Java Python ECON10003
Assignment #1
Introductory Macroeconomics
Due Friday 30 August
Instructions. You can but do not have to do this assignment in a group. If you work in a group, it can have at most three people. The assignment is due by 4pm on Friday 30 August.
Late assignments. Late assignments will not be accepted. Please apply for Special Consideration if for some documented reason you cannot submit by the due deadline.
Marking criteria. The tutors will mark the assignment according to the following criteria:
• Ability to use material discussed in lectures, tutorials, and other sources to answer the assign- ment questions in a logical and coherent fashion (90 per cent weight).
• Overall presentation of the assignment. This includes spelling, grammar, correct construction of diagrams, etc. (10 per cent weight).
• The maximum assignment length is 800 words.
QUESTIONS
1. Output Gaps and Policy (6 points).
In this question, you will explore the Keynesian model discussed in the lectures. You will be asked to make some calculations and provide some economic intuition. Be sure to provide all of your working. Correct answers without working may not receive full marks.
Consider the following equations representing decisions by households, firms and government:
C(Y) = 125 + 0.5(Y − T)
I = 50 G = 150
T = 100 Suppose that potential output is Y* = 500.
(a) (i) Calculate the level of output Y at the Keynesian Equilibrium and then calculate the output gap (in percentages).
(ii) Draw and explain a diagrammatic representation of the above. Be sure to include key features, including any intercept points, slopes and intersections.
Now assume that unemployment follows the simple model developed in lecture 4, where people can only be employed or unemployed. Assume a job separation rate s = 0.03 and a job finding rate f = 0.47.
(b) (i) Calculate the steady-state (natural rate) of unemployment.
(ii) Assume Okun’s Law (in percentages) holds with β = 0.33. Use your answers from above to calculate the unemployment rate and hence the rate of cyclical unemployment. Does your answer make sense? Explain.
(c) Suppose government would like to use fiscal policy to r ECON10003 Assignment #1 Introductory MacroeconomicsPython eturn to the potential level of output.
(i) By how much would it need to change its expenditure G?
(ii) By how much would it need to change its taxes T (instead of changing G)?
2. Estimating Okun’s Law (3 points)
In this question, you will investigate Okun’s Law empirically using an equation derived for you in the Appendix. Understanding this derivation will assist you in interpreting your results, but you are not expected to perform. the derivation yourself. You will be required to download and prepare the data, make a scatter-plot, and then run a simple linear regression (which you would have encountered in your high school Maths Methods class as well as QM1).
(a) Prepare the Data
Use the Australian Bureau of Statistics (ABS) website (https://www.abs.gov.au/) to download and prepare the following data series.
(i) Gross Domestic Product: Chain volume measures (seasonally adjusted) (Series ID: A2304402X) Note that the data is quarterly, i.e., 3-month periods ending in March, June, September, and December. Compute (ln(Yt ) − ln(Yt−1)) × 100.
(ii) Unemployment Rate: Persons (seasonally adjusted) (Series ID: A84423050A) Note that the data is monthly, but we want to make it quarterly to match the GDP series. Compute a quarterly average, e.g.,
avg(uDec Qtr) = 3/1 (uOct Mth + uNov Mth + uDec Mth)
Now compute the change in the average employment rate ut − ut−1 .
Keep only calculations starting from the September Quarter, 1978, and discard the rest. (b) Make a Scatter-plot
Use any program to generate a scatter-plot of the series that you created in part (a), with:
(i) quarterly growth rate of real GDP on the horizontal axis; and
(ii) change in the average quarterly unemployment rate on the vertical axis.
Does this plot match your expectations? Explain.
(c) Estimate a simple Linear Regression
Estimate a simple linear regression on the following equation:
∆ut = α − β∆ln(Yt ) × 100 + εt
where ∆ln(Yt) × 100 is the series you generated in part (a)(i) and ∆ut is the series you gen- erated in part (a)(ii). Report your output and provide an interpretation of the estimated slope coefficient βˆ2.
(d) Bonus questions for good students (not for points)
(i) What is the estimated rate of growth of potential output?
(ii) Do you think that the assumptions of constant growth of potential output and constant natural rate of unemployment are reasonable? Explain