REVISED GENERAL COMMENTS ON ASSIGNMENTS
The coursework in the paper consists of two assignments for all students. The purpose of these assignments is to test your understanding of the material covered and to ensure that the AACSB requirements are covered (international perspectives and critical thinking).It also provides a check on your progress to date.Each assignment is worth 20% of the total final assessment, and completion of all assignments is necessary for ‘terms’ (i.e., permission to sit the end-of-year final examination).
The second assignment is attached below. Each assignment has a number of questions, all of which must be answered.
Please consult with the administration guide for rules on 1) extensions and late assignments; 2) copying or plagiarism.The default assumption is that diagrams and calculations are required for every question.This will not apply to Question 4 below.
Presentation of assignments should comply with the following guidelines:
· Assignments should be either typed or printed using a biro (not a pencil) legibly on only one side of A4-size paper. Please do not use red ink (except to indicate changes of curves or values on a diagram).
· The opening page should have just 4 items on it: your name, your student ID number, 178.200, and the assignment number.
· Start a new question on a fresh page.
· When answering the questions, please use graphs wherever necessary. Graphs should be properly labelled and neatly drawn.Axes, curves, shifts of curves, old equilibrium values, new equilibrium values, and so on, must be shown clearly on the diagrams. If this is not done, the question will receive zero marks.
· In numerical problems, show all your steps to the solution. You may receive partial credit even when you obtain an incorrect answer if your method of obtaining the solution was correct.The allocation of part marks is at the discretion of the course co-ordinator.For calculation questions, where no workings are shown, zero marks will be awarded.
· Mathematical expressions must be displayed correctly. Work will be returned to the student unmarked if it fails to display appropriately superscripts, subscripts, and so on.If you cannot type the assignment appropriately displaying mathematical expressions, handwrite the assignment (using clear printing).When representing the Price Level, Mankiw uses P but it is preferable to use PL.
· For the essay (Question 4), you may wish to make use of the Massey University pre-reading service. A link is provided on the opening block of Stream.
· If you are a distance student, and are posting or faxing your assignment to NSATS, please use the contact information provided in the administration guide.The fax no in NZ is (06) 350-5625.So from overseas it would be 64 (6) 350-5625. But remember that you can email the assignment to NSATS if you reside overseas.
· Please note that while it is acceptable to send in assignments ahead of the due dates, they will not be marked and returned until after the due dates. As this is a large course, the marking of internal and extramural assignments is a big job.Please allow three weeks from the due date for assignments to be marked and results recorded.
(INTERNALS AND DISTANCE)
Assignment: 50 Marks (Contribution to final grade = 20 percent)
International perspective: covered in Chs 5, 12.
Critical thinking: covered in Chs 2-4, Epilogue
Instruction: Answer all four (4) questions
(The marks allocated per question are indicated on the relevant question)
A rough guide to the style of question is as follows: Qn 1 (10 marks); Qn 2 (5); Qn 3 (10); Qn 4 (25).
Calculation questions: Qns 1, 3.
Graphical questions: Qn 2
Essay question: Qn 4
Qn 1 (see Ch 5); Qn 2 (see Ch 5); Qn 3 (see Ch 12); Qn 4 (Chs 2-4, Epilogue, and various chapters in Mankiw’s Principles of Macroeconomics).
Question 1 (10 marks)
(Questions (a), (b), and (c) are worth 4 marks; Questions (d) to (g) are worth 6 marks)
Assume that in a small open economy where full employment always prevails, national saving is 300.
If domestic investment is given by I = 400 – 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed?
If the economy is open and the world interest rate is 10 percent, what will investment be?
What will the trade balance be? What will net capital outflow be?
Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.
If government spending rises by 100, does investment change? What is the level of investment after the change?
Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much?
Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much?
Will the real exchange rate rise, fall, or remain constant as a result of the change in G?
Question 2 (5 marks)
(a) In April 1995, Michel Camdessus, managing director of the International Monetary Fund (IMF), criticized U.S. economic policy for allowing the dollar exchange rate to fall too low. He recommended that the United States reduce its budget deficit in order to raise the exchange rate. Use the long-run model of a small open economy to illustrate graphically the impact of reducing the government’s budget deficit on the exchange rate and the trade balance. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
(b) Based on your graphical analysis, explain whether Mr. Camdessus’s policy recommendation will work. Specifically state what happens to the exchange rate and the trade balance as a result of the government budget deficit reduction.
Question 3 (10 marks)
(Questions a) to c) are worth 5 marks; Question d) to e) are worth 5 marks)
Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r – 200 + 2(M/P), while the IS curve is Y = 400 + 3G – 2T + 3NX – 200r. The function for the net exports is NX = 200 – 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r* = 2.5 percent.
