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Homework_1_2425

The homework assignment requires students to analyze macroeconomic data by creating five graphs in Excel related to inflation, unemployment, and GDP growth for their assigned country. Additionally, students must summarize an Economist article and explore concepts of aggregate supply and demand, particularly in relation to the effects of tariffs on intermediate goods prices. The assignment emphasizes the application of theoretical models and empirical data analysis.

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4 views

Homework_1_2425

The homework assignment requires students to analyze macroeconomic data by creating five graphs in Excel related to inflation, unemployment, and GDP growth for their assigned country. Additionally, students must summarize an Economist article and explore concepts of aggregate supply and demand, particularly in relation to the effects of tariffs on intermediate goods prices. The assignment emphasizes the application of theoretical models and empirical data analysis.

Uploaded by

Bruno Mellone
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Homework # 1

Prof. Zoe Kuehn


Open Macro
2024-25
DATA ASSIGNMENT: Hand in five graphs (done in excel) and brief answers to the questions
below (can be written on the computer). Do not hand in any excel sheets or tables.

1) Go to the website of the World Bank (World Bank Data) and download data for
inflation, unemployment, and real GDP growth for your assigned country (see
pdf on moodle website for “assigned country” and for the link to this website) for
the longest time series possible (most data is available from 1960s onwards!).
Use CPI inflation if possible, if not you can alternatively use Inflation defined by the
GDP Deflator; use the national definition of unemployment or alternatively the ILO
definition. Use aggregate real GDP growth nor per capita real GDP growth! If you
have trouble getting this data, please let me know as soon as possible, so I can
inform you where to obtain the data or assign you a di]erent country. Please do not
just choose a di]erent country on your own!
a. Plot the time series of unemployment and inflation. Comment briefly on the
observed relationship relating it to what we have seen in class. Do you observe
any periods of hyperinflation?
b. Plot the time series of unemployment and GDP growth. Comment briefly on
the observed relationship relating it to what we have seen in class.
c. Construct the original Phillips curve from your data
a. If you have been assigned a euro-area country please check the excel
file for time period limitations!);
b. Drop years of hyperinflation identified in a.
c. i.e. construct a scatter plot with unemployment on the x-axis and
inflation on the y-axis and add a linear trend and the equation for it.
Make sure that both variables are defined in %; i.e. 3% and not 0.03%.
d. Briefly, how does this equation compare to the ones for the US and
Spain seen in class?
e. Interpret the equation for two di]erent values of unemployment.
d. Construct the modified Phillips curve from your data
a. If you have been assigned a euro-area country please check the excel
file for time period limitations.
b. Drop years of hyperinflation identified in a.
c. i.e. construct a scatter plot with unemployment on the x-axis and year-
to-year di]erence in inflation on the y-axis and add a linear trend and
the equation for it. Again, make sure that both variables are defined in
% or percentage points; i.e. 3% and not 0.03, 2 pp and not 0.02.
d. Briefly, how does this equation compare to the one for the US seen in
class?
e. Interpret the equation for two di]erent values of unemployment.
f. Find the natural rate of unemployment.
e. Construct Okun’s law from your data
a. Here you can always use the longest time series possible, and periods
of hyperinflation are not relevant.

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b. i.e. construct a scatter plot with GDP growth on your x-axis and the
year-to-year di]erence in unemployment on the y-axis. Again, make
sure that both variables are defined in % or percentage points; i.e. 3%
and not 0.03, 2 pp and not 0.02.
c. Briefly, how does this equation compare to the ones for the US and for
Spain seen in class?
d. Interpret the equation for two di]erent values of unemployment.
e. Find the natural growth rate.

2) ARTICLE SUMMARY: TO BE DONE HANDWRITTEN!


Read the Economist article “Cold weather hot prices” (in moodle as pdf):
a. Sum up the article’s content in no more than three sentences. Starting
with: The article discusses….
b. In no more than three sentences describe how the article’s content
relates to what we have seen in class. Starting with: Related to what we have seen
in class, the article…

3) AGGREGATE SUPPLY & DEMAND:


In this exercise we will explicitly incorporate intermediate goods prices into our
aggregate supply curve to analyze the e]ect of an increase in tari]s which raise
imported intermediate goods priced. Suppose that the production function is of
the following form: 𝑌 = 𝑁 !"# Γ # where Γ are intermediate goods.
a. Write down the firm’s cost minimization problem for the case that a firm is
producing with the above specified production function. To do so, first
solve the production function to substitute out one of the inputs (labor or
intermediate goods). Then find the first order condition of the cost
minimization problem with respect to the one remaining input. After
several steps you will obtain the optimal amount of this input as a function
of 𝑌, 𝑤, 𝜃, 𝑃$ (the price of intermediate goods). Use your first step to find a
similar expression for the other input. Then substitute those optimal inputs
back into the cost minimization problem. Derive with respect to Y and you
should arrive at marginal costs which include priced for both inputs as well
as constant term (you can also find a pdf file with more help on this on
moodle).
b. From now on, assume that marginal costs are as found in a. but ignore the
constant term. Write down the price setting equation. Suppose that as
before, nominal wages are determined as follows: 𝑊 = 𝑃% 𝐹(𝑢, 𝑧), where
𝐹(𝑢, 𝑧) = 𝛾𝑧 − 𝛼𝑢. Subsititute the wage setting equation into the price
setting equation and substitute for u to obtain the aggregate supply
function in P and Y. Detail each step.
&! ,
c. Now define the relative price of intermediate goods as 𝜀 = &
and hence
𝑃$ , = 𝑃 × 𝜀 and substitute this expression for 𝑃$ in the aggregate supply
curve found in b. Solve for P.
d. Draw the aggregate supply curve for given values of 𝑃% , 𝑎𝑛𝑑 𝜀.

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e. Suppose that the price level is equal to the expected one. How does the
natural rate of unemployment change if the relative price of intermediate
goods 𝜀 increases? Argue carefully and with great detail within the
framework of the labor market when 𝑃% =P using graphs and make sure to
use the suggested function 𝐹(𝑢, 𝑧) = 𝛾𝑧 − 𝛼𝑢.
f. Starting from an initial equilibrium where production is at its natural level,
suddenly the relative price of intermediate goods rises. Describe step by
step how the AS-AD equilibrium will change in the short and medium/long
run. Use all graphs necessary to describe the e]ects in great detail.
g. Show how the e]ect of an increase in tari]s which increases the price of
imported intermediate goods on inflation depends on: 1) the share of
intermediate goods in the aggregate production function ( 𝜃 ) and 2) the
flexibility of wages with respect to unemployment ( 𝛼 ). Again, use graphs
to support your detailed answer.

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