Alaska Bible College Intermediate Macroeconomic Questions Paper

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Economics

Alaska Bible College

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Fall 2020 Intermediate Macroeconomics Project 2 Answer Sheet – Student's Name: Question 1 – a): (16 points) Rubric: Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in the lecture videos to represent the Real Intertemporal Model. Make sure to label the axes (3 points). Assume that the output demand curve's effect is stronger than the effect on the output supply curve. Show the effects of an increase in government spending on output, labor, real interest rates, and real wages (6 points). Explain with words (3 points). Explain with words what is the effect on consumption and investment (4 points). Fall 2020 Intermediate Macroeconomics Project 2 Question 1 - b): (12 points) Rubric: Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in the lecture videos to represent the Real Intertemporal Model with the new shape of both labor supply and output supply curves. Make sure to label the axes (4 points). Show the effects of an increase in government spending on output, labor, real interest rates, and real wages (4 points). Explain with words (2 points). Explain with words what is the effect on consumption and investment (2 points). Fall 2020 Intermediate Macroeconomics Project 2 Question 2 – a): (16 points) Rubric: Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in the lecture videos to represent the Real Business Cycle model. Make sure to label the axes (3 points). First, show the effect of a decrease in TFP in the current period (3 points). Explain with words (1 point). Then, show the effect of a decrease in future TFP. Assume that the latter effect is weaker and that intertemporal substitution of labor is weak such that it doesn't change the qualitative result in the labor market (2 points). Explain with words the overall effects on output, labor, real interest rates, real wages (2 points). Show the overall effect on the demand for money and prices (2 points). Explain with words (1 point). Explain with words what is the overall effect on consumption and investment (2 points). Fall 2020 Intermediate Macroeconomics Project 2 Question 2 – b): (16 points) Rubric: Make sure to create your graph on the FRED website and download it as an image. Then add the graph to the answer sheet. Hand-drawn graphs will not be accepted. 3 points for each variable. 4 points for the statement if the data agrees with the model. Minus 3 points per variable that is not in the percent change from a year ago. Minus 2 points if the graph is not starting around January of 2018 and ending around October of 2020. Fall 2020 Intermediate Macroeconomics Project 2 Question 2 – c): (16 points) Rubric: Make sure to create your graph on the FRED website and download it as an image. Then add the graph to the answer sheet. Hand-drawn graphs will not be accepted. 6 points for each variable. 4 points for the statement if the data agrees with the model. Minus 3 points per variable that is not in the percent change from a year ago. Minus 2 points if the graph is not starting around January of 2018 and ending around October of 2020. Fall 2020 Intermediate Macroeconomics Question 3 – a): (12 points) Rubric: Yes or no? (3 points). Explanation. (9 points). Project 2 Fall 2020 Intermediate Macroeconomics Project 2 Question 3 – b): (12 points) Rubric: Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in the lecture videos to represent the New-Keynesian model. Make sure to label the axes (3 points). First, show how the expansionist monetary policy takes place in the money market (2 points). Then, show the effect on the output market. Does output increase or decrease? (2 points). How is the change in output accommodated in the labor market? What happens with employment and wages? (2 points). Would a New-Keynesian economist agree that monetary policy helps the economy to recover? Yes or no? (1 point). Briefly explain why, based on the graphs. (2 points). Fall 2020 Intermediate Macroeconomics Project 2 Fall 2020 Intermediate Macroeconomics Project 2 Due: Wednesday, Dec 9th – 11:59 pm (Submit through Canvas) Instructions: 1. This assignment composes 30% of your final grade. You have ten days to complete it. Final answers must be submitted no later than Wednesday, December 9th, through Canvas as a pdf file. 2. Students must refer to the questions in this Question Sheet and provide their answers in the Answer Sheet. Make sure you add your name to the top of the Answer Sheet. After completing the assignment in the Answer Sheet, students must go to "File" →" Save as," select a folder and then choose the "File name" project2_[lastname] and "save as type" PDF. Students must submit the PDF file produced. 3. This is an individual assignment. Students are not supposed to communicate with other students or anyone else regarding the questions in the assignment. Students who are found to work with others to complete the assignment may be penalized according to the academic integrity and misconduct policies 4. Note that the questions will require you to provide a visual illustration of your arguments; that is, you will need to add to your answers graphs. You can produce graphs in the way you prefer as long as you make them. Photos of the textbook or screenshots of the lecture videos/slides will not be accepted. 5. You can add equations directly through Microsoft Word using insert → Equation. You can handwrite your equations and insert them as figures. Just make sure it is readable. As in the case of figures, you must produce your equations. Photos of the textbook or screenshots of the lecture videos/slides will not be accepted. 6. Make sure the final file is well-formatted, and the figures and equations are clear. Fall 2020 Intermediate Macroeconomics Project 2 Question Sheet Question 1 (Fiscal Policy in a Real Intertemporal Model) Suppose the real intertemporal model we studied in week 10. Assume that the demand multiplier is equal to one. a) Use the appropriate graphs to show the effects of an expansionist fiscal policy (an increase in government spending) on output, labor, real interest rates, and real wages. Explain all changes with words and also the effects on consumption and investment. b) Suppose that the labor supply curve is vertical, i.e., the quantity of labor is fixed. In this case, what are the effects of an expansionist fiscal policy on output, labor, real interest rates, and real wages? Illustrate your answer using graphs. Explain all changes with words and also the effects on consumption and investment. (Hint: the new shape of the labor supply curve implies a new shape of the output supply curve) Question 2 (Pandemics and the Real Business Cycles) Suppose an economy in equilibrium. Suddenly, a new virus threatens the population such that most of the jobs must be performed from home. Also, suppose that there is no significant change in the size of the labor force as people follow safety measures and the virus is more dangerous for individuals out of the labor force. In other words, there is no exogenous change in the labor market. However, working from home reduces the productivity of workers. Moreover, individuals expect this situation to take a long to end. That is, the negative shock in productivity is permanent. a) Use the Monetary Intertemporal model studied in week 11 to analyze the effects of a permanent decline in Total Factor Productivity on output, labor, real interest rates, real wages, and prices. Illustrate your answer using graphs. Explain all changes with words and also the effects on consumption and investment. b) Go to the Fred website and create a graph with the percentage change from a year ago of Real GDP, Employment-Population Ratio, Real Personal Consumption Expenditures, and Real Gross Private Domestic Investment. Restrict the years to start on January 1st of 2018. Download the graph and copy it into your answer. Does the behavior of these variables in 2020 agree with the model's predictions in item (a)? c) Go to the FRED website and create a graph with the percentage change from a year ago of the Consumer Price Index for all Urban Consumers and the monetary base. Restrict the years to start on January 1st of 2018. Download the graph and copy it into your answer. Does the behavior of prices in 2020 agree with the model's predictions in item (a)? Could you explain this behavior using the theory of endogenous money? Explain. Fall 2020 Intermediate Macroeconomics Project 2 Question 3 (Pandemics and Monetary Policy) Assume the same situation as in Question 2. After the shock, the government wants to act. The President asks for advice from two different groups of economists: Freshwaters and NewKeynesians. a) Freshwater economists are often advocates of the Real Business Cycle theory. In this theory, prices are flexible. According to this group, would an expansionist monetary policy be effective in recovering the economy? Explain with words. (You do not need to provide graphs here.) b) New-Keynesians believe that prices are fixed in the short-run. Use graphs of the NewKeynesian model with sticky prices to show the effect of an expansionist monetary policy, i.e., a decline in the target real interest rate. Would a New-Keynesian economist agree that monetary policy helps the economy to recover? Explain with words.
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Explanation & Answer