Using the LM curve, find the equilibrium level of Y in the small open economy, if M = 100.
Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX?
If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?
Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r – 200 + 2(M/P). This IS curve is given by Y = 400 + 3G – 2T + 3NX – 200r. The function for the net exports is NX = 200 – 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r* = 2.0 percent, and the exchange rate is initially 1.0.
If M = 100, G = 100, and T = 100, solve for the equilibrium short-run values of Y and NX. Is the initially given exchange rate equal to the equilibrium exchange rate?
If the central bank buys bonds in order to raise the money supply, will equilibrium Y increase? Show this using a diagram.
Question 4 (25 marks)
Write a short essay (up to 1,000 words) on Lesson 1 in the Epilogue (p. 568 in Mankiw’s Macroeconomics), one of the four fundamental conclusions from macroeconomics (see also Mankiw’s Principle 8 in his Principles of Macroeconomics).Lesson 1 says that: “In the Long Run, a Country’s Capacity to Produce Goods and Services Determines the Standard of Living of Its Citizens”.In explaining Lesson 1, Mankiw states that the factors determining the level and growth of GDP are of fundamental importance and hence the level and growth of GDP are of fundamental importance.In both the intermediate-level and the first-year textbooks, Mankiw focusses on the long run perspective when he justifies the use of GDP as a metric.So you should not focus on the short-run cycles in which there may be shortages of aggregate demand.Although he does not state it explicitly here, elsewhere Mankiw indicates that the population level also needs to be considered.So effectively there are four major macroeconomic metrics: GDP; GDP/head; GDP growth rate per year; and GDP/head growth rate per year.
First, you will need to discuss what Mankiw means by Lesson 1 (consider the terminology such as long run, capacity to produce goods and services, and standard of living).Second, you will need to discuss the metrics for the main terms (capacity to produce goods and services from a long-run perspective and standard of living from a long-run perspective).Third, you will need to discuss the validity of Lesson 1 within the context of the Mankiw definitions.Finally, you will need to consider whether Lesson 1 is important at all, if you take a broader perspective on the goal of macroeconomics (taking into account the various criticisms of GDP that have been made by critics, including Amartya Sen). You must address the following questions.You may structure your answers to questions a) to n) along the lines of short answer questions.
a) Explain the difference between the short-run time period and the long-run time period.What does the difference in perspective mean for the potential discrepancy between “capacity to produce goods and services” and actual production of goods and services? In other words, what does it imply about full employment of the factors of production? (1 mark)
b) The most important, compact, and flexible metric in macroeconomics is Gross Domestic Product (GDP).It is able to condense a vast amount of information into a single number.Define the term in words.GDP measures at least four things.What are they? In Ch 12 of Principles of Macroeconomics, how does Mankiw define the rate of economic growth?(2.5 marks)
c) Consider the production measure of GDP.Some means of adding up various physical things is required.For GDP, the first step is finding the “market value” of each item. This leads to a problem.What happens if the general level of all prices is rising (or falling)?Once nominal effects are corrected for, have we returned to a measure of physical output? (1 mark)
d) At the start of Section 2-1 of the second-year textbook, Mankiw makes two points about why GDP is important (each point is from the perspective of a different way of viewing GDP; see answer to b)).What are they?(1 mark)
e) What is stated at the opening of Chapter 2 is not sufficient to arrive at the conclusion in the Epilogue about the “standard of living.”GDP, defined in a way that overcomes the problem set out in c), is not sufficient for Mankiw’s claim in Lesson 1 in the Epilogue to be true.A second correction to GDP is required to establish a figure for the “standard of living.”See pp. 191-2 of the second-year textbook. Once we make this adjustment, we get two more of the fundamental macroeconomic metrics.This view of the “standard of living” has led to a number of controversies. In countries such as China (and in India in certain years), there have been policies put in place to directly reduce or slow the growth of the denominator.In other countries, this policy was condemned (often on religious lines).Comment on the controversy.(2 marks)
