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Macroeconomic Policy Assignment 1 - relates to material covered in Weeks 14 Due date: Tuesday April 13th 2010. Read the questions carefully and in...

explain the relationship between business cycle and labor force participation rate
Macroeconomic Policy Assignment 1 – relates to material covered in Weeks 1-4  Due date: Tuesday April 13th 2010. This assignment is worth 15% of your final grade. • Read the questions carefully and in your answers address the concepts and issues associated with each question. • Where word limits (this excludes diagrams, tables, footnotes and references) have been stated for parts of a question, they should be seen as guidelines only. Answers which differ greatly from the word limit however, may be penalized. • Use the word limit as a guide to the depth of answer expected. Remember DO NOT PLAGIARISE . Read the Faculty’s policy on plagiarism, which can be found at the beginning of the Unit Book. • Refer to the section “ Referencing Requirements ” in your Unit Book for assistance. You may use either the Harvard or Vancouver system of referencing. • You must note the source of all information quoted directly – including equations and diagrams. • You must also note the source of key ideas and information even if not quoted directly. • Also read the sections on ‘assignment submission’ and ‘criteria for assessment’ again and make sure that you have addressed each requirement. A bibliography must be included with your answer even if you only use the text as reference. Failure to include a bibliography will result in zero marks for the assessment . Question 1: 15 marks Word Limit: Parts (a) & (b) 100-150 words each, part (c) 200 words. Mark Allocation: Part (a) 4 marks, Part (b) 6 marks, Part (c) 5 marks Diagrams: Use diagrams to help explain parts (a) and (b). a) Differentiate between ‘actual real GDP’ and ‘natural real GDP using diagrams to assist. b) Explain the links between unemployment (actual and natural), inflation and GDP (real and natural) using diagrams to assist you. c) What is meant by the term ‘stabilization policy’? What types of stabilization policies are used most commonly in your country’s economy? Do you think they are effective? (A brief justification is needed here.)
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Question 2: 15 marks Word Limit: 100-150 words each part Mark Allocation: a)-10 marks, b)-5 marks Diagrams: You must use a diagram to answer part (a). a) Using the “Keynesian Cross” model of the economy, explain how the equilibrium level of real GDP is determined? Explain the effect of a change in planned autonomous expenditure on output. Is this effect related to the so called “multiplier” effect? Explain. b) Explain how interest rates and bond prices are related? How is the price of a five-year bond determined? Discuss how changes in the real interest rate affect spending decisions of consumers and producers? Question 3: 15 marks Word Limit: 200 – 300 words Mark Allocation: 15 marks Diagrams: Use the IS-LM model developed in Chapter 4, Gordon (2009) to help with this task. “The impact on national real income, interest rates and Investment, of a contractionary monetary policy or contractionary fiscal policy is identical” Evaluate this statement using the IS-LM model developed in Chapter 4 of your textbook (Gordon (2009) Macroeconomics , Pearson), to aid you. You must evaluate the statement with close reference to your diagrams. Question 4: 15 marks Word Limit: Part (a) 50 – 100 words, Parts (b) & (c) 100-150 words each Mark Allocation: Part (a) 3 marks, Parts (b) & (c) 6 marks each a) On what factors does the size of the government deficit depend? Explain the crowding out effect. b) In an economy the government budget has increased. Evaluate and discuss the following statements: i. The increase in the budget deficit implies that the government behaved wastefully. The government should cut spending or raise tax rates. ii. The increase in the budget deficit has been a result of a responsible policy to soften the impact of economic downturn. c) Using the Barro-Ricardo theorem, evaluate the following statements: i. Due to population aging over the next 50 years the government will find it hard to respect its commitment to provide age pensions to all eligible persons unless it increase taxes or reduces benefits. ii. Retirement benefits promised by the government lower private savings in the economy because it reduces workers’ incentives to save.
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