06 Aug Assignment 2
Instructions: Please read the instructions below before attempting the assignment.
- Answer all questions.
Question 1 (2 + 2 + 2 = 6 marks)
The expectations augmented Phillips Curve has the form: . Suppose that currently in the economy we have, , and some points along the expectations augmented Phillips Curve are illustrated in the table below.
| Exhibit A | |
| Price Inflation () | % Unemployment Rate () |
| 24 | 3 |
| 22 | 4 |
| 20 | 5 |
| 18 | 6 |
| 16 | 7 |
| 14 | 8 |
- Given the data in the table calculate the value of in the expectations augmented Phillips Curve.
- The central bank would like to have, . Illustrate the gradualist and cold-turkey approaches to getting inflation down using the Phillips Curve assuming adaptive expectations. In the case of the gradualist approach assume that is cut in two sets; first to 10% then to 0%. Identify the maximum unemployment rate that will be reached in the case of the cold-turkey approach.
- For the case of cold turkey, how would the adjustment process you outlined above differ if economic agents had rational expectations? [Instructions: No diagrams should be used here. Explain your answer in words. Maximum 100 words. You must enter the word count of your answer.]
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Question 2 (2 + 2 = 4 marks)
Suppose that the economy is at full employment and is hit by a negative supply shock such as a large rise in oil prices.
- Illustrate this in an AD-AS diagram indicating the new level of prices and output.
- Discuss and illustrate in an AD-AS diagram the short run and long run effects on the economy of the central bank adopting the following policies. [Instructions: Maximum 50 words. You must enter the word count of your answer.]
- doing nothing
| (word count: ?) |
- increasing the money supply
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Question 3 (2 + 2 = 4 marks)
Suppose that Trumponomics—the economic policy of new President of the United States, Donald Trump—seems likely to involve cutting taxes and increasing government spending.
- Illustrate what you think the effects of such a policy are likely to be on price and potential output in the long run using an AD-AS model in. [No discussion needed. Illustrate your diagram clearly.]
- Discuss how the nature of the changes you illustrate in (a) will depend upon exactly what kind of tax cuts and spending increases are implemented. [Instructions: Maximum 150 words. You must enter the word count of your answer.]
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Question 4 (2 + 2 + 2 = 6 marks)
In the following questions we are considering the neoclassical growth model.
- In a diagram illustrate an economy in a steady state. Identify the steady state level of output per capita () and capital per capita (). Also determine the growth rate in , , output () and capital () at the steady state as a function of the model parameters; the savings rate (), the population growth rate () and the depreciation rate (). [Instructions: Maximum 100 words. You must enter the word count of your answer.]
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- Suppose there is an increase in the population rate to . Illustrate the new steady state equilibrium for output per capita (), capital per capita () relative to that in (a). Also determine the growth rate in , , and at the steady state as a function of the model parameters compared with that in (a). [Instructions: Maximum 100 words. You must enter the word count of your answer.]
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- Given your answer in (b) comment on the effectiveness of population growth as a driver of increases in the steady state output per capita. Discuss other factors which could lead to rises in steady state output per capita in the neoclassical growth model. [Instructions: No diagram should be used here. Maximum 200 words. You must enter the word count of your answer.]
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Marking Rubric
| Very Poor
(0 marks) |
Poor
(0.5 marks) |
Fair
(1 mark) |
Good
(1.5 marks) |
Very Good
(2 marks) |
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| Question 1(a) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 1(b) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 1(c) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 2(a) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 2(b) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 3(a) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 3(b) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 4(a) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 4(b) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. | Provides a reasonable answer to the question but one which does not address key issues. | A sound answer to the question but not comprehensive or insightful. | Addresses the question in a comprehensive and insightful manner. |
| Question 4(c) | Fails to answer the question in any meaningful fashion. | An answer which provides some useful comments but fails to address the main thrust of the question. |
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