04 Jun Question Economics 304 Homework #1– A ride into reality!
Question
Economics 304
Homework #1– A ride into reality!
Due Wednesday, 9/10 at the beginning of class – 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, clickHere.
Use the following two links to answer the following questions:
For Nominal Wages (W) Click Here
Price index CPI (P) [2] Click Here
I recall back in the early 1990s (before many 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).
d) When I used to fish in Miami, say June of 2001, I used to tip the captain and mate $30. Calculate the tip that I would need to give the captain and mate 1) 10 years prior (June of 1991) and 10 years hence (June of 2011) that would have the same purchasing power as my tip in June 2001. In other words, calculate the tips that I would need to give the captain and mate so that they can achieve the same level as satisfaction as in June 2001 (assume importantly that the basket they consume is same as the CPI basket).
e) Using the most recent data, calculate the percent change in the real wage over the most recent 12 months in two different ways. First, calculate the real wage one year ago and now and take the percent change of those two numbers. Second, use the approximation as we used in class…%?(W/P) = %?W – %?P. That is, take the percent change in nominal wages and subtract the percent change in prices (aka inflation). Now compare your two answers, is the approximation close to the real deal?
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 (calculate the real wage when you were born as well as the number employed) as point A and the conditions as of the present as point B. Use actual numbers an
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