Attached. Please let me know if you have any questions or need revisions.

Fall 2020

Intermediate Macroeconomics

Project 2

Answer Sheet – Student's Name:

Question 1 – a): (16 points)
Rubric: Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in
the lecture videos to represent the Real Intertemporal Model. Make sure to label the axes (3 points).
Assume that the output demand curve's effect is stronger than the effect on the output supply curve.
Show the effects of an increase in government spending on output, labor, real interest rates, and
real wages (6 points). Explain with words (3 points). Explain with words what is the effect on
consumption and investment (4 points).

D

Fig. 1

Demand

Real Wages

D1
D1

Fig. 3
D

(W)w1
W

Output

Nx

Labor

Current Income
D1

D1
D
Fig. 2

Yx

Nx

N1

Labor

Interest rate

(Y)Y1

N1

D
Fig. 4

Y

Y1

Current Output

Government spending results in an increase in real wages and a shift in the demand for labor from
D to D1and hence, an increase in labor demand (Fig. 1). The output increases as the demand curve
shifts from D to D1 (Fig. 2). The demand for current goods increases, and the demand curve shifts
from D to D1 and hence an increase in current income (Fig. 3). Government spending also
increases the real interest rate and shifts the demand curve from D to D1, and increases current
output (Fig. 4).

Fall 2020

Intermediate Macroeconomics

Project 2

Consumption and investment have a great effect on the economy. Investment increases the
country's economic activities since more goods are generated—the demand curve for goods and
services shifts to when the government purchases exogenously. Consumption is when the
government finances government purchases using taxes and bonds and pays off the bonds and
interest on bonds in the future. Investment is made by big corporations where they produce certain
products which end up stimulating the demands. Investments increase the demand for labor,
increase the supply of goods, and increase investments in the current period. The government can
also stimulate demand like any other investment firm.
Question 1 - b)...


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