f) In Chapters 1 and 10 of Principles of Macroeconomics Mankiw uses terminology rather imprecisely. He treats three terms as essentially equivalent: standard of living, “economic well-being” and income. Given the equivalence of these terms, from a long-run perspective, Principle 8 (“A Country’s Standard of Living Depends on its Ability to Produce Goods and Services”), and also Lesson 1 from the second-year book, looks to be a tautology: the ability to consume stuff depends on the ability to produce stuff).Consider the discussion of a good or worthwhile life at pp. 207-11 of the Principles of Macroeconomics. Comment on whether leisure, volunteer work, and a high environmental quality are commonly regarded as “goods” (either for the individual directly concerned or indirectly through the well-being of the society as a whole) and the effect of a decline of each of these in the measured GDP.If increasing production is due to an increase in average working hours, a decline in volunteer work, or a decline in environmental quality, how robust is Principle 8?(4 marks)
g) Comment on whether mass starvation (e.g. famine), sustained poverty, and gross inequality are regarded as “bads.”If increasing production is due to an increase in inequality, how robust is Principle 8?A hidden assumption in modern macroeconomics is that economic growth will “tickle down” to everyone.Comment on the theoretical possibility of growth without any “trickle down” and whether any modern economy seems consistent with this possibility.(2 marks)
h) In Mankiw’s view, is GDP a good measure of “economic well-being” (and hence standard of living and income)? (1/2 mark)
i) In Chapters 1 and 10 of Principles of Macroeconomics, Mankiw uses terminology rather imprecisely. At a number of points he refers to the “quality of life.”What does Mankiw mean by that term? Does he think that GDP is a good measure of it as well? (1 mark)
j) Since GDP and the other related metrics (mentioned above) were developed, a number of commentators have indicated dissatisfaction with the whole set of conventional national accounts.State what some of the criticisms of these metrics are (mention criticisms made by Stiglitz, Sen, and others).For example, some commentators refer to other concepts such as quality of life, social health, social welfare, well-being, a good life, human capabilities, and so on.How do they differ from the conventional measures, especially GDP/head?Comment on the view of the critics on the narrow focus of many governments and advisors from international agencies on the promotion of economic growth (2 marks)
k) Is there any necessary connection between living in a higher GDP/head country and improved longevity, improved physical health, and improved mental health for the bulk of the population (relative to those living in a lower GDP/head country)?Consider, for example, obesity, reliance on low nutrition take-away meals, sedentary lifestyles, stress, and suicide rates. (2 marks)
l) The United Nations has developed a metric called the Human Development Index (HDI).What is it?How does it differ from the GDP? Is it another variant of GDP, such as the metrics discussed in pp. 29-31 of the textbook, or is it an attempt to embody an alternative framework along the lines of the critics of the conventional measures?(2 marks)
m) What is the Kerala model of economic development? What metric(s) of development have been used there?(1 mark)
n) What do you conclude about the use of GDP as the primary macroeconomic metric? Are you satisfied with what Mankiw means by the “standard of living”? Does his definition capture the common understanding of the term?Alternatively, is “standard of living” as Mankiw defines the term, a useful term for economists, but irrelevant to what really matters in the lives of real people? In short, is macroeconomics irrelevant to the real world or falling short of its true aspiration?Do you think that Mankiw is correct from the very long run perspective in stating that Lesson 1 (p. 568 Macroeconomics) is one of the 4 things that macroeconomists know?Do you think that GDP, GDP/head are the best metrics for international comparisons across countries of “well-being” understood in a way that does not amount to “more stuff”?In the medium to long term, should societies (especially developing countries) focus their attention on economic growth or the growth of GDP or GDP/head as the main measure of economic progress (development)?Is some other approach better?(3 marks)
In preparing your answer to Question 4, you should start by reading:
Mankiw, N. Gregory (2010) Macroeconomics, 7th ed, New York: NY: Worth Publishers, pp. 3, 5, 17-24, 40, 45, 171, 191-2, 568.
Mankiw, N. Gregory (2012) Principles of Macroeconomics, 6th ed,, Mason, OH: Southwestern Cengage Learning, pp. 13-4, 196-213, 235-6, 252.
Frank, Robert H. and Bernanke, Ben S. (2004) Principles of Economics, 2nd ed., Boston: McGraw-Hill/Irwin, p. 458.
Nussbaum, Martha (2011) Creating Capabilities, Boston: Harvard University Press, see her list of central capabilities and her comments on Kerala, at pp. 5-6, 17-45, 166 and two videos of Nussbaum advertising the book:
Sen, Amartya (1999) Development as Freedom, Anchor Books ed (20000), New York: Anchor Books. On capabilities and GDP/GNP, see pp. 4-6, 14, 72-86, 150, 290-1.See index entries for gross national product and capabilities. On the Indian state of Kerala, see pp. 45-8, 91, 154, 199, 222.See index entries for Kerala.
United Nations Development Programme (UNDP) (website and reports).(The current administrator [head] of the UNDP is Ms Helen Clark, a former Prime Minister of New Zealand).See especially the tab on idices and data, as well as the various human development reports,and the State of Human Development in HDR 2006.
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