ECF2331/ECF5923/ Macroeconomic Policy Semester 1, 2023

Administration aspects (please read all parts carefully)

Due date:

▻   Friday 5 May 5 pm (Melbourne Time)

▻   Late submissions incur a penalty of 10% of the mark per day.

Submission:

▻   Your assignment must be submitted online via Moodle. A submission link is provided in the Moodle folder “Assignment” . Your tutor will mark your assignment. Thus, once you receive your marks, you can obtain feedback from your tutor.

▻  Your assignment uploaded through the submission portal is final, thus, no resubmissions are allowed.

▻  This is an individual assignment. We have Plagiarism detection software that cross- compares submitted assignments.

Word & Page limit:

▻  The maximum word length for the entire assignment is 1500 words, strictly. Exceeding this limit entails penalties resulting in a loss of marks. However, as per university protocol , there is a +/- 5% leeway. You can dedicate more words to certain questions if you stay within the word limit.

▻   Max. 8 pages. Exceeding this limit entails penalties resulting in a loss of marks. Formatting:

▻   If you are referencing, then make sure to include references at the end of the assignment and use the APA-referencing style.

▻  Submit as PDF (But be careful. There have been occasions where PDF can mess up    the formatting. You MUST double-check before you upload your assignment into Moodle. Incorrect formatting will incur a penalty – so the responsibility is on you to verify your final version).

▻  You do not need to attach an assignment cover sheet.

▻  Q1 is a data analysis question. You do not need to attach the data to the  assignment. Complete your calculations in Excel and provide the results as a diagram (see Q1 below for more details).

A final note:

▻  As students you are required to undertake independent research. This may include resorting to secondary sources (i.e., non-textbook/lecture material such as research articles, books, websites, etc.). This is part of your growth as a student within the    university environment. Whether you decide to work in academia, the private and/or public sectors, independent research is essential! Not all material is provided in one place, and thus, research across multiple sources is paramount.

Question 1. Okun’s Law [3 marks]

Obtain the data for the Australian real GDP growth rates (quarterly) and Unemployment rates that are available onFRED(https://fred.stlouisfed.org/#) from 1966-10-01 to 2022-07-01. The information about the

series is given in the following table.

(a)  Using the data construct a scatter plot of change in unemployment vs. real GDP growth rates. Use MS Excel. [0.5 mark]

(b)  Construct the trend line and show the estimation of the trend line.  Determine how well the data fit the regression model for the trend line.[1.0 mark]

(c)  Determine the average growth rate of full-employment output for Australia. [1.0 mark]

(d)  Suppose that in a recession real GDP growth falls 1 percent over 1 year. Predict the rate of unemployment rise using the estimated Okun's law. [0.5 mark]

Question 2. An Estimate of the Natural Rate of Unemployment [2 marks]

Using the natural rate of unemployment, the Phillips curve equation can be rewritten as:

 t  −    = −β (ut – u*) + g (aggregate-supply factors), (1)

where β is assumed to be positive, and the minus sign implies that the relationship is inverse.

(a) What data are required to estimate equation (1)? Discuss. [1.0 mark]

(b)  Let us assume that we obtain the following estimation of the equation of the regression line (1):

 t  −    = 1.4 −0.22ut +errort

Could you use this equation to estimate the natural rate of unemployment? Explain. [1.0 mark]

Question 3. Monetary Policy [2.5 marks]

As discussed in Ch.14 of the textbook, since money demand is unstable, the central bank may prefer to target interest rates rather than the money supply itself. When the central bank follows an interest-rate- targeting policy, the financial markets and media typically look at changes in the short-term interest rates rather than changes in money supply to gauge the central bank’s intentions. The following figure illustrates a time-series plot of the Federal Funds (FF) rate, the growth rate of the real GDP, and a percent change of the GDP implicit price deflator from the preceding period, for the US since 2005.

(a) If changes in monetary policy are reflected primarily by changes in the short-term interest rate, what relationship would you expect to see between these variables? [1.0 mark]

(b) Based on your answer in part (a), does this relationship hold up in the data? [1.5 mark]