ADVANCED TOPICS IN MACROECONOMICS
Take-home assignment
Answer ALL questions in Sections 1, 2, 3, 4.
The maximum number of marks available for SECTION 1 is 20 MARKS The maximum number of marks available for SECTION 2 is 20 MARKS The maximum number of marks available for SECTION 3 is 20 MARKS The maximum number of marks available for SECTION 4 is 40 MARKS
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The TOTAL number of marks available for the paper is 100 MARKS
Please refer to the Guidelines at the end of the questionnaire (this document) for details and instructions on how to complete this coursework. Further material (questions and answers; original pictures in high definition; hints), will be available in the dedicated post on Blackboard.
Your Coursework document should be typed using the font “Times New Roman”, size 12 points, single spaced, 1-inch (2.54 cm) margins on all sides of the page (top, bottom, left and right). If you can please upload it as a PDF file when you submit it through Blackboard, that will make the marking much easier (thanks!)
You need to submit your Coursework 1 by 14 March 2022 (3pm) in electronic format through Blackboard. The submission page where you can upload your file will become available in the Summative Assessment section of Blackboard one week before the deadline.
ECO-6005B Module Contact: Dr Simone Valente, ECO Copyright of the University of East Anglia
UNIVERSITY OF EAST ANGLIA
School of Economics
Coursework 1 – Spring 2022
SECTION 1 “Guess what happened” (20 marks)
Suppose you observe the time series of output y and real money supply Ms / P reported in the Figure below. Nominal money supply Ms is under full control of the Central Bank.
Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t = 1, and interpret time t = 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements:
(a) Can the shock be a permanent change, positive or negative, in public expenditures G ? Motivate your answer.
(b) Can the shock be a permanent change, positive or negative, in nominal money supply Ms ? Motivate your answer.
(c) Can the shock be a permanent change, positive or negative, in firms productivity λ ? Motivate your answer.
(d) Can the shock be of a permanent change, positive or negative, in the slope of labour supply β ? Motivate your answer. Add any further considerations that you think can be relevant to this exercise.
Please answer the above questions in words: use concepts and economic intuition, do not use equations from the model to justify your answers.
Maximum length of your answer to this Section: 1.5 pages END OF SECTION 1
SECTION 2 “Incorrect simulations” (20 marks)
You work at the Central Bank and you are in charge of forecasting the effects of possible future shocks using the ASAD Redux model. Today, your task is to predict what will happen if the economy is subject to two consecutive shocks, namely,
• At time t = 1, there is a persistent positive shock on aggregate demand due to increased desired expenditures (e.g., a higher propensity to consume).
• At time t = 2, the Central Bank implements a permanent reduction in money supply.
The Central Bank wants you to forecast what will be the effects of a range of monetary contractions of different magnitude. Hence, you run six numerical simulations of the model assuming different sizes of the reduction in money supply. However, the software is faulty and some simulation results are wrong. Your computer produces six scenarios for employment (N) and price level (P), but some scenarios are clearly incorrect and inconsistent with the general predictions of the theoretical model: you need to eliminate the wrong scenarios from your analysis. Looking at the six scenarios depicted below (2.A-2.F), can you tell which ones are incorrect and which ones, instead, are consistent with the theory?
Answer this question by interpreting time t = 6 as the medium run, and explain for each scenario why such scenario is or is not consistent with the theory. Add any further considerations that you think can be relevant to this exercise. For example, can you link the correct scenario(s) you have identified in this exercise to realistic situations and to some plausible behaviour of Central Banks?
Maximum length of your answer: 1.5 pages END OF SECTION 2
SECTION 3 “Identify shocks without short-run data” (20 marks)
You have data for real output y, price level P, and the nominal wage W at two distant dates (time t = 0 and time t = 10) for three different economies:
United Kingdom
Date Output
t = 10 y=190
Date Output
t=0 y=250 t = 10 y=250
Date Output
t=0 y=220 t = 10 y=240
Price level Wage
P = 10 W=50
P = 10 W=40
Price level Wage
P = 15 W=45 P = 15 W=45
Price level Wage
P = 12 P = 12
W =40 W =35
All these observations reflect potential equilibrium levels: each of the three economies was in a first potential equilibrium at time t = 0 and and is in a new potential equilibrium at time t = 10. You do not have any short-run data. Use any suitable model studied in Topic 1 (Lecture Notes, Chapter 1) to interpret the data and answer all the following questions:
(3.a) Between time t = 0 and time t = 10, one of the three economies experienced a shock on labour supply (a change in β) and a fiscal intervention (a change in taxes). Can you identify this economy? Motivate your answer and try to speculate on what could be the rationale for the fiscal intervention following the shock on labour supply.
(3.b) Between time t = 0 and time t = 10, one of the three economies experienced a shock on productivity (a change in λ) and a monetary intervention (a change in money supply). Can you identify this economy? Motivate your answer and try to speculate on a plausible reason for the monetary intervention.
