Chapter - The Phillips Curve
1. The Original Phillips Curve
(a) Show the equation of the original Phillips Curve
(b) What is the main relationship this equation implies? Also, please give a numerical example of the implication.
(c) In the historical context, before 1970s, why expected inflation has no role here? (Πte = 0)
(d) What are the main reasons that caused the original Phillips Curve invalid since the 1970s?
2. The Modified Phillips Curve
(a) Given Πt = θΠt-1 + (m + z) - αut, please derive the Modified Phillips Curve.
(b) What is the main relationship that this new Phillips Curve implies? Also, please give a numerical example of the implication.
(c) Why last year inflation (Πt-1) has effect in this version of the Curve?
(d) What are the main differences between the Original and Modified Phillips Curve?
Chapter - Openness in Goods and Financial Markets
1. The Real Exchange Rate
Suppose the United States produced one good, Dell Laptop, and Japan also produced only one good, Sony Laptop. Dell Laptop costs $1,000 in the US and Sony Laptop costs Y138,000 in Japan. One dollar is worth Y115. Please work in details on the real exchange rate between the US and Japan. Which laptop is cheaper? by how much?
2. Interest Parity Condition
Suppose the interest parity condition holds. Also assume that the one-year interest rate in the US is 5% and the one-year interest rate in Canada is 6%. What does this imply about the current versus future expected exchange rate (for the US and Canadian Dollars). Moreover, to have interest parity condition functional, what are the assumptions for financial investors we must have? Discuss.
Chapter - Goods Market in Open Economy
1. The Demand for Domestic goods and Net Exports
(a) Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
(b) Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in government spending will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
(c) Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in foreign demand will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
(d) Explain why the multiplier in an open economy is different from the multiplier in a closed economy.
(e) Explain what the "Policy Coordination" is all about. How it matters and why we need it in order to recover from economic crisis. You can also discuss the G20 and the 2009 Stimulus.
2. The Marshall-Lerner Condition
(a) Show the derivation of the Marshall Lerner equation
(b) In order to have an improvement of the trade balance after a real depreciation, what condition we must have from the equation above. Provide the numerical example when the condition holds.
(c) Please provide the numerical example when the Marshall Lerner condition does NOT hold.
Chapter - Output, the Interest rate, and the Exchange Rate
1. Flexible Exchange Rate
(a) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect an increase in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibria.What are the changes of output, investment and trade balance.
(b) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a monetary expansion will have on the domestic economy. In your graphs, clearly label all curves and equilibria.What are the changes of output, investment and trade balance.
(c) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a decrease in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibria.What are the changes of output, investment and trade balance.
(d) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a monetary contraction will have on the domestic economy. In your graphs, clearly label all curves and equilibria.What are the changes of output, investment and trade balance.
2. Fixed Exchange Rate
By using the interest parity equation,please verify the statement that "Under fixed exchange rates, the central bank gives up monetary policy as a policy instrument. "Explain in details and also discuss the conditions we must have in the financial market.
Chapter - Exchange Rate Regimes
1. Aggregate Demand in the Open Economy
Please derive the Aggregate demand under fixed exchange rate. Why the Aggregate Demand is downward-sloping?
2. Equilibrium in the Short run and Medium run
(a) Suppose output is above the natural level of output. In a fixed exchange rate regime, using AS-AD diagram and explain how the economy can return to the natural level of output.
(b) Suppose output is below the natural level of output. In a fixed exchange rate regime, using AS-AD diagram and explain how the economy can return to the natural level of output.
(c) Suppose the economy is operating below the natural level of output. Use the AS-AD diagram and discuss the arguments for and against using a devaluation in such a situation.
Chapter - Solow Growth Model
1. Original Solow Growth Model
(a) Write down the equations that show relationship between Output and Investment, Investment and Capital Accumulation, and the Capital per worker and Output per worker. What are the assumptions here for the Solow model?
(b) Graphically illustrate the functions of depreciation and investment per worker. In your graph, clearly label all curves, steady state and equilibria.
(c) Suppose depreciation per worker is less than saving per worker. Given this situation, explain what will happen to each of the following variables over time: capital per worker, output per worker, saving per worker, and consumption per worker.
(d) Suppose depreciation per worker is more than saving per worker. Given this situation, explain what will happen to each of the following variables over time: capital per worker, output per worker, saving per worker, and consumption per worker.
(e) Suppose there is an increase in the saving rate. Explain what effect this will have on output, output per worker, the rate of growth of output, and the rate of growth of output per worker. Also, graphically illustrate and explain the effects of an increase in the saving rate on the Solow growth model. In your graph, clearly label all curves and equilibria.
2. Solow Growth Model with Technological Progress
(a) Write down the equations that show relationship between Output per effective worker and Capital per effective worker, Investment per effective worker and Capital per effective worker. What are the assumptions here for this version of Solow model?
(b) Graphically illustrate the functions of required investment, output and investment per effective worker. In your graph, clearly label all curves, balanced growth and equilibria.
(c) Suppose there is an increase in the saving rate. Explain what effect this increase in the saving rate will have on the rate of growth of output per worker. Also, graphically illustrate and explain the effects of an increase in the saving rate on the Solow growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this increase in the saving rate.
(d) Suppose there is an increase in the rate of technological progress. Explain what effect this increase in technology will have on the rate of growth of output per worker. Also, graphically illustrate and explain the effects of an increase in the rate of technological progress on the Solow growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this increase in the rate of technological progress.