Question 1

a)  Refer to the importance of primary data for public policy analysis and design.

Primary data is crucial for crafting, evaluating, correcting, and continuing public policy programs. Allows for data-driven decisions and monitoring progress.

b)  Discuss the pros and cons of using primary and secondary data for research purposes.

Primary data allows to directly answer research questions, but it is expensive to obtain. Secondary data is often inexpensive, but may not allow to answer perfectly the research questions.

c)  Mention and briefly explain the steps for collecting primary data.

Design: select sample, respondents, type of questionnaire.

Build and pilot the survey instrument.

Implementation: Field work

d)  Discuss main methodological differences you would consider between collecting primary data for an education program and for an employment program.

Education programs would need information from children, they could interview the parents, but could also have questions built for students or schools to answer. Employment programs would need information from adults, the respondent can only be informed members of a household. Sample and locations would be different, respondents also, type of questionnaire can be the same.

Question 2

a)  Discuss the relationship between a structural fiscal deficit and long-term government debt.

Structural deficits lead to an accumulation of long-term debt.

b)  How can government debt lead to a fiscal crisis?

As government debt becomes too large to manage, the risk of default increases. Creditors will demand a higher interest rate to compensate the risk premium, the governments have to pay it. The debt increases exponentially and there is no way to pay it back, leading to a fiscal crisis.

c)  How  did  the  housing  market  affect  production  during  the  2008  recession?  Explain  the mechanism.

The financial system was leveraged by mortgage-based securities. As the housing market collapsed, collateral value decreased and defaults increased, thus the financial system had large loses. This led to lower returns and asset valuations for individuals, decreasing consumption and investment. GDP falls.

d)  How is the case of the fiscal in Costa Rica different from the Great Recession? How are the cases alike?

The case of Costa Rica comes from a structural deficit, not a specific event affecting the aggregate demand. The cases are alike in that both got aggravated by a decrease in output. Both also needed government intervention to solve the problem.

Question 3

a)  How can commodity money and fiat money create inflation? Explain the differences.

Commodity money can only increase at the rate of the commodity (gold) increasing. Fiat money can be easily created without any commodity backup, so it is possible for a much larger inflation to be obtained.

Consider an economy that behaves as in the Kydland and Prescott Model with the following Social Loss Function: L = 0.5(y – y*)2 + 0.5a(π – π*)2

b)  How would the Central Bank optimize inflation if the choice of π is credible and if it is not?

(Show all steps)

1-  If expectations are anchored (full credibility): then we have  =  e , so y = yn , the Central

Bank wants to

min  0.5(yn   − y∗ )2  + 0.5a( − ∗ )2

π

The solution should be π = π*

2-  If expectations are not anchored: the policymaker takes  e  as given, the problem is: min  0.5(yn  + b( − e ) − y∗ )2  + 0.5a( − ∗ )2

π

FOC:  (yn   + b( − e ) − y∗ )b    + a( − ∗ ) = 0

→ (b2  + a) + b(yn  − y∗ ) = b2 (e  − ∗ ) + (b2  + a)∗

→  =  (y∗  − yn ) +  (e  − ∗ ) +  ∗                                                                              (∗)