course material

1. Applied Macroeconomics
Applied MacroeconomicsPlease read carefullyThe Deadline: Each team must submit an
electronic copy through Blackboard and ahard copy to an Assignment Box (to be
announced), located on the groundoor ofthe Australian School of Business building, in the
West wing by 4:00pm on Monday 9September 2013. Do not use plastic sheets or binders.
Simply staple the pages together.The name and ID of each team member should be on the
cover page. The deadlinefor submission for both the electronic and hard copy is Monday, 9
September 20134.00pm. This assignment counts for 17 percent of the nal mark. As this
component ofassessment is worth less than 20%, special consideration does not apply.
Submit ONEhard copy and ONE electronic copy per team. There are penalties for submitting
morethan one copy as it interferes with antiplagarism controls.Team size: Students are
encouraged (but not obliged) to self-organise into groups of 2or 3 members each and hand
in one assignment per team. The maximum size of a teamis 3 students. Assignments
produced by larger teams will not be marked.Late Submission Policy: If your team fails to
submit both the electronic copy and the hardcopy by the given deadline your assignment
will not be marked. Special considerationdoes not apply to the late submission of the team
assignment. Your team has manyweeks to complete the assignment and it is your risk if you
decide to leave things to thelast few minutes to complete. This policy will be enforced to the
minute.Plagarism: All electronic copies of essays will checked for plagiarism on the
Turnitinsoftware into which they are uploaded. See notes on Plagiarism in the Course
Outline andalso note that the Turnitin software will automatically check against all other
assignmentssubmitted (including in the past and to other institutions all over the world).
Please alsonote that it will be academic misconduct if the copy submitted electronically is
not thesame as the copy given to your tutor. While discussing the assignments with peers
isencouraged, do not lend your assignment to another student. When an assignment
iscopied, it is di cult for the instructor to determine who the copier is and your team maybe
penalised heavily.Consultation: The tutorial session ofWeek 6 will give a chance to ask
clarifying questions.1ECON 2104 – Applied MacroeconomicsMARKING GUIDE FOR TEAM
ASSIGNMENTCriteria and weighting Below expectations (F) Meets expectations (P/Cr)
Exceeds expectations (D/HD)1 Presentation: clear and precise(20%)• Ideas not
communicated clearly,e.g. incorrect vocabulary/ grammar• Unprofessional presentation,
littleevidence of editing (e.g. manyspelling, punctuation errors)• Data presented poorly.
Axes notlabeled, sources not reported.Tables inaccurate.• Ideas generally
communicatedclearly although could be moreeffective• An attempt at

2. professionalpresentation and editing: onlyminor spelling/ punctuation errors.• Data
generally presented well.Some imprecision or lack of details(e.g. missing dates, labels,
axes)• Ideas communicated clearly andfluently; mostly accuratevocabulary/ grammar•
Ideas expressed concisely• Very professional presentation – evidence of thorough
editing(negligible errors)• Data presented professionally.Sufficient detail (no missing
datesor label) and no irrelevant material2 Structure: clear and wellorganized (20%)•
Difficult to follow sequence of ideas;unclear focus• Text not clearly structured,
e.g.paragraphs not clearly developed.• Sufficiently clear focus and(mostly) logical sequence
of ideas.• Adequately structured• Ideas developed logically andcoherently• Clear focus; no
irrelevant material• Well structured3 Critical thinking applied toissues and ideas, and use
oftheory (60%)• Does not clearly/correctly identify orexplain issues/problem• Little
analysis or critical evaluation ofideas or information• Struggles to appropriately
applytheory.• Poor handling of the data. Relatesdata imprecisely to the theory• Identifies
and defines keyissues/problems but does notconvey all aspects or complexity• Some
analysis and application oftheory but with limited depth• Good handling of the data.•
Clearly identifies and explains allaspects of issues/problem andconveys complexity of
issue.• Insightful analysis and criticalevaluation of ideas or information,using appropriate
theories andshowing depth of understanding• Relates the data accurately to
thetheory.2Question 1: (10%)Take the simple aggregate demand model we reviewed in
class which assumes governmentspending is exogenous (i.e. G = G). Imagine, instead, that
some fraction of governmentspending responds to the state of the economy. In particular,
assume that G increasesif output is below potential output, Y < Y and G decreases if output
exceeds potentialoutput, Y > Y . In particular assumeG = G ?? (Y ?? Y )so the simple model we
reviewed corresponds to the special case = 0. Assume also forsimplicity that a = b = 0 and
NX = 0.1.1 Explain why in this model a rule like this can stabilise output around
potential.1.2 Why is the equilibrium level of output a function of potential output, Y ? Why
isthe equilibrium level of output a function of ? Provide intuition.1.3 Dene the scal decit as D
= G ?? T. Represent graphically the scal decit asa function of output. Compare the behaviour
of the decit for two di erent valuesof . Find the level of output for which the decit is zero.1.4
Some economists argue that scal policy does not respond symmetrically to thestate of the
economy. In particular, they argue that during recessions the govern-ment increases
spending by more than it decreases it during boom times. Howwould you change the
graphical representation of the scal decit from 2.3 to cap-ture this kind of scal
policy?Question 2: (15%)The simple model of aggregate demand predicts that the budget
decit is countercyclical,i.e., that it rises when output falls and falls when output rises.Use
Australian annual data to assess the validity of this prediction. Report yourndings and
conclusions.Suggested
sources:http://www.abs.gov.au/AusStats/ABS@.nsf/MF/5206.0http://www.budget.gov.au
/2011-12/content/fbo/html/appendixb.htmQuestion 3: (30%)The following questions are
based on the excel spreadsheet CGBC.xlsx which stands forConsolidated Government
Budget Constraint. CGBC.xlsx simulates the path of govern-ment debt for di erent
assumptions and starting conditions. You are meant to changethese assumptions and initial
conditions and explore the implications for the dynamics3of government debt. CGBC.xlsx is

