Econ assignment

Econ-UA-12 Department of Economics

Intermediate Macro New York University

Prof. Gerald McIntyre Spring 2021

6 Study Questions for the Take Home Final in Econ 12 Spring 2021

Type up answer each question below, then save each answer to your computer as a separate

.pdf using the naming convention given above. Each question should be answered on one-

typed page. Use Times New Roman 11-point or 12-point font, 1-inch margins and either

single line spacing, or 1.5 line spacing, or double line spacing. All questions have equal

weight.

1. An economy is in a steady state where the MPK = 12%, depreciation is 4% per year, population
growth is 2% per year, and the growth rate of efficiency workers is 2% per year. Suppose a

politician says the government should move the savings rate towards the value that maximizes

consumption per worker. If the government cares only about people who are alive now, since

they are voters, should the government implement this policy? Use all appropriate models, graphs

and mathematics in your explanation.

2. Explain how each of the following affect the long run equilibrium natural rate of unemployment.
(a) A permanent increase in the minimum wage, (b) A permanent increase in unionization of the

labor force, (c) A permanent increase in the cost of monitoring the quality of workers’ effort, (d)

A permanent increase in the replacement ratio of unemployment-insurance benefits, (e) A

permanent increase in the proportion of young workers in the labor force.

3. The Congressional Budget Office projects a US federal budget deficit of $200bn a month in 2021.
The Fed has said it will buy at least $80bn a month of US government bonds in 2021. Using an

appropriate model from our course, describe the effects of this policy mix in the short run and

long run (assume this policy mix is permanent). Include all relevant graphs, mathematics and

words in your answer. Describe the effects on as many macroeconomic variables as possible.

4. Recently a well-known macroeconomist said, “The Volcker era was a war on inflation; the
Powell era is a war on unemployment.” [Powell is the current Fed chair]. Describe what is meant

by the phrase “war on unemployment.” What does this war entail? What are the dangers of

engaging in such a war? Describe how the “war on unemployment” relates to the US economic

experience of the 1960s.

5. M. Friedman argued the federal government should balance its budget only when output is

beyond potential. Friedman’s statement can be written as a fiscal policy rule: (G – T) < 0, if and only if Y > Yp. Explain why this rule stabilizes the economy. Explain why the following rule, if

Y < Yp then (G – T) < 0, destabilizes the economy. Use any and all appropriate mathematics, graphs and words. 6. Nominal interest rates are typically pro-cyclical, that is they rise when output rises above potential and fall when output falls below potential. Using the short run model we have studied this term, explain all the reasons why nominal interest rates are pro-cyclical, that is, explain why nominal interest rates rise when output rises above potential output and why nominal interest rates fall when output falls potential output. Your answer should include any and all appropriate mathematics, graphs and words.