Using the AD-AS and IS-LM graphs in your answer, and starting where Y = Yn,

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I. Using the AD-AS and IS-LM graphs in your answer, and starting where Y = Yn,

Price/Interest rateAS1AS2LM2

LM1

e2

P0/r0e1

AD1IS1

IS2

AD2

Y

Y1* Y2*

According to the graph above, in the short run curves, the price levels and the interest rate of the curves settles at equilibrium e1 and e2 respectively.

Increase in tax has an effect of increasing the price levels in the economy. As a result, the AS curve shift to the right while the aggregate demand declines and make the AD curve to shift to the left.

The output y adjusts to y1*

Increase in the price level increases the interest rate level in the economy. High interest rate makes the LM curve to shift to the right and reduces investment/savings in the economy. This decline makes the IS curve to shift to the left as indicated in the curve above. The overall output adjusts at y2*

Increase in the interest rate as a result of the increasing taxes in the economy makes the investment and money demand to decline in the economy. As a result, the consumption levels reduces to y2* as indicated in the graph above.

II.Given the Phillips Curve: EMBED Equation.3

π t= EMBED Equation.3 π EMBED Equation.3 + 0.1 – 2 u t

where π EMBED Equation.3 = θ π t-1 and θ = 0 initially

where we assume u t = 0.04 (or 4%) for all t

π t= EMBED Equation.3 π EMBED Equation.3 + 0.1 – 2 u t

when θ=o initially, π t =0.1-2ut

π t= 0.02

=2% for period t.

For the second period, t+1, i.e 0+1, π t= 1+ 0.1-2(0.04)

=1.02

=10.2%

For priod t+2, π t= 2+0.1-2(0.04)

=20.2%

When adjustment are made, so that θ=1, π t=1(3) +0.1-2(0.04)

=30.2%

For t+4, π t=40.2%

And t+5, π t=50.2%

As the inflation rate rises above the expected natural rate of inflation, the expectations of the inflation are never met for the five years. The inflation is higher than the expected.

III. Both the authors, Robert Reich and Emily Chong argue for an increase in the minimum wage in the U.S. This quote is from Reich, “the Walton family [which owns most of Walmart] now exceeds the wealth of the bottom 40 percent of American families combined ….” Using the information in both articles, first explain how it is that such inequality has occurred. Second, explain the benefits to raising the minimum wage.

The Walton family wealth may exceed the wealth of the bottom 40% of the American families due to the ownership of resources (capital of the Walmart) at their disposal. Inequality in the income distribution is a factor which has myriad effect to the United States’ economy.

The following explanations are the benefits of raising minimum wage to the United State’s economy:

Benefit to the workers and to the economy: raising the minimum wage inject some spending into the economy at large and at the same increase the purchasing power of the workers. Increase in the level of purchasing power of the individual workers increase their standards of living and their increase the general consumption. It also increases their investments and savings.

On the other hand, increased spending in the economy induces economic growth and the general Gross domestic Product of the overall economy of the United States.

Reducing the gap f income inequality: income inequality has been a major factor in the American economy and increasing the minimum wage to some reasonable level reduces the gaps the level inequality in the system.

Economic stimulus: increasing the minimum wage is considered a fiscal policy aimed at stimulating the economy. When a low income household earn more money, in real wage, their increased purchasing power increase spending, and more dollars are injected into the economy. According to the Federal Reserve Bank of Chicago study, spending by households that have a minimum wage worker by rose by $700 per quarter and indicated high spending in the economy.

Increased financial security and creation of job opportunities thereby achieving one of the government objectives of unemployment rate reduction.

IV.Use the 2013 Economic Report of the President data appendix for this, which can be found at HYPERLINK “http://www.gpoaccess.gov/eop/” http://www.gpoaccess.gov/eop/. In the list of statistical tables, find Table B-60 and save a copy for yourself.

Using the annual data from 1980 forward, calculate the individual inflation rate for each of the following consumer price indices: for All Items, for Housing, for Medical Care, and for Energy.

Before you can graph these series over time, you must remove the apostrophe at the beginning of “years”. Do this by highlighting the “years”, then right-click on the little box with the‘!’ in it on the right and choose “convert to number”.

Graph all these inflation rates over the years on 1 graph. (Choose a scatter plot that allows you to distinguish the different series when printed.) Include an appropriate title and make sure you have the years on the horizontal axis.

Finally, discuss the relationship between these indices as follows:

How do you interpret the negative values

Which index is most volatile, and which is the least

What is the general pattern of inflation over time for each series

Which series might best explain the behavior of the ‘All Items’ inflation