tackle everything

Exercise 9.6 (Moderate) In the last step, you will simulate business cycles in the model economy. All you need to know is the capital ki at the beginning of time and the random shocks er. As a starting capi- tal, use ki = 3.7. You can generate the random shocks with the random number generator in your spreadsheet. In Excel, just type "=RAND()", and you will get a uniformly distributed random variable between zero and one. Generate 50 such random numbers, and use your formulas for a and i and the equation for capital in the next period, keel = (1-6) k + is, to simulate the economy. Plot consumption and investment (on a single graph). How does the volatility of the two series compare? Plot a graph of GDP, that is, consumption plus in- vestment. How do the business cycles you see compare with the ones you found in the real world? You don't need to compute the length of each cycle, but try to make some concrete comparisons. 84 Business Cycles Exercise 9.7 (Easy) Read the following article: Plosser, Charles. 1989. "Understanding Real Business Cycles". Journal of Economic Perspectives 3(3): 51-78. Flosser is one of the pioneers of real business cycle theory. What you have done in the previous exercises is very similar to what Flosser does in his article. His economy is a little more realistic, and he gets his shocks from the real world, instead of having the computer draw random numbers, but the basic idea is the same. Describe the real business cycle research program in no more than two paragraphs. What question is the theory trying to answer? What is the approach to answering the question? Exercise 9.8 (Moderate) What does Plosser's model imply for government policy? Specifically, can the government influence the economy, and is government intervention called for?Exercise 10.4 (Moderate) For the purposes of this exercise, assume that you have data on annual national job creation G and job destruction D. for N years, so t = 1. .. N. Show that if annual national job reallocation R: and net job creation NET, have a negative covariance, then the variance of job destruction must be greater than the variance of job creation. Recall the definition of variance of a random variable X for which you have / observations, {}M: var(X) = ~ _(: -2), where a is the mean of X. Similarly, recall the definition of the covariance of two variables X and Y . If there are N observations each, {z,, D:)My, then: cov(X, Y)= = _(: -2)(: -D). These definitions and the definitions of NET, and R, provide all the information necessary to answer this exercise. 94 Unemployment Exercise 10.5 (Easy) Consider the employment statistics in chart below. Compute each of the following five measures: (i) the economy-wide rate of job creation of (ii) the economy-wide rate of job destruction di; (iii) the net rate of job creation net; (iv) the upper bound on the number of workers who had to change employment status as a result of the gross job changes; and (v) the lower bound on the number of workers who had to change employment status as a result of the gross job changes for each each of the years 1991, 1992, 1993, 1994, and 1995. Year Xay " de net. UB|LB 1990 1000 0 500 1991 800 100 800 1992 1200 200 700 1993 1000 400 600 1994 800 800 500 1995 400 1200 600 1996 1400 600 1997 0 2000 500 Exercise 10.6 (Moderate) For each of the following statements, determine if it is true, false or uncertain and why. If possible, back your assertions with specific statistical evidence from DHS. 1. Foreign competition is destroying American manufacturing jobs. 2. Robots and other capital improvements are replacing workers in factories. 3. Most job creation occurs at plants that grow about 10% and most job destruction occurs at plants that shrink about 10%. 4. Diversified plants are better able to withstand cyclical downturns. 5. Every year, high-wage manufacturing jobs are replaced by low-wage manufacturing jobs.Exercises Exercise 11.1 (Easy) Suppose the aggregate production technology is Y = 34 . and that [ = 150. Both the labor force and productivity are constant. Assume that the depreciation rate is 10% and that Exercises 109 20% of output is saved and invested each year. What is the steady-state level of output? Exercise 11.2 (Moderate) Assume that the Solow model accurately describes the growth experience of Kuwait. As a result of the Gulf war, much of the capital in Kuwait (oil extracting equipment, vehi- cles, structures etc.) was destroyed. Answer the following questions, and provide brief explanations. . What will be the effect of this event on per capita income in Kuwait in