 MWF 11 15 am 12 05 pm 10 Sparks Building Section 002 MWF 2 30 3 20 pm 102 Thomas Building Spring 2013 Chuderewicz YOU MUST USE THIS AS A TEMPLATE THAT IS MAKE SPACE FOR YOUR ANSWERS BY HITTING ENTER you certainly don t need to type this assignment LEAVE THE QUESTIONS AS THEY ARE AND PLEASE STAPLE NOTEBOOK PAPER OR ANY PAPER STAPLED TO THE BACK IS NOT ACCEPTABLE ALSO PLEASE PUT THE FIRST TWO LETTERS OF YOUR LAST NAME IN THE TOP RIGHT HAND CORNER OF THIS PAGE SO THAT WE CAN ALPHABETIZE THESE EASILY THANKS IN ADVANCE Economics 304 Homework 1 A ride into reality Due Friday 1 25 at the beginning of class you must hand in homework in the section you are registered in no late papers accepted Instructions Please show all work or points will be taken off Good luck 1 60 points total 10 points each part In this first homework assignment we are getting our hands dirty to get familiar with some of the major macroeconomic variables that we will be using and working with throughout the semester Our first chapter with something to sink our teeth into is chapter 3 and it is all about the factors of production the labor market and of course the production function Major variables in this part of the macroeconomy i e the supply side of the economy include but certainly are not limited to employment denoted N real wages denoted w W P where W nominal wage and P is the price index typically the CPI and real GDP denoted Y When we move to chapter 4 we encounter many more major macroeconomic variables including consumption C investment I and the real interest rate denoted r among others We are going to use FRED as our source of data many professional economists use this site nice clean data 1 I provide you with the links to the data that is needed throughout this assignment For an interesting look at the W vs the P click Here Use the following two links to answer the following questions For Nominal Wages W Price index CPI P 2 1 Click Here Click Here FRED stands for Federal Reserve Economic Data click Here for the FRED website Hint when deflating using a price index we typically move the decimal two place to the left For example in 12 09 W 18 80 and the price index was 217 541 The real wage is thus 18 80 divided by 2 17541 2 I recall back in the early 1990s back around the time when most of you were born when Bill Clinton was running for President and he was arguing that under the Bush Sr Administration 1989 1992 that real wages for Americans actually fell implying that on average workers were better off in terms of the real wage at the beginning of the Bush Administration compared to the end of the Bush Administration a Calculate the real wage W P the first month of the Bush Sr Administration 1 89 and compare it to the last month of the Bush Sr Administration 12 92 Please show all work Was Bill Clinton correct in his claim Why or why not b The last four years of the Clinton Administration were arguably the absolute best in terms of the recent performance of the US economy 1 97 12 00 When we get to Chapter 3 we will discuss this period in much more detail and we refer to this period as the new economy Of course one metric of the health of any economy is the behavior of the real wage In this part we repeat the analysis above but use the final four years of the Clinton Administration In particular calculate the real wage W P the first month of Clinton s second term 1 97 and compare it to the last month of Clinton s second term 12 00 Did real wages rise or fall during this period Please show all work c Now do the same with the Obama Administration That is calculate the real wage at the begining of the Obama Aministration 1 2009 and compare it to the present real wage use the most recent available data Could have Mitt Romney make the same claim that Bill Clinton made in the early 1990s about real wages falling during their opponents Administration d When I arrived here in August of 1990 for grad school the price of a sticky bun in the College Diner was 1 20 If the price of sticky buns rise in exact proportion to the CPI what would the current price of sticky buns need to be now so the the real price of sticky buns remains the same as it was in August of 1990 round down to nearest penny Use the CPI the same price index that you have been using thus far for your calculations Please show all work e Calculate the real wage when you were born and compare it to the real wage as of the present make sure you write down the month and year you were born so we can verify your answer Which real wage is higher and why To answer compare the percent change in W to the percent change in P over this time horizon To answer f you need to use the following link Employment N Click Here f Draw a graph with the real wage w W P on the vertical axis and employment N on the horizontal axis Locate the initial conditions when you were born as point A and the conditions as of the present as point B Use actual numbers and label your points accordingly You graph should have two points and no lines How many more people are working now relative to when you were born hint the answer is in millions 2 2 70 POINTS total 10 points each part Another critically important real economic variable we consider in this homework assignment is the real interest rate We learned that the real interest rate is the difference between nominal interest rates and inflation In fact there are two real interest rates ex ante and ex post Ex ante real interest rates are the expected real rates where ex post real interest rates are the real rates that were actually realized An example will help Suppose one year nominal interest rates are 5 and you expect that prices are going to rise by 3 i e your expected rate of inflation e is 3 over the holding period one year Your ex ante or expected real rate of interest is therefore 2 Now suppose that over the year inflation wasn t 3 but 4 instead your expectation rate of inflation was wrong That is actual inflation equaled 4 and thus your actual real rate referred to as the ex post real rate of interest is only 1 Naturally ex ante and ex post real interest rates differ anytime expectations of inflation are different than the actual rate of inflation To summarize the ex ante real rate is equal …