ECON 7071: Assignment #2

发布时间：2024-05-20

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ECON 7071: Assignment #2

(Due May 31st 11:59PM)

In the questions to follow, use the equations below to put structure on the IS-MP model that you are to use in the determination of the level of output, Y , and the interest rate, i. Planned aggregate expenditures is given by

All overlined variables represent components of autonomous planned aggregate expenditures. Let if > 0 represent a weighted average of foreign interest rates while having ξI > 0 and ξX > 0 indicates that aggregate investment and aggregate exports are responsive to domestic interest rates. Assume that 0 < (mpc - mpm)(1 - τ ) < 1 so that the multiplier is well-deined.

Let monetary policy be captured by the interest rate rule i = i* + φY (Y - YN ) + φπ (π - πT ) where YN is the economy’s natural level of output, πT is the central bank’s inlation target, Y is aggregate output, and π is the realized inlation rate. Assume that φY > 0, φπ > 0 and i* > 0.

1 Question #1 (35 Marks)

Using the Keynesian Cross and the IS-MP diagrams, provide answers to the fol- lowing questions. For each answer that you provide, number each shift in curves that you make and also number any movement along curves. Using your numbering of the shifts and movements along the curves provide an economic explanation for the reason behind the shift or movement along the curve.

1.1 Part I

Suppose that bad news about expected credit market conditions in the United States results in a reduction in the interest rates paid on assets that are demoninated in U.S. dollars.

Using your diagrams illustrate how this situation will afect the Australian econ- omy. Speciically, show the efects on (demand-determined) output as well as the Australian interest rate and explain how the changes in output and interest rates arise. Start your economy at an initial condition where output is labelled Y0 and the initial interest rate is i0 . Label the level of output and interest rate that prevail after all the adjustments occur by Y and i. (20 Marks)

1.2 Part II

Now suppose that the Reserve Bank of Australia (RBA) wishes to prevent the con- ditions from the U.S. inancial markets from afecting the level of output in Australia. How can the RBA adjust i* in order to ensure that output returns to Y0 ? In a new set of diagrams illustrate and explain your answer. Be sure that your new diagrams start of from (Y ; i) of your answer to Part I. (Don’t forget to number your shifts and movements along curves so that your written responses correspond to speciic adjustments in your diagrams.) (15 Marks)

2 Question #2 (15 Marks)

In this task you will take data GDP, interest rate and price level data and produce data to plot results on changes in the RBA’s target cash rate against both changes in outputs deviation from trend and changes in the inlation rate. The idea is that the coe伍cients in the interest rate equation that we have been using in class have these interpretations so let’s see what the data looks like.

Download the ile Assignment2Data.xlsx. You should see dates of the observations in column A, a measure of GDP in column B, the consumer price index in column C and the RBA’s target cash rate in column D.

1. Populate column E with the change in the target cash rate from its previous economic quarter’s value for the periods March 1991 through March 2021.

2. Construct ln(GDP) in column F.

3. Using the HP ilter, construct the trend in ln(GDP) using the HP ilter weight for quarterly data, 1600, and place these observations in column G.

4. In column H, construct the % deviation of GDP from its trend by subtracting observations in column G from their corresponding observations in F.

5. In column I, for each period starting in March 1991 through to March 2021, construct the change in the % deviation of GDP from trend from the previous period and multiply by 100.

6. Populate column J with the ln(CPI).

7. For each period running from March 1991 through to March 2021, calculate the annualized inlation rate by taking the diference of ln(CPI) in a period from its observation in the previous period and multiply by 400. Put these calculations in column K.

8. In column L, using the data in column K for each period spanning June 1991 through March 2021, calculate the change in the inlation rate by subtracting its previous period’s observation from the current period’s observation.

9. Copy the data that you have between June 1991 and March 2021, from columns A, E, I and L into a new worksheet (do not create a new workbook - just open a new worksheet in your current workbook).

10. Produced two separate scatter plots. In the irst igure, produce a scatter plot of changes in the target cash rate with its associated observations of changes in the % deviation of output from its trend.

11. Construct a second scatter plot of changes in the target cash rate with its associated observations of changes in the inlation rate. For both your plots, ensure that you have the change in the cash rate measured on the horizontal axis and the change in either the % deviation of output from trend or the change in the inlation rate on the vertical axis. Label your axes and provide a title for each scatterplot.

12. Is there any discernible pattern in either of your scatterplots?

Submit a scan of your written answers as a .pdf and include the Excel spreadsheet with your calculations and plots.