REVISED VERSION ~SECOND TAKE-HOME EXERCISE SET [9 Points Total]~ L. Tesfatsion ~DUE DATE: Tuesday, Feb 13, 9:30 A.M.~ Econ 302/Spring 96 ~**PLEASE NOTE:~ Exercise answers are to be turned in at the #beginning# of class on the due date. Late assignments will not be accepted---no exceptions! Students are encouraged to work #together# on these and all future exercise questions. However, each student is required #separately# to pass in an answer sheet to minimize the danger of "free-riding" and consequent disasters on the midterm and final exams! ----------------------------------------------------------------- ~EXERCISE 2.1 [3 Points]:~ Hall and Taylor, Chapter 2, ANALYTICAL Exercise Number 8, page 64. ------------------------------------------------------------------- ~EXERCISE 2.2 [3 Points]:~ Hall and Taylor, Chapter 2, MACROSOLVE Exercise Number 2, page 65. ~IMPORTANT CORRECTION:~ Hall and Taylor incorrectly omit V = [net factor and transfer payments] in the accounting identities stated in parts a) and b) of this exercise. Corrected statements for Parts a) and b) are given below. Also, note that the MacroSolve data labelled "savings" represents PRIVATE savings for the U.S., and the MacroSolve data labelled "investment" represents private gross investment for the U.S. ~PART a) REVISED:~ First, explain intuitively rather than algebraically why it must always be the case that, in realized terms, private savings equals investment plus the government deficit plus net exports plus net factor and transfer payments. In algebraic terms: (*) S`p = I + [Gov't Deficit] + NE + V . Second, using the MacroSolve data for savings (which represents U.S. #private# savings), for investment, for the government deficit, and for net exports, all expressed as percentages of GDP, confirm for 1930-1993 that savings are #approximately# equal to the sum of investment plus the government deficit plus net exports. STUDENTS SHOULD APPEND TABULATIONS AND PLOTS FOR THIS MACROSOLVE DATA TO THEIR TURNED IN EXERCISE SETS. ~PART b) REVISED:~ According to relation (*), private saving and investment should be positively related (given everything else remains the same), the government budget deficit and investment should be negatively related (given everything else remains the same), net exports and investment should be negatively related (given everything else remains the same), and net exports and the government deficit should be negatively related (given everything else remains the same). Graph each relationshop using annual U.S. data from 1930 to 1993. Historically, have these relationshops existed? In particular, do the data support the argument that government deficits "crowd out" investment in the sense that times of high government deficits tend also to be times when investment is low? Are high government deficits correlated with low net exports in the sense that times of high government deficits tend also to be times when net exports are low? ~NOTE:~ In addition to eye-balling the data plots, check out the "correlation statistic" provided by MacroSolve (under "Statistics") whenever two time-dated variables are plotted together. By construction, the correlation statistic must lie between -1 and +1; and a positive correlation statistic indicates that the two variables tend to move #together# over time whereas a negative correlation statistic indicates that the two variables tend to move in #opposite# directions over time. ------------------------------------------------------------- ~EXERCISE 2.3 [3 Points]:~ Hall and Taylor, Chapter 3, ANALYTICAL Exercise Number 3, page 85.