the next five years? . What will be the effect of this event on per capita income in Kuwait in the long run? What will be the effect of this event on the annual growth rate of per capita income in Kuwait in the next five years? What will be the effect of this event on the growth rate of per capita income in Kuwait in the long run? . Will recovery in Kuwait occur faster if investment by foreigners is permitted, or if it is prohibited? . Would Kuwaiti workers gain or lose by a prohibition of foreign investment? Would Kuwaiti capitalists gain or lose? Exercise 11.3 (Moderate) In this and the following two exercises, you will apply growth accounting to measure the determinants of growth in output per worker in a country of your choice. To start, you need to pick a country and retrieve data on real GDP per worker and capital per worker. You can get the time series you need from the Penn World Tables. See Exercise 9.1 for information about how to access this data set. You should use data for all years that are available. In Section 11.3, we introduced growth accounting for output growth, while in this exercise we want to explain growth in output per worker. We therefore have to redo the analysis of Section 11.3 in terms of output per worker. The first step is to divide the production function in equation (11.11) by the number of workers Ly, which yields: (11.20) Equation (11.20) relates output per worker 1,/L, to capital per worker K-1/L. If we use lower case letters to denote per-worker values (1: = Y:/Lt, ke-1 = Ki-1/L:), we can write equation (11.20) as: (11.21) 1 = APRET.110 Economic Growth Use equation (11.21) to derive a formula for Ar and to derive a decomposition of growth in output per worker into growth in capital per worker and productivity growth. You can do that by following the same steps we took in Section 11.3. Exercise 11.4 (Moderate) Compute the productivity parameter A, for each year in your sample. For your computa- tions, assume that 1 -a = .4. This is approximately equal to the capital share in the United States, and we assume that all countries use the same production function. In fact, in most countries measures for 1 - a are close to .4. Exercise 11.5 (Moderate) By using log-differences, compute the growth rate of GDP, productivity, and capital per worker for each year in your sample. Also compute the average growth rate for these three variables. Exercise 11.6 (Moderate) What percentage of average growth per worker is explained by growth in capital, and what percentage by productivity growth? For the period from 1965 to 1992, the average growth rate of output per worker was 2.7% in the United States, and productivity growth averaged 2.3%. How do these numbers compare to your country? Does the neoclassi- cal growth model offer an explanation of the performance of your country relative to the United States? If not, how do you explain the differences?Exercises Exercise 12.1 (Easy) For each of the following questions provide a brief answer. 1. (True, False or Uncertain) All things being equal, there is more total savings under a funded than under an unfunded pension system. 2. For the U.S., at the moment, isn > r? 3. Name three items in the Federal budget that account for more than 20% of all gov- ernment expenditures (each). Exercise 12.2 (Easy) Assume that every dollar spent by the government augments total output by o, where 0 0. Here assume that U > 0, " G1. Now what is the market-clearing interest rate ro? 3. Which is greater, ro or ro? Does this fit with your intuition about the effect of tempo- rary government spending? Exercise 12.4 (Moderate) Consider again the model of Section 12.3 above. Calculate S, explicitly when the return on public savings is n and the return to private savings is r. Assume n #'r and r is small. Exercise 12.5 (Moderate) Grace lives for two periods. She has preferences over consumption streams co, c, of: "(co, ci) = In(co) + # In(c), where 0 1. Human capital is augmented by schooling by the simple formula Kj = S, so given a choice for S, Grace earns 1 - S while young and AS while old. There is no bond market. The government is interested in helping Grace go to school. It levies a lump-sum tax of G on Grace when she is young and uses it to augment her human capital so that K1 = 5+ G where o > 0. Answer the following questions: 1. Assume G = 0. Find Grace's optimal schooling choice S and human capital K1. 2. Assume G > 0. Find Grace's optimal schooling choice S and human capital K1. Remember that Kj is affected directly by G. Show that S is decreasing in G and that Kj is decreasing in G is o