University of oregon ec 202, winter 2016 a problem set #3

Problem Set #3
Due in section Friday, March 11, 2016. No late problem sets accepted! (Seriously. No late problem sets are accepted for credit.)
NOTE: To ensure proper grading, write your answers in the area indicated.
1. (2 points) Ruth works as a judge for an important federal court in Washington, DC. Assume for 2015 her taxable
income after her personal exemption and the standard deduction was $236,500 and that she will take no other
deductions. Use the following table of the tax brackets for single filers for 2015 to answer the following questions.
2015 Federal Tax Brackets
Rate Single Filers
10% $0 to $9,225
15% $9,225 to $37,450
25% $37,450 to $90,750
28% $90,750 to $189,300
33% $189,300 to $411,500
35% $411,500 to 413,200
39.6% $413,200+
a. What was Ruth’s marginal tax rate for 2015? Briefly explain.
Ruth’s marginal tax rate %
b. Calculate the amount of income tax that Ruth owed for 2015. Show your work. Round your answer to the nearest
penny.
amount of income tax
Ruth owed for 2015
c. Given Ruth’s taxable income listed above, what was the average tax rate for her federal income tax? Show your
work. Express your answer as a percentage and round that percentage to one decimal place.
Ruth’s average tax rate %
EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 2 of 7
2. (4 points) For each situation, draw the necessary shift (or shifts) of a curve (or curves) on the graph, drawing any
appropriate arrows and labeling any newly drawn curves. On the side, indicate whether the overall price level and the
level of output (GDP) will increase, decrease, stay the same, or change ambiguously over the time frame described.
a. Government spending increases, and a multitude of public works projects dramatically improves infrastructure.
In the long run the overall price level
• increases.
• decreases.
• stays the same.
• changes in an ambiguous way.
[Circle one of the above.]
In the long run the level of output (GDP)
• increases.
• decreases.
• stays the same.
• changes in an ambiguous way.
[Circle one of the above.]
b. A major snowstorm damages crops and creates huge transportation delays.
In the short run the overall price level
• increases.
• decreases.
• stays the same.
• changes in an ambiguous way.
[Circle one of the above.]
In the short run the level of output (GDP)
• increases.
• decreases.
• stays the same.
• changes in an ambiguous way.
[Circle one of the above.]

EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 3 of 7
3. (2 points total) Consider the government of the country of Yed, which ends 2010 with a debt of $550 billion. Over the
following four years, Yed’s government has revenues and expenditures as given in the following table.
a. Fill out the “Amount of deficit” column in the table above for each of the four years given.
Enter deficits as positive numbers and surpluses (if any) as negative numbers. This usage of signs seems
counterintuitive, but it will make the next part simpler.
Show your work below. (Yes, the math is trivial. Show it anyway.)
b. Fill out the “Running total of debt” column in the table above for each of the four years based on what the
previous year’s debt was and how the new year’s deficit or surplus changes it. Remember that Yed ended 2010
with a debt of $550 billion and that all numbers in the table are in billions of dollars.
Now the assignment of positive and negative signs becomes more useful: deficits add to an existing pile of debt,
and any surpluses cause the debt to decrease by that amount.
Show your work below. (Again, it’s simple. Still, write it out. It’ll help you remember how to do it.)
Year
Government
tax revenues
(billions of
dollars)
Government
expenditures
(billions of
dollars)
Amount of
deficit
(billions of
dollars)
Running total
of debt
(billions of
dollars)
2011 350 330
2012 350 360
2013 340 380
2014 360 390
EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 4 of 7
4. (2 points total) Watch “Deficits & Debts”, episode 9 of Crash Course Economics:
https://www.youtube.com/watch?v=3sUCSGVYzI0
[Link also available in the Canvas module “Problem Set 3 links”.]
a. Rounded to the nearest trillion dollars, how high is the federal debt of the United States?
trillion dollars
b. The animated “Thought Bubble” feature discussed two reasons why governments might be worried about
borrowing or unable to borrow more money indefinitely. Explain the first of these reasons in your own words.
c. The animated “Thought Bubble” feature discussed two reasons why governments might be worried about
borrowing or unable to borrow more money indefinitely. Explain the second of these reasons in your own words.
d. Why does the existence of the federal debt ceiling in the United States NOT eliminate concerns about the level of
debt running out of control?
EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 5 of 7
5. (3 points total) Assume that when aggregate income (i.e., aggregate output or Y) increases by $200 million in the
country of Intrometida aggregate consumption (C) there increases by $38 million.
a. Using the pieces of information just given, find the marginal propensity to consume (MPC) for the economy of
Intrometida? What is the marginal propensity to save (MPS)? Show your work. Express your answers decimals
rounded to two places.
MPC
MPS
b. What is the numerical value of the government spending multiplier for the economy of Intrometida? Show your
work. Express your answers decimals rounded to two places.
government-spending multiplier
c. The government has decided that the current level of aggregate output (Y) in Intrometida, $600 billion, is too low.
In response, the government of Intrometida has decided to increase government spending by $30 billion. Using
the rounded answer for the multiplier calculated in part (b), what will the new level of aggregate output be as a
result of the spending policy? Show your work.
[Hint: First, solve for the change in output using the change in government spending and the appropriate
multiplier. Then add the change to the previous level of output (Y) given in the statement of this part. The
handout from section on Mar. 4th will be helpful for this part.]
new aggregate output
EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 6 of 7
6. (2 points total) Watch “What’s all the Yellen About? Monetary Policy and the Federal Reserve”, episode 10 of Crash
Course Economics:
https://www.youtube.com/watch?v=1dq7mMort9o
[Link also available in the Canvas module “Problem Set 3 links”.]
a. According to the video, who is arguably the most influential person on Earth, whose decisions (good or bad) likely
affect billions of people?
b. The Federal Reserve cannot simply tell commercial banks what interest rates to charge borrowers. Instead, how
does the Federal Reserve indirectly manipulate interest rates?
c. In response to the high inflation of the late 1970s the Federal Reserve (led at the time by its Chair, Paul Volcker)
decreased the money supply. This contractionary monetary policy succeeded in driving down inflation, but what
was the downside?
d. According to the video, what is quantitative easing?
EC 202, Winter 2016 Problem Set 3
University of Oregon
Page 7 of 7
7. (4 points) For part (a) draw the necessary shift (or shifts) of a curve (or curves) on the graph, drawing any
appropriate arrows and labeling any newly drawn curves. On the side, indicate whether the real GDP and overall price
level will increase (↑), decrease (↓), stay the same (–), or have an ambiguous change (?) over the time frame described.
a. The central bank increases the money supply.
In the short run: In the long run:
real GDP ↑ real GDP ↑
real GDP ↓ real GDP ↓
real GDP — real GDP —
real GDP ? real GDP ?
overall prices ↑ overall prices ↑
overall prices ↓ overall prices ↓
overall prices — overall prices —
overall prices ? overall prices ?
b. List the three ways discussed in lecture that the Federal Reserve could increase the money supply for the economy
of the United States. No further explanation is needed.
c. Review the short-run and long-run effects on the country’s GDP and overall price level as analyzed in part (a).
What might politicians be tempted to do in the months before an election (that is, with the election happening in
the short run) if they had the authority to increase the money supply? Why might that be a bad idea in the long
run? What does say about the importance of the independence of central banks from political influence?

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