management

Suppose a foreign aid donor is deciding how to best target aid money to those in poverty. The donor calculates the mean 2020 GDP per capita in each country in the world and converts country-specific values to USD ($) using international exchange rates. The donor then defines as poor all individuals living in countries where the GDP per capita is below $1.90 USD per day. Based on the material covered in class and course readings, identify three or more reasons why this approach will fail to efficiently/accurately identify the world's poor (please include at least one reason discussed in the assigned article titled "The Trouble with GDP").

2) (2 points) Suppose a researcher calculates PPP (purchasing power parity)-adjusted income per capita at the country level and finds it is strongly positively correlated with country-level average years of completed schooling among those aged 18+. The researcher concludes that providing income transfers to individuals residing in low-income countries will lead to increases in educational attainment. What do you think of this conclusion? Are you comfortable in taking the described relationship between income and schooling as evidence that higher incomes cause higher levels of schooling? Why or why not?

3) (3 points) Summarize the neo-classical growth theory-based argument for why free trade/market liberalization would be expected to lead to economic convergence (i.e., poorer countries catching up to wealthier countries). Then, discuss two or more reasons why market liberalization alone may fail to lead to economic convergence in practice. How does the ability of neo-classical growth theory to predict current economic development trends affect our understanding of how to most effectively reduce poverty (if at all)?

4) (2 points) Jeffrey Sachs' Millennium Villages Project (MVP) was designed to demonstrate how aid can help the extreme poor in rural Africa. There is debate about whether the MVP was successful in doing so. Ignoring whether the MVP actually worked, discuss whether the MVP makes conceptual sense. In particular, discuss the broad features of the MVP that Sachs argues should make it successful.

5) (6 points) Consider the debate over foreign aid and Chinese investment in Sub-Saharan Africa.

a. (3 points) William Easterly, Dambisa Moyo, and others argue that foreign aid has done more harm than good in practice. Summarize the theoretical and empirical (i.e., data-based) arguments they offer in support of this position. Do you find their arguments compelling? Why is it difficult to convincingly establish whether aid has helped or harmed recipient countries in a causal sense?

b. (3 points) In class and in your readings, we considered the recent rise in Chinese investment in Africa. Identify two or more reasons why Chinese investment might be theoretically preferable to foreign aid. Then, discuss whether the theoretical concerns regarding foreign aid identified in 5a would also apply to Chinese investment. Identify at least one additional reason why Chinese investment in Africa may ultimately prove harmful for recipient countries.

6) (2 points) Compare two alternative poverty measures: poverty headcount ratios and average poverty gaps. Describe a policy question that each measure would be more helpful in answering. Then, explain whether it will be the case that if country A has a higher poverty headcount ratio than country B, it must also have a higher average poverty gap. What are the implications of your conclusion?

7) (5 points) Consider the relationship between economic growth and inequality in a society.

a. (2 points) Explain why the effect of economic growth on inequality is theoretically ambiguous. Then, discuss one or more economic arguments in support of the claim that income inequality is undesirable (i.e., arguments distinct from ethical fairness or equity concerns).

c. (3 points) Describe the Kuznets curve which relates economic growth to inequality. Is the empirical evidence (including that described in the World Social Report) consistent with the hypothesized relationship between inequality and economic growth? What role does the empirical evidence suggest that social/intergenerational mobility plays in determining the relationship between growth and inequality?

8) (2 points) Discuss two puzzles identified in "The Economic Lives of the Poor" and summarize the potential explanations for these apparent puzzles offered by Banerjee and Duflo (the authors). Then, for each puzzle, suggest one potential explanation not covered by the authors

The consumer's problem in a dynamic model

Consider a two-period consumption-saving model from Chapter 9. The consumer's income in the current and future periods is denoted by y and y'. There are no taxes. The consumer's utility function is given by

U(c,c') = c + c', 0< <1, [1]

where denotes the discount factor. Assume that the credit market is perfect. The real interest

rate on borrowing and lending is denoted by r.

(10 points) Derive the two conditions that define the optimal choice of consumption in the current and in the future periods. You can use a graphical approach or a mathematical optimization technique. Describe the economic meaning of the optimality conditions.

(10 points) Find the explicit analytical expressions for the optimal values of consumption in both periods and for the optimal saving s in terms of the exogenous variables and the parameters of the model.

(10 points) Suppose y =480, y'=500 and =0.95. Consider the real interest rate r=0.2. Using the expressions found in part (e), compute the optimal numerical values of consumption in both periods. Does the consumer choose the same level of consumption in both periods? Is the consumer a lender or a borrower? Explain.

(7.5 points) Keep the values y =480, y'=500 and r=0.2, but assume =1. How, if at all, does your answer to part (f) change?