(3.c) Between time t = 0 and time t = 10, one of the three economies experienced a fiscal contraction and a monetary expansion. Can you identify this economy? Motivate your answer and try to speculate on plausible reasons for this combination of fiscal and monetary interventions.
Maximum length of your answer to this Section: 1.5 page END OF SECTION 3
SECTION 4 “Everything you think about virtual currencies” (40 points)
Your task for this section is to write a short essay about “virtual currencies”, that is, digital coins that are “neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but are accepted by economic agents as a means of payment and can be transferred, stored or traded electronically.” This definition is from the European Banking Authority.
In principle, you can write everything you think about whether virtual currencies are a good or a bad idea, whether they can help or damage the economy. But in order to reach deep conclusions, ask yourself some key questions that will make you think more systematically about virtual currencies:
(I) (the money demand side) What do you think motivates agents to demand virtual currencies rather than fiat money issued by national authorities (e.g. pounds, euros, dollars)? Think about possible differences in the main uses of virtual currencies versus national fiat money.
(II) (the money supply side) What do you think about the fact that virtual currencies are not issued by national authorities? (feel free to make examples – e.g., how bitcoins are put into circulation and what the consequences can be – if that helps)
(III) (policymakers) Do you think that policymakers should see virtual currencies as a threat or as an opportunity?
Maximum length of your answer: 3 pages END OF SECTION 5
END OF QUESTIONNAIRE
COURSEWORK 1: Guidelines
• Concepts and intuition. In your answers, you should emphasize the relevant concepts and give priority to economic intuition. Try to demonstrate that you have understood the material and that you are able to extract from apparently mechanical models the key economic reasoning that allows you to address the questions. To this aim, answer all the questions using plain English, do not answer by means of equations or diagrams.
• Motivating one answer and the next…. In principle, each section asks you to motivate your answer with concepts and economic reasoning. However, if you have to re-use the same concept twice and you want to save space, please feel free to reference yourself across sections. Example: if you have already explained why a given shock increases output in your answer to (say) Section 1, and you need to re-explain the same mechanism in your answer to (say) Section 3, please feel free to write in Section 3 that “output increases as a result of the same mechanism explained in Section 1”.
• Originality and style. In general, do not copy & paste material from the Lecture Notes, from the slides or any other sources. Use your own words. In terms of style, your answers should be short but complete: try to go straight to the point, making statements that are exhaustive and clearly motivated without going off-topic.
Section 1: specific guidelines
– Answering “yes” or “no” (or little more than that) to the various sub-questions will not give you a good mark even if such statements are correct. High marks require you to motivate your answers in a careful and effective way. Show us you know the economic intuition for your answers.
– In section 1, you should explain what type of shocks can or cannot generate the behaviour of output and real money supply that you see in the figure. You have four possible candidate explanations – (a), (b), (c), (d) – and you need to explain which of these are correct or not according to the ASAD model. Please consider each candidate explanation in turn: if you believe that (a) is correct or is not correct, you need to explain why in either case; and you need to do the same for (b), (c) and (d) as well.
– What is the meaning of “permanent change”? It means that we only consider shocks in which one variable changes its level at time t =1 and then remains at such new level forever. Note that a “change” can be positive or negative.
– Try to answer by focusing on the essential points, keep the answer short but complete. Marks will mostly reflect the quality of your answers in terms of economic intuition and reasoning.
– In this exercise, understanding whether there is one or more than one possible explanation for the time series is part of the exercise.
Section 2: specific guidelines
– As above: identifying the correct scenarios and the incorrect scenarios without explaining the economic intuition behind your statements will not give you a high mark.
– The practical task for this section can be summarized as follows. Try to represent a positive aggregate demand shock followed by a monetary contraction using the ASAD model. Next, look at the figure in Section 2. For each scenario, you need to ask yourself: can this scenario be predicted by the model or not? If yes, it is a scenario that is consistent with the theory. If not, it is a wrong scenario produced by faulty software.
– In this exercise, understanding whether there is one or more than one correct scenario is part of the exercise.
Section 3: specific guidelines
– In this exercise there are no ambiguities: one scenario can only be associated to one economy, your task is to “pair” economies (UK, France, Germany) to shocks (scenarios 3.a, 3.b, 3.c) using the available data. All the necessary information is in the data.
– Remember that “changes” can be positive or negative.
Section 5: specific guidelines
– Please list all your bibliographic references at the end of your document. The list of references will not count towards the 3-page limit for your short essay.
– If you seek specialised literature, I recommend concentrating on academic papers on virtual currencies and/or institutional papers from Central Banks and international organizations. Try not to hinge on news articles authored by journalists, look for publications authored by professional economists. A good source of non-technical articles written by professional economists (which often include references to technical articles written by the same authors) is
https://voxeu.org/
– Section 5 will be marked according to the standard UEA Senate Scale criteria for essays (a copy of which will be uploaded on Blackboard).
Good luck! ECO-6005B
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