Macroeconomic Theory: Homework 1
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Macroeconomic Theory:
Homework 1
VERY IMPORTANT: Problem 1 asks you to create an Excel spreadsheet, and problems 2, 3, and 4 are analytical. For your homework submission: put the Excel spreadsheet and your solutions to problems 2, 3, and 4 in a .zip file and submit this .zip file (the only compression format accepted is .zip: if you submit your assignment using any other compression format your grade for the entire assignment will be zero). Also, your solutions to problems 2, 3, and 4 should all be in a single .pdf file (no format other than .pdf is accepted: if you submit any format other than .pdf or more than one file then your grade will be zero). Handwritten solutions are totally fine as long as they are clearly legible (you can take pictures of your answers and then convert the pictures into a single .pdf file).
Problem 1 (25 points). Go to the St. Louis Fed’s Federal Reserve Eco- nomic Database (FRED) and download data for the unemployment rate and real GDP for the US at quarterly frequency from 1948:Q1 through 2023:Q4. Put these data in an Excel spreadsheet and use data from 1948:Q2 through 2019:Q4 (so, data prior to the Covid pandemic) to set up two graphs of Okun’s law within the Excel spreadsheet: one using the annualized growth rate of GDP and the other using the “non”annualized growth rate of GDP. Both graphs should have a trend line included. This Excel spreadsheet should, in essence, look pretty much the same as the Excel spreadsheet we went over in the lecture material.
Problem 2 (25 points). Indicate whether each of the following state- ments is true, false, or uncertain. For statements that are Uncertain, explain why that is the case.
1. The largest component of GDP is consumption.
2. The propensity to consume has to be positive, but otherwise it can take on any positive value.
3. An increase of one unit in government spending leads to an increase of one unit in equilibrium output.
4. An increase in the propensity to consume leads to a decrease in output.
Problem 3 (25 points). This problem examines the implications of allowing investment to depend on output. Suppose the economy is charac- terized by the following behavioral equations:
C = c0 + c1 Yd
Yd = Y − T
I = b0 + b1 Y
Government spending and taxes are constant, and the economy is closed. Also, b0 and b1 are positive parameters, and b0 can be interpreted as business confidence.
Problem 3a. Solve for equilibrium output. Please show your work in detail. Also, please box your final answer: if you don’t box your final answer then your grade on this part of the problem will be zero.
Problem 3b. For the solution to Problem 3a to make sense, what must be true, mathematically, about the term c1 + b1 ? Put another way, what numerical values can this term take? Please explain your reasoning.
Problem 4 (25 points). Consider the following money demand func- tion:
Md = $Y (a − b ∙ i),
where a and b are positive parameters. Also, define real money demand as the ratio of money demand to the price level (GDP deflator) so that real money demand is Md /P. If real money demand rises by one unit, by how many percentage points does the interest rate change? Please show your work in detail and box your final answer. If you do not box your final answer then your grade on this problem will be zero.
2024-02-07