(7.5 points) Keep the values y=480, y'=500 and =0.95. However, assume that the real interest rate decreases to r=0.1. Find the new optimal values of consumption and saving. Is the consumer a lender or a borrower? Explain.

(5 points) Is the consumer better off after the decrease in the real interest rate? Explain why or why not.

(10 points) Illustrate the impact of the fall in the real interest rate on a graph. On this graph, show clearly the optimal consumption choices that correspond to the old and the new interest rates. In addition, make sure to label the axes and the points of the intercepts of the budget constraint with the horizontal and vertical axes. Indicate the value of the slope of the budget constraint, the endowment point, and the point of optimality. Use the income and the substitution decomposition to explain the economic reasoning behind the responses of consumption and saving.

(24 points) Suppose a consumer has preferences represented by the utility function U(X,Y) = X2Y. Therefore, MUX=2XY and MUY=X2. Suppose PY = 1, and the consumer has $300 to spend. Draw the Price-Consumption Curve for this consumer for the prices of PX = 1, PX = 2, and PX = 5. Your graph should accurately draw the budget constraints for each of the prices for good X and specifically label the bundles that the consumer chooses at each price. Also, for each bundle that the consumer chooses, draw the indifference curve that goes through that bundle. Make sure to label your graph carefully and accurately.

4. (16 points) Suppose a consumer has preferences represented by the utility function U(X,Y) = MIN[2X,Y]. Suppose PX = 4 and PY = 2. Sketch the graph of the consumer's Engel Curve for good X.

1. You are given the following information about an economy (note: the interest rate is measured in percentage points. A five percent interest is r = 5). Be sure to show your work.

C = 150 + 0.667 YD - 10 r (M/P)S = 100

I = 200 10 r + 0.1 Y (M/P)D = 0.2 Y - 10 r

G = 200

NX = 50

T = 0.25 Y

YD = Y - T

A. (i) Derive the IS equation (solve for r - interest rate). Graph the curve. (Do not worry

if the slope seems small. This is because a one percentage point change in r will be associated with a large change in Y in dollars.)

(ii) Derive and graph the LM curve (again, solve for r).

(iii) Calculate the equilibrium income and interest rate. Illustrate graphically.

(iv) Calculate Consumption and Investment at the equilibrium point.

(v) Calculate the fiscal budget surplus.

B. Suppose government spending rises to G = 400 (change of 200).

(i) Calculate the new IS and LM curves.

(ii) Calculate the new equilibrium GDP and interest rate.

(iii) Illustrate graphically (on the same graph as in Part A)

(iv) What is the change in Y? What is the change in G? What is the government

spending multiplier, Y/G? Is this different than the multiplier in the simple

Keynesian model (with proportional taxes but without interest rates)? Explain why.

(v) Calculate Investment at the new equilibrium. Does investment rise or decline?

Explain why. Is it possible for Investment to move in the opposite direction?

(vi) What is the new fiscal budget surplus? Why did the budget change less than the $200 change in government spending?

C. Suppose instead of an increase in G, money supply is increased to (M/P)s = 200 (change is 100) Use G =200 as in part A.

(i) Calculate the new IS and LM curves.

(ii) Calculate the new equilibrium Y and r and show graphically (include the original IS & LM curves from Part A to illustrate which curve has shifted).

(iii) Calculate Investment at the new equilibrium. Explain why it changes from Part A.

(iv) What happens to the fiscal surplus? Explain why it changes.

D) Increasing G and increasing M/P have similar effects on Y. In what way do they have different effects? How will this affect the composition of output (C, I, G)?

2. Use IS-LM graphs and explain the following statements:

A. World War II helped the US get out of the Great Depression.

B. The Fed's very low interest rates in the early 2000s contributed to rising GDP (though some later blamed this for the housing price bubble).

C. The Great Recession of 2008 was caused by a large decline in consumption and investment spending.

D. The Obama fiscal stimulus increased government spending and reduced taxes, however, some economists say that the stimulus was too small and caused unemployment to remain high for several years.

E. The Federal Reserve Bank responded to the crisis by increasing the money supply substantially until the federal funds rate was about zero.

F. Once interest rates hit the zero lower bound, some economists argued that further increases in the money supply would not increase GDP so expansionary fiscal policy was needed to increase GDP and reduce unemployment.

3. Suppose that policymakers want to decrease the fiscal deficit

A. Use an IS-LM graph to illustrate the effect on equilibrium GDP and interest rates if government spending is decreased, explaining briefly what happens.

B. Use an IS-LM graph to illustrate the effect on equilibrium GDP and interest rates if taxes are increased, explaining briefly what happens.

C. Suppose the policymakers want to reduce the fiscal deficit without decreasing GDP. Is there a fiscal-monetary policy mix that can achieve this goal? Use an IS-LM graph to illustrate your suggestion.