1 Practice with simple calculations related to Fiscal Policy: Question 1: According to Paul Krugman, the complex multiplier for the United States is about equal to 2. The American Recovery and Reinvestment Act of 2009 earmarked $787B in deficit spending, of which $330.4B was spent in 2009. (Total government deficits for 2009 were $1251.7B.) The increase in nominal GDP from 2009 to 2010 was $541.2B (3.8%). If we assume that this growth resulted from the ARRA stimulus package, what was the implied multiplier associated with the stimulus package? Question 2: Look at disposable income, personal consumption and personal savings. What was the personal savings rate in the United States in 2011? (Use savings/disposable income, i.e. Average Propensity to Save.) Question 3: What proportion of GDP was our federal government sector in 2010? (Divide federal government spending by GDP.) Per dollar of government spending, how much government spending was financed by government debt (negative savings) in 2010 at the federal level? (Divide negative federal government savings by federal government expenditure.) Question 41: One popularly reported statistic for national economies is the Debt/GDP ratio. Total US Federal Debt in 2010 was $13.562 Trillion. What was our Debt/GDP ratio in 2010? Question 5: Refer to Graph Set #2, the first picture entitled “Eurostat News Release.” How does the EU compare in the size of its public sector? (What percentage of GDP is government spending?) Are its government deficits larger or smaller than those of the US as a percentage of GDP in 2009? Question 6: Government stimulus can take the form of increased spending or reduced taxes, or both. It creates government debt in both cases, but that debt affects the larger economy by different pathways. Can you answer each the following questions in one short sentence? · The government increases spending without increasing taxes, and a deficit is generated: · Where does the money to finance the deficit come from? · How does this affect affordable credit for Investment and Consumption? · How does it affect National Incomes? Who is the government paying money to when they make an expenditure? · The government decreases taxes without decreasing spending, and a deficit is generated: · Where does the money to finance the deficit come from? · How does this affect affordable credit for Investment and Consumption? · How does it affect personal savings rates (if personal taxes are lower)? How does it affect business savings rates, i.e. retained earnings, if profits taxes are lowered? How does it affect the cost of borrowed funds for businesses? Monte-Carlo Option Pricing This exercise uses observation that an option price can be calculated as a discounted risk-neutral expectation. Context This observation suggests that we could value an option by sampling many thousands, say, of possible asset prices, at , calculating the payoffs, taking their expected value and discounting th.