HW3 E322 - Bulent Guler - HW3 PDF

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Bulent Guler - HW3...

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ECON 322: Intermediate Macroeconomics, Spring 2017 Instructor: Bulent Guler Assignment 3 Due by Wednesday, March 8, in class.

1. Consider a one-period closed economy, i.e. agents (consumers, firms and government) live for one period, consumers supply labor and demand consumption good, whereas firms supply consumption good and demand labor, and government finances an exogenous spending via lump-sum taxes. Suppose that representative consumer's preferences change, in that his or her marginal rate of substitution of leisure for consumption increases for any quantities of consumption and leisure. a. Analyze the effects of this change in preferences on the consumption/leisure choice of the individuals given a constant wage and tax. Support your answer with appropriate graphs. b. What will be the effect of a change in preferences in this way on equilibrium quantities and prices (specifically consumption, hours worked, output and real wage). Explain your answer with supporting graphs. c. Based on your answer to part (b) and (c), do you think that changes in preferences might explain business cycles? Explain why or why not, with reference to the key business cycle facts. 2. Consider the same economy as in Question 1. a. Analyze the effects of an increase in government spending. What happens to consumption, output, employment, wage and consumer’s welfare? b. Now, assume that taxes are proportional to labor income. How does your answer to part (a) change? You might need to study two cases here. Remember the discussion we had concerning Laffer curve. Analyze the response of output, consumption, employment, wage and consumer’s welfare when initially economy is at a lower tax rate and when it is at a high tax rate. c. Now, suppose that taxes are lump-sum again, but assume the increase in government spending is spent on infrastructure expenses like construction highways, railroads and subsidizing research and development activities so that it makes firms more productive. That is, as government spending increases, firm’s productivity, z, increases also. Analyze the effects of the change in government spending within this context? Does any of your answers to part (a) change? 3. Follow the following steps to organize the data you will need to do this question. You do not have to return the data with your homework. Just provide answers to the following questions. a. Download the data

b.

c.

d. e. f. g. h.

i. Go to website of Federal Reserve Bank of St. Louis (FRED Economic Data): http://research.stlouisfed.org/fred2/categories/18. You will download all the relevant that using this website. Note that all the variables you download should be seasonally adjusted, quarterly and nominal variables. There are versions of the variables which are not seasonally adjusted, with different frequency (monthly, annual), and which are in real terms. However, you should download the seasonally adjusted, quarterly and nominal versions of the variables. All the variables names and codes are reported below. ii. The variables might have different starting points. Pick the latest starting point as your initial point for all variables. iii. Click on GDP/GNP. Download Gross Domestic Product (variable name: GDP) iv. Click on Personal Income & Outlays. Download the following variables: 1. Personal Consumption Expenditures: Durable Goods (variable name: PCDG) 2. Personal Consumption Expenditures: Services (variable name: PCESV) 3. Personal Consumption Expenditures: Nondurable Goods (variable name: PCND) v. Click on Price Indexes & Deflators. Download Gross Domestic Product: Implicit Price Deflator (variable name: GDPDEF) Using the GDP implicit price deflator, convert all the above nominal variables into real variables. Basically, you have to divide each variable with the price deflator and multiply it with 100. Apply HP-filter for each variable. You can use the HP-filter provided in the following website: http://dge.repec.org/cgi-bin/hpfilter.cgi. Use default penalty parameter (1600). For the second question choose “log”, and for the third question choose “deviations from trend”. For the last question, it depends on how you save the data. Most likely, your data points are separated by new lines, so choose “new line” if that is the case. If your data points are separated otherwise, choose the corresponding option from the list. Plot detrended GDP and detrended consumption of durables in the same graph. Plot detrended GDP and detrended consumption of nondurables in the same graph. Plot detrended GDP and detrended consumption of services in the same graph. What differences do you notice in these graphs regarding the correlation, lead-lag relation, and volatility comparisons of these variables? Provide an explanation for the differences you observe in part (g)...