Advanced Macroeconomics Assignment
Candidates should answer 2 questions from section A and two questions from section B.
SECTION A
Answer TWO (2) questions from this section
QUESTION 1
Responses to the urgent need for a vaccine during Covid19 pandemic have varied around the world. In March 2020 US President Donald Trump sought to get a German company to relocate to the US to give Americans priority access to the vaccine they were developing. In this regard, patents are very important in the pharmaceutical industry. Without them, or some equivalent intervention, the R&D would not take place.
Based on the models of economic growth that you learned in the first semester answer the following questions.
- a) What type of market characterises the development, production and distribution of most vaccines and pharmaceutical drugs?
[30%]
- b) What model of economic growth includes the system of patents as part of the R&D process? Present such model and discuss the equations that you believe are relevant to support your argument.
[35%]
- c) The pharmaceutical industry is characterized by the process of “creative destruction”. In your own words, explain what this term means. Based on this definition, identify the winners and the losers in the short and long run.
[35%]
Advanced Macroeconomics Assignment
QUESTION 2
The Covid19 pandemic has created an unprecedented level of uncertainty in the global economy. Businesses globally are still facing ed with restrictions and additional costs to ensure the safety of employees and customers. These restrictions and additional precautions have placed additional difficulty in projecting the future performance of businesses, especially those reliant on heavy foot traffic such as retail and restaurants. Further, as more employers encourage employees to work from home, there is added pressure on the commercial real estate industry as firms recognize the ability to reduce office space. Based on the risk factors outlined above, it is expected there will be a significant increase in the cost of capital.
Given the above and based on the theories learned in the first semester
- a) Discuss the expected impact of Covid19 on investment. Present and explain the equations that you believe are relevant to support your answer.
[50%]
- b) Focusing on the UK economy, compare the effects of the Covid19 crisis on investment with those related to Brexit.
[50%]
Advanced Macroeconomics Assignment
QUESTION 3
Explain the following sentence about the production model.
- a) Per capita GDP will be higher in countries that have high quantities of capital per person and use that capital efficiently.
[25%]
- b) Describe the concepts of constant returns to scale in capital and labour and compare it to diminishing returns. What are the implications of diminishing returns in the empirical fit of the model? Present and discuss the equations that you believe are relevant to support your answer.
[25%]
- c) In the absence of differences in total factor productivity (TFP), the production model underestimates the differences in income across countries. Present and discuss the equations that you believe are relevant to support your answer.
[25 %]
- d) Explain the meaning of TFP. Why are some countries more efficient at using the capital and labour at their disposal than others?
[25 %]
Advanced Macroeconomics Assignment
QUESTION 4
In a paper published in the Journal Economic Perspective, Aker and Mbiti argue that “Existing empirical evidence on the effect of mobile phone coverage and services suggests that the mobile phone can potentially serve as a tool for economic development in Africa.” (‘Mobile Phones and Economic Development in Africa’, JEP, 2010). Mobile phone is just one of many examples in which ideas invented in one place can, at least potentially, be used to increase income throughout the world.
Based on the models of economic growth that you learned in the first semester address the following.
- a) What model of economic growth can exploit the concept of non-rival ideas? Report and discuss the equations that you believe are relevant to support your argument.
[35%]
- b) In terms of overall economy, what are the consequences of having ideas that can be used by everyone? Present and discuss the equations that you believe are relevant to support your argument.
[35%]
- c) Explain why the discovery of new ideas can provide a theory of sustained growth. Present and discuss the equations that you believe are relevant to support your argument.
[30%]
SECTION B.
Answer TWO (2) questions from this section
QUESTION 5
- a) Give a realistic example of a shock that would trigger a recession according to the Real Business Cycle (RBC) model. Describe, using the main equations and graphs, how the initial shock would propagate according to the model. How would you test the theory’s predictions, and how well do you think these would fit the actual data?
[33.3%]
- b) Give an example of an AD shock and discuss its effects according to the RBC model. Explain how the central bank can control inflation in this setting.
[33.3%]
- c) Present the employment or leisure smoothing equation and discuss the role of intertemporal labour supply in the Real Business Cycle model? What features of the model can be helpful to capture a pandemic-induced business cycle? What is the model missing?
[33.4%]
QUESTION 6
- a) Starting from the Neoclassical Benchmark Model, illustrate how market imperfections affect the general equilibrium of the economy. In your answer, make use of the most relevant equations and graphs. What is missing from the model for disequilibrium after a shock to be “sustained”?
[33.3%]
- b) Compare the New Keynesian Phillips Curve of Calvo and the Sticky Information Phillips Curve of Mankiw and Reis. Discuss the role of central bank credibility in the two models.
[33.3%]
- c) Compare inflation behaviour after a pandemic shock using the New Keynesian Phillips Curve (NKPC) and the Adaptive Expectations Phillips Curve (AEPC).
[33.4%]
QUESTION 7
- a) Discuss the operation of modern monetary policy in “normal” times. How has this changed after the global financial crisis?
[33.3%]
- b) Describe the steps for an economy to end up in a deflation trap and policymakers’ options to help the economy.
[33.3%]
- c) In the aftermath of the global financial crisis, many countries’ central banks have resorted to unconventional monetary policies. These policies have continued during the Covid-19 pandemic. Discuss how and whether they work and the risks involved.
[33.4%]
QUESTION 8
- a) In the modern macroeconomic framework, monetary policy is considered the preferred stabilisation tool. When should a fiscal policy tool be “resurrected”?
[33.3%]
- b) The size of the output gap matters when it comes to stabilisation. Using graphs, compare the effects of a discretionary fiscal impulse with a large negative gap under the zero-lower bound with those of the same policy when the output gap is zero.
[33.3%]
- c) Discuss the sustainability of policies adopted in the current macroeconomic setting.
[33.4%]