Reference no: EM133201038

Assignment:

Part 1: Multiple Choice

1. In economics, MONEY refers to

a) Income
b) Wealth
c) Assets used and accepted as payments
d) All of the above

2. According to the Solow Growth model sustained (continuous) economic growth can be attained if

a) Savings rate rises
b) Population growth falls
c) Productivity growth is positive
d) None of the above

Fill in the blank:

3. In the Solow Growth model what are 2 factors that can cause the standard of living to rise (i.e. lead to higher economic growth). Also indicate whether the factor is rising or falling:

1.__________& 2.________.

4. The interest rate that banks charge each other for overnight loans (in the overnight market) is referred to as ___________, it is also the instrument of monetary policy for the FED.

5. The Federal Reserve Bank was established in _____________ (give exact year).

Part 2. Problem & Short Answer Questions. Show all work (derivations)

1. Suppose y_t=4k_t^0.5 (the per worker production function), d=0.1, n=0.02, and the aggregate savings function is given by S_t=0.3Y_t.

a. Solve for the steady state level of capital per worker (k), the steady state level of output per worker (y), the steady state level of consumption per worker (c), and the steady state level of investment per worker.

b. Suppose that the savings rate falls. What will be the impact on all the steady state values you calculated in part a)? Discuss the intuition in detail as done in class.

c. Continue with b. Illustrate the impact of the fall in s on the steady state level of capital per worker (k). Label everything: including all axes and all curves.

2. Here you are asked to discuss some specific policies that can be used to increase economic growth and thus the standard of living. Specifically, discuss 2 policy designed to raise productivity (TFP) growth. Elaborate on each; do not just list them.

3. Use the material to answer the question belows.

Suppose that L(Y,i) = 500 + 0.4Y - 1000i

Y = 1500, r=0.08, expected inflation = 0, and P=50.

a) Calculate the real money demand. (show work).

b) Calculate the nominal money demand. (show work).

c) If the market for money is in equilibrium, what is the real money supply?

d) Now suppose expected inflation increases from 0 to 0.01. What is the impact on the Price Level? Calculate the new P. (show work).

Part 3. Provide TYPED answers to all questions below.

1. Read the article posted on iLearn titled: "Consequences of Rising Income Inequality".

The Solow Growth Model we use in chapter 6 does not address the issue of inequality. It simply looks at whether standard of living is higher, lower or same over time, and what can explain rising living standards (as measured by higher consumption per person) over time. However, it is possible that while consumption per person rises over time, due to higher income per person, not all individuals in the economy benefit equally. Hence, even if income per person is rising on average, it is possible that some gain more and some gain less. The article you are asked to read addresses rising income inequality in the US.

Read the article and answer the following questions: Provide your responses in essay type format.

a. What is the time period that the authors are considering? (just give the years).

b. What evidence do the authors provide to support the claim that income inequality in the US has increased. Specifically, what has happened to the income share of the top 10% and top 20% over time? Discuss.

c. Discuss figure 2. Make sure to interpret what is presented in the figure.

d. What are the causes of rising income inequality? Discuss (do not just list them).

e. What does the article state about the likely consumption of workers if income inequality had not risen over time?

f. Lastly, what does the article state about transfers? Specifically, discuss the last 2 paragraphs on pg. 4.

4. Data - plot and discuss. For this question you need to obtain data and briefly discuss it, just like in Assignment 1. Try to discuss the behavior of the data over the business cycle (i.e. the fluctuations) as well as the trend. Discuss any interesting/unique behavior you observe.

Obtain the maximum data points possible; always make sure you plot a series that has not been discontinued. Use data that has been seasonally adjusted (this is specified).

Source: Obtained data from the Federal Reserve Bank of Saint Louise, the FRED database. You can edit the figures: change the units if needed (from $ to growth rates for example) add multiple series/variables to the same diagram, etc. It is also possible to download the figure and paste it into word. Here is the link:

Here is what you need to do: (plot on separate diagrams, unless stated otherwise)

1. Plot and discuss: plot the following 3 series on the same diagram - M1 Money Stock, Currency component of M1, and M2 Money Stock - all at monthly frequencies. Discuss what the variables measure and then discuss the behavior of each over time.

2. Plot and discuss: 10-year Treasury Constant Maturity Rate - at monthly frequency. This is the interest rate on the 10-years to maturity US Treasury bond. Discuss its behavior over time.

3. Plot and discuss: personal savings rate - at monthly frequency. Discuss what the variable measures (i.e. define it) and then discuss its behavior over time.