Econ 302 Exercise Set 2

Course Instructor: Leigh Tesfatsion
Date: 5 February 1996

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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!

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~EXERCISE 2.1 [3 Points]:~   Hall and Taylor, Chapter 2, ANALYTICAL
Exercise Number 8, page 64.

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~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.

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~EXERCISE 2.3 [3 Points]:~ Hall and Taylor, Chapter 3, ANALYTICAL
Exercise Number 3, page 85.

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