Questions
1. Currently in the US, inflation as measured by the CPI, is about 1.5% and u is about 7.6%; assume that US un= 6%.
Present the appropriate equation(s) (no need to provide all data, just fill in what you can given information above) and best graph to illustrate this u-inflation situation given the following questions. Make all assumptions clear.
a.Can you say whether or not actual inflation is equal to expected inflation? Why or why not? Explain.
b.Can you say whether or not inflation will rise or fall from its current amount, cet par? Why or why not? Explain.
2. If gm = 10 % and gy trend = 5% then what will the rate of inflation be at the end of the MR? Discuss and explain using the appropriate equations; present appropriate name, if any. Do your best to show what will happen through time in P-Y space. Make any necessary assumptions.
3. The savings rate in the US, s, rose from 3.6% during 2012 Q1 to 4.7% 2012 Q4 (source: "US economic outlook," April 12, 2013, from bmonesbittburns.com).
a. What effect, if any, would this increase in s have on US living standards, both their level and growth rate? Discuss and explain using an appropriate graph.
b. What is meant by the "Golden Rule" (GR)? Use the Mankiw Golden Rule graphto discuss whether this increase in the US s would have any effect on the GR variables of interest.
4. Given the specific assumptions of the models that we have been using, comment on the following statement. Be sure to refer to a specific result, model or equation to justify your response and provide any appropriate term, if any.
"We know that the K stock depends on I, which depends on the interest rate, which is determined in the money market. Thus, the current expansionary MP stance by the Fed should speed up the growth rate of the US economy and favourably affect American citizens' living standards in the LR."
How would your answer change if the quotation discussed the Fed's having a positive growth rate of the Money Supply (gm) rather than simply the implied higher level of the money supply?
5. During 2012 Q4, government spending (G) fell by 7% and is predicted to continue to fall during each quarter in 2013 due to sequestration (source: "US economic outlook," April 12, 2013, from bmonesbittburns.com). What effect, if any, will these G reductions have on the US standard of living? That is, will there be any effect on the LR equilibrium in the basic Solow growth model? Why or why not? Make all your assumptions clear and provide the appropriate term(s), if any.
6. Is the following statement true, false or uncertain? Explain fully, use the appropriate graph (that is, the Solow Growth model of Ch. 12 - the model with Technological Progress, TP), and make all your assumptions clear.
The facts that the U.S. spends a greater % of its GDP on R&D, has more researchers per 1000 total employment, and (usually) has more patents filed annually than does China, can all be used to predict that the US will have a higher standard of living and a higher growth rate of Y/N than China.