3. available through Blackboard. Although you maydownload it as many times as you’ d like, I
recommend that you save a copy and name itteamCGBC.xlsx in case you need to revert back
at any time to the original. To answerthe questions you only need to change the numbers
which are painted red. If you needto go back to the benchmark values, these are in blue in
Columns AD to AN.Notice that in year 16 a scal consolidation takes place: the growth rate of
governmentspending falls, the tax rate increases and the debt to GDP ratio stabilizes and
thengradually starts to fall.3.1 Explain why the debt-to-output ratio continues to rise for a
few years after thescal consolidation has taken place.3.2 For the baseline values the debt-to-
output ratio peaks in year 33. Find the tax rate(after year 15) such that the debt-to-output
ratio peaks in year 25.3.3 For the baseline values the debt-to-output ratio peaks in year 33.
Find the growthrate of nominal G (after year 15) such that the debt-to-output ratio peaks in
year24.3.4 Keep the growth rate of real output at 2%. Are there parameter values such
thatthe primary decit-to-output ratio remains constant at its initial value of 2%? Ifso, report
these values and explain why they stabilise the primary decit-to-outputratio. If not, explain
why there are no values that can satisfy this condition.Assume now that no scal
consolidation takes place in year 16. That is, set the growthrate of nominal G (after year 15)
to 6% and set the tax rate (after year 15) to 20%.3.5 What is the debt-to-output ratio equal
to in year 40?3.6 What growth rate of real output achieves a debt-to-output ratio in year 40
equalto that in year 1?4Question 4: (15%)Consider the Solow-Swan model we developed in
class. The parameter values are givenin the table below:Parameter Value0.33s 0.25A 15n
0.020.05L(0) 1319K(0) 263,8004.1 At time 0, is the capital-labour ratio increasing,
decreasing or constant? Explainand complement your answer using diagrams.4.2 If the
economy is on its balanced-growth path by period 19, what is the level of thecapital stock in
that period? And the capital-labour ratio?4.3 Find the steady state level of income per-
capita, consumption per capita and thereal interest rate.4.4 Let s vary and plot steady state
consumption per-capita as a function of s at thevalues of the remaining parameters.4.5 Find
the value of s that maximises steady state consumption per capita. Comment.Question 5:
(30%)The following questions are based on the excel spread TaylorRules.xlsx, which
containsmeasures of ination, real activity and interest rates in the Sheet called Data”
andcontains an example of a monetary policy in the Sheet called Rules” . The policy
rule,called Rule A, is given byrt = r + ( t ?? ) + g(gt ?? g ) (Rule A)where r is a constant, and g
are monetary policy response coe cients. In the ex-ample t is a measure of ination and gt is a
measure of real activity. The parametrizationof the rule is in columns B and C and in rows 1
to 9 and reproduced belowParameter Valuer 5.32.5g 3.21.5g 0.55The Trimmed Mean serves
as the measure of ination and GDP growth as the measureof real activity.5.1 At the
parameter values given in TaylorRules.xlsx compute for each quarter thedi erence between
the actual cash rate, robst and the implied policy-rule cash rate,rt. Show a plot of the implied
policy rule cash rate and the actual cash rate andanother plot of the resulting di erence, et =
robst ?? rt, i.e the errors. Compute forthe sample the sum of the error terms, PTt=1 et.5.2 Set
to 1:5 and g to 0:25 and nd values for r, and g such that the sum ofthe error terms is zero,
PTt=1 et = 0. Plot the new and old series for et togetherand report the standard deviations
of the each of two series. Comment.5.3 Replace the trimmed mean measure of ination for
the all groups CPI” measure,also known as the Headline measure of ination. Adjust to its

4. sample meanand set to 0.8 and g 0.1. What is the standard deviation of et? Plot the
newimplied policy-rule-cash-rate together with that in 5.1. In the December quarter of2000,
the two rules call for very di erent levels of the cash rate. Why?For the questions that follow,
consider the following alternative rulert = (1 ?? )r + rt??1 + ( t ?? ) ?? u(ut ?? u ) (Rule
B)where ut stands for the rate of unemployment and t is the trimmed mean measureof
ination. Set the parameters to the values shown belowParameter Valuer 5.152.69u
6.520.800.50u 0.105.4 Plot the implied policy rate and the actual one. What is now the
standard deviationof the error term?5.5 For the December quarter of 2008 the average level
of the cash rate was 5.3 percentand the one implied by the rule was close to 7.8 percent.
This corresponds tobiggest deviation (in absolute terms) for the ination-targeting sample.
What washappening in the Australian economy at the time? What do you see as
potentiallimitations of a Rule like B?Suggestion: Read the Statement by Glenn Stevens,
Governor of the Reserve Bank ofAustralia at the time, http://www.rba.gov.au/media-
releases/2008/mr-08-27.html65.6 The sample mean of the unemployment rate is around
6.5 percent. In part, thissample mean is inuenced by the early 1990?s recession but also by
institutionalchanges in the degree of legal regulation of the Australian labour market which
hasbeen progressively relaxed. It is quite likely that the current steady state level ofthe
unemployment rate (NAIRU) is today lower than the sample mean.Propose an alternative
rule which responds in some way to the unemployment ratebut is inmune to shifts in steady
state unemployment like the one described above.Show a plot of your proposed rule (called
it Rule C) and compare it with Rule Band the actual cash rate.7ORDER THIS ESSAY HERE
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