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Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation’s goods and services. What is the most likely short-run effect on this nation’s economy if there is a significant downturn in economic activity in other nations around the world?

Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation’s goods and services. What is the most likely short-run effect on this nation’s economy if there is a significant downturn in economic activity in other nations around the world?

WEEK 4 PRINCIPLES OF MAC

Start by reading and following these instructions:

1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.

2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.

3. Consider the discussion and any insights you gained from it.

4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.

Assignment:

1. Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation’s goods and services. What is the most likely short-run effect on this nation’s economy if there is a significant downturn in economic activity in other nations around the world?

2. Consider a country with an economic structure consistent with the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate higher future profitability from investments they undertake today. Explain whether or how this could affect the following:

a. The current equilibrium interest rate

b. Current equilibrium real GDP

c. Current equilibrium employment

d. Current equilibrium saving

e. Future equilibrium real GDP

3. Bureau of Labor Statistics: Economy at a Glance

Use the link at BLS Pay to visit the Bureau of Labor Statistics (BLS) Web site.

Perform the indicated operations, and answer the following questions.

a. In the “Pay and Benefits” popup menu, click on Employment Costs. Choose Employment Cost Trends. What are the recent trends in wages and salaries and benefits? In the long run, how should these trends be related to movements in the overall price level?

b. Back up to the home page, and in the “Productivity” popup menu, click on Labor Productivity  and then on PDF next to “LPC News Releases: Productivity and Costs.” How has labor productivity behaved recently? What does this imply for the long-run aggregate supply curve?

c. Back up to the home page, and now in the “Employment” popup menu, click on National Employment and then on PDF next to “National Employment (from the Current Employment Statistics survey”.  Does it appear that the U.S. economy is currently in a long-run growth equilibrium?

Consider the following: aggregate demand and long-run aggregate supply. Search the Internet for data on factors that influence the assigned curve for each. For which factors do data appear to be most readily available? For which factors are data sparser or more subject to measurement problems?

4. Some economists have begun factoring into their long-run aggregate supply evaluations the underutilized and untapped resource endowments near and within the Arctic Circle. Bringing those resources into broader use, these economists suggest, could do much to generate speedier rightward shifts of the long-run aggregate supply curves of the United States and other northern nations.

Lands with Unexploited Resource Endowments

The Arctic, the global region north of 66.33 degrees latitude, contains only slightly more than 4 percent of the earth’s surface area. Nevertheless, nearby regions stretching southward to 45 degrees latitude encompass another 11 percent of the earth’s surface and an additional 25 percent of its landmass. Wide swaths of these lands contain significant endowments of as-yet unexploited resources, including minerals, oil, and natural gas.

Three key explanations can be offered for the meager utilization of the Arctic and near-Arctic resources. First, the region is not particularly hospitable to people, who must adapt to long summer days and winter nights and too long periods of extreme cold. Second, large tracts of land are covered with thick permafrost and with heavy sheets of ice, or glaciers. Third, much of the land near and within the Arctic is publicly owned. Governments have fewer incentives than private individuals and businesses to extract productive resources from these lands. Indeed, failure to place the Arctic and near-Arctic resources in private hands has done more to consign them to an economic deep freeze than the cold air above them.

Could unfreezing Arctic endowments heat up aggregate supply growth?

The volume of untapped Arctic oil is thought to be sufficiently large to provide the entire world’s requirements for about half a year, and today’s technology could fuel global natural gas requirements for an estimated 2 years. If all estimated Arctic oil could be extracted, it would last the world at least 3 years, and all of the region’s likely natural gas reserves would be enough for about 25 years. Mineral endowments are less certain, but most geologists suspect that the unexploited Arctic and near-Arctic lands contain vast amounts of metal ores.

Of course, making most Arctic resources accessible to private producers would gradually add to the annual flows of resources that residents of northern nations such as the United States could use to produce goods and services. Estimates indicate that drawing on these endowments would boost annual U.S. real GDP growth by an appreciable fraction of a percentage point. Thus, reducing government ownership of these underutilized and untapped endowments would contribute to higher economic growth.

a. Why do you suppose that firms in Arctic nations are already developing specialized tanker ships and platforms for use in privately accessible Arctic areas?

b. What are the possible opportunity costs of opening Arctic lands to private extraction of as-yet unavailable resource endowments?

Resources

For reports of current data about likely Arctic oil and natural gas endowments, go to Arctic Survey.

To learn about economic issues and Russia’s plan for extracting metal ores in the Arctic, go to Arctic Russia.

WEEK 5

Start by reading and following these instructions:

1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.

2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.

3. Consider the discussion and any insights you gained from it.

4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.

Assignment:

1. Figure 12-9 on page 272 displays real investment spending as a percentage of global real GDP since the mid-1990s for developed versus emerging nations. The figure shows that in recent years, decreases in planned investment expenditures as a percentage of global real GDP have occurred in highly developed countries. In contrast, planned investment spending as a percentage of global real GDP has been rising for nations with emerging economies.

