Reference no: EM131938055

Macroeconomics Assignment

The assignment will consist of:

A. At least one of the questions from the pre-exam discussion and from the following list:

1. What are two methods Doyle broadly mentioned for measuring output in the financial sector? What assumptions must be made about the opportunity costs of various participants in the market in order to derive each? Which measure does Doyle prefer? Why do you think some economists/National Income Accountants prefer the other? [i.e. why is the other one used]

2. If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investment)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?

3. How do you think marketing/advertising services affect the welfare of the country? Is this properly accounted for in GDP? How should we think of the value of convincing a customer to change from a rival's inferior product? How should we think of the value of convincing a customer to change from a rival's superior product? Can you think of any assumptions such that we could use measurable data on advertising expenditure by firm and sales by the same firm to measure this?

4. Describe the behavior of consumption, investment, labor, productivity, wages, the price level and the money supply over the business cycle both in terms of correlation, magnitude and lead vs lag. Give the economic intuition behind the results on consumption, productivity, wages and price levels. For some of these rather than the intuition you should explain the importance of this evidence in terms of supporting/rejecting important theories in economics. This is especially true if the evidence itself is either weak or ambiguous.

5. The most commonly used measure of the money supply (M1) consists of a term (currency) that is directly controlled by policy and another term that is influenced by both policy and economic activity (Debit Cards). Given this and a general rule that the Fed wants to increase the amount of currency during a downturn, what should the two offsetting effects be in terms of the relationship between GDP and money supply? If instead of money, we want to look at the supply of all liquid assets, how should the above tradeoff change? A good answer defines what it means for an asset to be liquid and why the liquidity of entire classes of assets may change during downturns. Why might some assets be more liquid during different parts of the business cycle?

6. Suppose an economy has two years worth of data, years 1 and 2. Sup- pose there are also two goods, bread and corn. Suppose in year one fifty units of corn are sold at a price of 1 $ and 20 units of bread are sold at a price of 2 $. Suppose in year two, 60 units of corn are sold at a price of 1.5 $ and 80 units of bread are sold at a price of 2.05 $. Compute nominal GDP in both periods. Compute real GDP un- der both definitions of a base year. Compute also chain weighted real GDP. Compute the CPI's with each base year. What are the implica- tions for these measures for the amount of inflation in this economy. What about the amount of economic growth? Suppose that corn in year 2 is twice as valuable as corn in year 1 to consumers in terms of their enjoyment from their consumption (or in terms of its nutritional value). How would your above calculations change numerically?

7. Why in the opinion of many economists does the US government mea- sure both a GDP deflator and a CPI? Historically how have the two been related in practice? In addition to the CPI, the government also measures a producer price index. Which of the two (CPI or PPI) has shown the highest increase in price levels in the US?

8. How would a statistician charged with measuring national product ac- counts distinguish pure price increases from productivity (quality) in- creases in the cell phone industry? What statistical measurement re- quires this choice to be made? Be as specific as possible about the method you would employ for a single product line like a cell phone.

9. Suppose an individual has 40 hours to work. Suppose also the individ- ual has a net wealth outside the labor market of 100$. Suppose the wage rate is equal to 10 $ per hour. Graph the budget constraint. Sup- pose the marginal rate of substitution between consumption (C) and leisure (l) is equal to l . What will a utility maximizing consumer choice between labor and consumption be? Suppose the wage falls to 5 $ per hour. What is the new choice of labor vs. consumption. Interpret this in terms of substitution and income effects. At the minimum, use a graph to do this though the best answer will give numbers to both effects. Repeat this exercise with both 10 and 1000 hours respectively. [This is in case the 40 hour limit binds. I want you to practice without it binding at least once]

10. Consider a generic consumption/leisure choice. How will the following events/policies affect the consumer's choice of labor supply if at all? Be specific as possible about income and substitution effects:

(a) A raise in wage rate
(b) A labor income tax on all income.
(c) A labor income tax on all labor income beyond the first 20 hours.

11. Explain why most macroeconomists do not need to precisely measure the initial capital stock in their data in order to good idea of the recent size (value) of the capital stock. For example how could an extended data set on investment be used to create an estimate for the capital stock. Your answer should have an equation in it and explanation of which variables are measurable and if so how they are typically measured.

12. What is the price of leisure in our simple static model? Give a graph- ical example where leisure could behave like an inferior good for a substantial change in its price. If possible show the individual con- sumption/leisure choices which produced the labor demand curve in your example.

13. Eventually we will use our household to stand in for an average house- hold in the US economy. We will call such a household, a "represen- tative" household. How might you use the "representative" household to understand issues like unemployment, the decision to be a home- maker and early requirement given that the representative household will likely always How might such a representation understate the costs of employment? On a second note, we are assuming the loss a house- hold due to lack of employment is offset partially by a gain in leisure. For what policy questions might that be a fair assumption? What aspects of unemployment may be missing by that assumption?

14. Consider an economy which experiences the destruction of some of the nation's capital stock (say through a hurricane is destroyed). How should this effect equilibrium, consumption, output and labor supply? Now, let's say the government tries to offset some of the effects of the decline in capital by increasing government spending. What is the likely outcome of this policy intervention in terms of restoring consumption, output and labor supply to its pre hurricane levels?

15. In our model, the affects of changes on wages are ambiguous because the income and substitution effects move in opposite directions. How do (many) macroeconomists deal with this ambiguity in terms of study- ing business cycle? How do economists resolve this ambiguity when studying long term economic development?