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Macroeconomic Questions: Analysis and Solutions

## The Impact of Tariffs on the US NIIRU

1. a. What will happen to the US NIIRU (aka NAIRU or un) if President Trump, by putting “America First,” imposes tariffs on many goods from many countries? Be sure to explain what this “shock” is; use the un equation to check.

b. Use the extended IS-LM model linked to the PC graph to examine the SR and MR effects of this “deglobalization” shock. Assume the US starts at the full MR eqm and that πe t  = π  t-1.  Describe what happens to π for two periods of the MR (that is, t+1 and t+2).  Make any other assumptions clear; assume that the Fed changes its policy rate “to stabilize inflation” (see p. 181). Throughout the adjustment process (from the initial to the final full MR eqm), will workers have Bargaining Power (BP)?  Why or why not?

2. a. US u was 3.6% in October; since January 2018, u has declined by 0.5 percentage point. What does this change in u tell you about the US real GDP growth rate since January 2018? Provide appropriate name and equation. Make all assumptions clear.

b. One of the key current US macro concerns is low productivity growth. If we treat this as a decrease in labour-productivity-growth “shock,” cet. par., describe what happens using Okun’s Law (equation and graph).

3. According to FRED (St Louis Fed https://fred.stlouisfed.org/series/PSAVERT), the personal savings rate, s, in the US has fallen dramatically through time, from about 17% in May 1975 to about 7.8% as at October 2019. What effect, if any, would this decrease in s (cet. par.) have on US living standards, both their level and growth rate, in the Basic Solow Growth model? Discuss and explain using the Basic Solow Growth Model graph. In addition, show the log-scale figure that depicts Y/N through time before and after this s decrease. Note: it’s true that there have been many s decreases through time in the US, but for simplicity’s sake, just look at a one-time decrease in s.

4. a. Does the “Paradox of Thrift” (POT) occur in the Basic Solow growth model?  Why or why not?  Explain and show what happens in the Basic Solow Growth Model graph following the “POT” shock.

b. If there is “Full Crowding Out,” cet. par., what if anything will happen in the Basic Solow growth model? Explain fully; be sure to describe what the shock entails. Graph not required.

## Analyzing the Effects of Deglobalization Shock Using the IS-LM Model

5. Is each of the following statements True, False, or Uncertain?  Explain your answer and follow the instructions:

a. If the rate of Technological Progress (TP) slows, cet. par., then immigration that leads to a higher rate of growth of N can be used to offset the effect of this TP slowdown on the SS level of Y/NA. Appropriate graph required.

b. In the Solow Growth Model with TP, a one-time increase in s will increase the rate of growth of Y/N only temporarily, BUT in the Basic Solow Growth Model, a one-time increase in s will lead to a permanently higher rate of growth in Y/N.  No graph required (but you may use one), just explain your answer clearly.

c. If the rate of depreciation falls, cet. par., then the (K*/N)GR will increase.  Graph required: Mankiw Golden Rule (GR) graph in which you show the GR outcome before and after the “shock.”  Be sure to include the mathematical condition of the GR and explain what the GR is.

6. a. DERIVE the LR eqm or steady-state (SS) values of Y/NA and K/NA if the production function is

Y=K6/7 (AN)1/7. Does this production function exhibit the characteristics it should? Explain and show these traits mathematically. Graph the LR eqm or SS in the appropriate space.

b. Use the production function above to provide the growth rates of the following variables in the SS (aka Balanced Growth) and explain fully by providing the appropriate equation or mathematical rationale: output per worker or Y/N; Y; Y/NA; K per effective worker, and K per worker or K/N.

7. a. Do we know unambiguously that productivity growth adversely impacts employment in the SR?  Why or why not?  As part of your answer, provide the appropriate graph as well as some empirical evidence.

b. What is the relationship between productivity growth and u rate in the MR?  Use the appropriate version of the WS-PS model to explain -- and show -- why a productivity growth slowdown would be associated with a higher un.

c. According to ch. 13, what are the two main reasons for increased wage inequality in the US and do they imply that the US is “condemned” to steadily increasing wage inequality?  Explain.

Readings questions, POINT FORM IS FINE:

I. Refer to Martin Wolf’s “Let Knowledge Spread Around The World,” Financial Times April 24, 2018 (see coursesite):

a. Why does Mr. Wolf call knowledge somewhat “paradoxical”?

b. Compare China’s recent R and D expenditure and patenting to Japan, US, Germany, France and the UK. How does Mr. Wolf explain these differences and what role has globalization played?

c. Concerning the productivity growth slowdown, what is the most important task for advanced countries? What policies should be in place to accomplish this task?

II. Refer to “Are digital distractions harming labour productivity?” from The Economist December 7, 2017 (see coursesite):

a. What are the findings about the effect of IT on labour productivity according to Aral and Brynjolfsson, MIT?

b. Perform a cost-benefit analysis (or list pros and cons) of IT at the workplace by listing 3 benefits and 3 cons or costs. Be sure to list at least one of the negatives associated with “digital distractions” according to Nixon, Bank of England. What happened to this cost-benefit tradeoff starting in the mid-2000s?

c. In which industries/sectors is labour productivity persistently low and how might this be affecting the productivity numbers?

d. Why did productivity “leap up” in the immediate aftermath of the financial crisis?

e. Other than possibly reducing our productivity, why should we care about our own and others’ “digital distractions”?