Global real GDP has increased every year except for a brief dip during 2009. Consequently, planned real investment has risen in all nations in most years. What Figure 4 depicts, therefore, is a shift toward relatively greater increases in planned investment in emerging nations compared with developed countries.

Within any nation’s economy, variations in planned real investment spending operate through the multiplier to bring about changes in equilibrium real GDP. Thus, a country that experiences a larger upward shift in its planned investment function than another nation will, if both countries’ multipliers have close to the same values, observe a greater increase in its equilibrium real GDP

This relatively larger increase in investment spending helps to explain why countries such as China, India, South Korea, and Singapore are emerging from a status of less developed toward eventual classification among developed nations. Relatively higher planned real investment expenditures in these nations are, through multiplier effects, boosting real GDP per year. Thus, flows of real GDP are expanding faster in these emerging-economy countries than in developed ones.

a. If interest rates, or opportunity costs of investment, happened to be the same in both developed countries and emerging economy nations, what could account for faster upward shifts in the latter group’s planned investment functions?

b. Are stocks of productive capital currently growing at a faster pace in developed countries or in emerging-economy nations? Explain.

Resources

To track real investment spending as a percentage of real GDP in recent years for individual nations, go to Spending vs GDP.

For links to economic data for both developed countries and emerging-economy nations, go to IMF.org.

2. Paying off State Debts instead of Boosting Expenditures

Figure 13-7 on page 292 of your textbook displays two sets of data. One is the cumulative quantity of grants of discretionary funds transmitted from the federal government to state governments since late 2008. The other is the net amount of borrowing by state governments.

As grants of federal funds to state governments accumulated after 2008, the net borrowing of state governments declined. Many state governments were heavily in debt at the end of 2008, with borrowings in excess of $160 billion. For these states, the receipt of discretionary federal grants beginning in 2009 was a godsend, because it allowed them to start paying off a number of existing debts.

Debt Repayments are not Immediate Flows of Spending

The funds intended by the federal government to enter the nation’s flow of income and expenditures did not reach that flow. States sent them to creditors.

Rather than direct the federal funds to additional spending, therefore, the state governments used the bulk of ARRA federal grants to pay off part of debts generated by spending projects completed in prior years. Most estimates indicate that of the federal “stimulus” funds given to state governments, less than 5 percent were directed toward new spending within the nation’s flow of income and expenditures. Thus, a 95 percent direct fiscal offset resulted. Instead of providing an immediate boost in state infrastructure spending on roads, bridges, and the like, nearly all of the federal funds transmitted to state governments for spending instead were saved.

a. Why might federal spending on roads, waterways, or national security be less subject to direct expenditure offsets than spending on health care or education?

b. What might account for the fact that estimates of effect time lags for fiscal policy often differ considerably across different types of government expenditures?

Resources

Take a look at the U.S. government’s official Web site for tracking the use of ARRA funds at U of W – ARRA.

For further discussion of why directing so many federal ARRA funds to the states failed to produce very much fiscal stimulus to the U.S. economy, go to ARRA Fizzle.

3. The U.S. government is in the midst of spending more than $1 billion on seven buildings containing more than 100,000 square feet of space to be used for study of infectious diseases. Prior to the government’s decision to construct these buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings began, however, the universities dropped their plans. Evaluate whether the government’s $1 billion expenditure is actually likely to push U.S. real GDP above the level it would have reached in the absence of the government’s construction spree.

4. The Share of Tax Revenue Going To Discretionary Spending

Figure 14-6 on page 312 of your textbook shows the share of total federal spending on entitlements has increased during the past 20 years. How has this trend affected the government’s ability to fund its discretionary spending?

Figure 14-7 on page 314 of your textbook displays the percentage of tax revenues available to apply toward discretionary spending—that is, after paying for entitlement expenditures—since the early 1990s. During the late 1990s, this percentage rose above 100 percent, meaning that the federal government officially operated with surpluses and paid down some of its outstanding debts.

After the late 1990s, however, the percentage of tax revenues available to cover discretionary spending after paying entitlements steadily declined. Since the late 2000s, this percentage has dropped substantially.

Indeed, during periods in which the percentage of tax revenues available to allocate to discretionary spending has been zero or negative, the federal government’s tax revenues have been insufficient to pay for any of its discretionary spending. During these intervals, all discretionary spending has been financed with borrowed funds.

Borrowing in Part to Cover Entitlement Spending

When the share of federal tax revenues allocated to discretionary spending is below zero, the government borrows more than the amount of its discretionary spending. During these intervals, the government borrows funds to help pay some of its non-controllable expenditures on entitlements as well as to cover its discretionary spending.

a. What would be true of entitlement spending if the percentage of taxes allocated to discretionary spending rose to 100 percent and the federal budget was balanced? (Hint: Under a balanced budget, tax revenues equal the sum of discretionary and nondiscretionary expenditures.)

b. How would entitlement spending be funded if tax revenues just covered discretionary spending and there was a government budget deficit?

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