The level of the unemployment rate in the United States was 8.9% in the first quarter of 2011, compared to a consensus estimate of the current natural rate of unemployment of 5.5%. The level of GDP in the United States in the first quarter of 2011 was $15 trillion at the prices of 2010. There were 140 million people at work in the United States in the first quarter of 2011. Savings and investment as a share of GDP in the first quarter of 2011 were only 12.2% of GDP, compared to a normal level for the United States over the past generation of 18% of GDP.
Suppose by some implausible cinematic plot device your consciousness were to be transferred at this moment into the body of Eugene Sperling, Assistant to the President for Economic Policy, in his small cramped office on the second floor of the West Wing of the White House (no, the TV show does not give a good picture of what the offices are like: they have to get the cameras into and out of the set, after all). President Obama calls and tells you that Federal Reserve Chair Ben Bernanke has just told him that the Federal Reserve Open Market Committee is unwilling to take any additional steps to boost employment and production.
President Obama asks if you would write up a two-page memo for his political staff telling them what the ideal macroeconomic fiscal policy over the next several years for him and the congress to undertake to deal with the aftermath of the recession would be if there were no political constraints on the federal government's budget. He tells you to keep it to at most 400 words--that is all that they will read. He tells you that most of the audience for this memo took courses like Econ 1 and IAS 107 in the past, but that they have forgotten all of it. You can use equations and graphs if you wish, but they had better be understandable to somebody who knows no economics. He also asks you to forecast what will happen to the growth of the American economy over the next 25 years if we do not recover from the downturn but, like Japan after 1990, remain in a depressed state with low investment at its current share of GDP for a generation. Be sure, he tells you, to outline both the risks from adopting the policy you recommend and the risks from not adopting the policy you recommend but continuing with business as usual.
You call across to the staff in the Eisenhower Executive Office Building next door, and they tell you that the depreciation rate on capital looks to be 4%/year, the future rate of growth of the efficiency of labor looks to be 1.75%/year, the rate of labor force growth looks to be 0.75%/year, and that the diminishing-returns parameter in the production function looks to be 0.5. They also tell you that the Okun's Law coefficient is about 2, that the tax rate on income is about 1/3, that the marginal propensity to consume looks to be 3/4, and that the marginal propensity to spend on imports looks to be about 1/6.
You debate telling President Obama that you are sorry but that you are not Eugene Sperling. But you decide that you would then be hauled off to the mental hospital, that whatever else happened Eugene Sperling would never get his job back, and that after the situation is resolved he would be really unhappy and would not thank you. You decide to carry out the assignment. You decide to do the assignment yourself--you do not dare talk to anybody because it will slip that you are not really Eugene Sperling.
Email your answer to this take-home assignment as a pdf file to brad.delong@gmail.com and dzahedi@berkeley.edu by 11 AM on Tuesday April 19. Include in the title of your email your name, your SID number, and the phrase "IAS 107 take home".
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