Econometric question

Part I (30 points) 1. Use the following version of Model 1 to address pans a e. WJ'P = d0 dl"'L + d2*K + d3*RM (1) Endogenous Exogenous L5 = so + s1*(W1'P) + 5:11:13ch (2;. w, P, L, L',Y K,RM,E1TC L=L' (3;. AD,C.I,T M,l-L,G Y = 100*L-7KJ (4) AD = k*MfP (5) EITC=earned income tax credit AD = C + I + G (6) C = 3* (Y-T) (7;. T = .25*Y (a) Y = AD (9) a. Determine the reduced form equation for employment. b. Determine the reduced form equation for output (income). c. Identify the Aggregate Supply curve. 11. Use the results from a, b, and c to determine how an increase in the earned income tax credit (BITE-subsidies to low income workers) would affect employment, output, real wages, and the price level. Use the results from a, b, and c to determine how a rise in governmental purchases (G) would affect employment, output, real wages. and the price level. Pan 1]. Answer two of the following three questions (20 points each). Be sure to show your work. 2. Use the data in the table below to represent a household's consumption and income for each given year. - Use a xed weight index (Laspeyres) to determine how much income has changed for this household from year 1 to year 2. . Use a current weight index (Paasche) to determine how much income has changed from year 1 to year 2. . Use a chain weighted index to determine how much income has changed between the two years. Steak (pounds) Price Quantit $11] 100 3. $20 80 The data in the table below describe key features of the trade relations between China and three of its major trading partners. Use these data to answer parts a. and b. Exchange rates are expressed in Chinese Yuan or Renminbi terms. Country Share of Exchange Rate Exchange Rate Price Index Price Index USA 30% 8.28 RMBJ$ 6.30 RMBI$ Trade 2012 2005 (CPI) 2012 (CPI) 10.5 RMBJ'Euro 3.215 RMBJ'Euro NA NA 12.9 Yen! RMB 12.8 YenJ'RMB 230 a. Calculate the trade weighted exchange rate for China for 2012, assuming that the 2005 rate equals 100. How much has it changed since 2005'? [Be cat-4h! to use appropriate units in your calcufnriamJ b. Assume that China's price index in 2005 was 100 and that for 2012. it stands at 130. How has the real exchange rate between the U.S 3:. China changed between 2005 and 2012'? c. Explain why the real exchange rate represents terms of trade. Question 2 (20 points) This question studies the co-existence of money and credit. Time is discrete with an infinite horizon. Each period consists of two subperiods. In the day, trade is bilateral and partially anonymous as in Kiyotaki and Wright (1991) (call this the KW market). At night trade takes place in a Walrasian or centralized market (call this the CM). There are two types of agents, buyers and sellers, and the measure of both is normalized to 1. The per period utility for buyers is u(q) + U(X) - H, and for sellers it is -q + U(X) - H, where q is the quantity of the day good produced by the seller and consumed by the buyer, X is consumption of the night good (the numeraire), and H is hours worked in the CM. In the CM, all agents can turn one unit of labor into a unit of good. The functions u, U satisfy the usual assumptions; I will only spell out the most crucial ones: There exists X* E (0, co) such that U'(X*) = 1, and we define the first-best quantity traded in the KW market as q' = {q : u'(q') = 1}. Here we will assume that there are two types of sellers. Type-1 sellers, with measure 1 - o, never accept unsecured credit. Hence, in any meeting with this type of seller, the buyer must pay on the spot (quid pro quo) with money. In contrast, type-2 sellers, with measure o, accept money but they also accept unsecured credit, in the form of a promise by the buyer to repay the seller in the forthcoming CM with numeraire good. However, there is a credit limit: the buyer can credibly promise to repay only an amount up to C B - 1. New money is introduced, or withdrawn if a