ECON Assignment: Slowdown in economic growth and interest rates, microeconomics

ECON Assignment: Slowdown in economic growth and interest rates, microeconomics

ECON Assignment: Slowdown in economic growth and interest rates, microeconomics

The following macroeconomics concept/models should be used to answer when appropriate: The IS curve, Monetary Policy and Philipps curve, Stabilization Policy and he AS/AD framework, Exchange rates for international trade.

L A Slowdown in Economic Growth? (30 points, 5 points each part) Consider the extent to which the recent growth slowdown can be explained by data on R&D.

• Download the series “Y001RX1A020NBEA’ from the FRED database on “Real Gross Private Domestic Investment in Intellectual Property Prod­” This series will be our measure of real R&D for the economy (we’re ignoring global R&D to simplify things). Convert this series into an index so that the 1967 value equals one by dividing all entries by the 1967 value. Plot this series on a ratio scale with the labels “1 2 4 8…” on the vertical axis. This graph is the answer to part (a) of this question.
• Suppose the idea production function for this economy takes the form

AA_t±i _

 ________ zRtA_t‘⁾‘

At

where z and 7 (the Greek letter “gamma”) are parameters that take some positive value, R. is the R&D series that you plotted in part (a), and A_t corresponds to total factor productivity in the economy (relative to the model we considered in class, we are setting ,3 = 1). In one paragraph, discuss the economic interpretation of this idea production function.

• Assume that A1967 = 1 and z =02. Why does the value of 0.02 for make sense?
• Use the idea production function from part (b) together with the param­eter values we’ve assumed so far to simulate the time series of total factor productivity growth in this model from 1968 through 2022 and show your result in a graph. NOTE WELL: in order to do this, you will have to choose a value of -y. Experiment with different values of 7 and choose one that you think is reasonable.
• What value of did you choose and why?

(1) In a paragraph, summarize the takeaway from this question: can U.S. R&D data explain the recent growth slowdown? What are the pro’s and Cons of this explanation?

Interest rates and inflation expectations. (30 points, 6 points each).

In this exercise we will look at the relationship between nominal and real interest rates, and the role of inflation expectations.

NOTE: For parts (b), (c), (d), and (e) below, your answer should consist of a single well-written paragraph.

Go to https: / /www.federalreserve.govidatadownload/Build.aspx?rel^,H15 to ob­tain the yield on government securities. In the Data Set field pick “Selected In­terest Rates” and click continue. Follow the instructions to get monthly yields for 5- and 10-year maturity Treasuries, nominal (TCMNOM) and inflation in­dexed (TCMII). Also get the Federal Funds Rate (FF). Get the data from Jan 2003 to April 2023. In the Maturity field, pick Overnight, 5 year, and 10-year. At some point you will have to click on “Format Package” to proceed. Down­load the CSV values into excel.

(a) The yield on nominal bonds is the interest rate at the corresponding ma­turity. Inflation indexed bonds are protected against inflation, so their yield is the real interest rate. Using the nominal and real interest rates, compute the 5- and 10-year ahead inflation expectations, as perceived by the market, at each point in time. For the purposes of this question, we will ignore risk-premia. Assume the Fisher equation holds in expecta­tions.

Plot and show the following graphs (no other explanations are required for part (a)):

1. The 5- and 10-year nominal interest rate and the Federal Funds rate
2. The 5- and 10-year real interest rate

• The 5- and 10-year expected inflation

(b) What are liquidity traps, and how is this concept relevant to monetary policy during the financial crisis and the COVID-19 crisis?

• How would you describe the long-run behavior of real interest rates (over the last two decades)? Hint: Compare the average real rates before 2010 and after 2010. How is this related to the concept of “secular stagnation” and r? What does this imply about the likelihood of liquidity traps under inflation-targeting monetary regimes?
• What is the main relationship between the FF rate and the 5-year and 10-year nominal rates? Why were 10-year nominal rates higher than 5-year rates after the financial crisis?
• What happened to inflation expectations during the financial crisis (specif­ically, late 2008)? What was the effect on real interest rates and aggregate demand? Compare to what happened during the COVID-19 crisis and its

Inflation Targeting in the U.K. (30 points, 6 points each).

Suppose the Bank of England is considering whether or not to raise the target rate of inflation from 2 percent to 4 percent.

• As background for this problem, obtain graphs of the inflation rate in the K. as well as the Bank of England’s “base rate” (which is an analog to the U.S. fed funds rate). (You can just find a source and copy the images; no need to make a new graph yourself.) Show these graphs in your solution and discuss in a paragraph what you see there.
• Assuming that the U.K. economy begins in steady state, with inflation at the target level, explain how GDP and inflation would evolve in response to changing the inflation target from 2 percent to 4 percent.
• What are some arguments in favor of this change?
• What are some arguments against this change?
• On balance, do you think moving to a 4% inflation target would be a good idea?

Estimating Potential GDP (30 points, 5 points each)

4. There are good reasons to believe the CBO’s estimate of potential GDP for the United States in 2020­2022 is not accurate. You are on the staff of the macroeconomics forecasting group for a leading company, and they have asked you to come up with your own estimate of potential output in these years.

Details: Use the Short-Run model as presented in class. Make whatever as­sumptions are necessary to implement your calculation and explain why you think these assumptions are plausible. It is not necessary for you to run any regressions in order to answer this question. All data that you use should come from /orders /fred.stlouisfed.org/ when possible. If you use a different source be sure to indicate it.

• Explain the methodology you are using to estimate potential GDP for the U.S. in 2020-2022.
• You will need to use data (see next part) and make assumptions about parameter values and shocks to implement your methodology. What as­sumptions are you making? Defend those assumptions.
• What data are you using in order to implement your method; provide the series code for each measure. Plot the key data series since 1990 that you are using.
• Create a graph of the CB0 series GDPPOT (from FRED) for the period 2018 to 2022. Also include your alternative estimate for 2020-2022 on this plot.
• Create a table for the years 2020, 2021, and 2022 showing Y measured using (i)the CBO potential GDP and (ii) your new estimate of potential. In the same table, show the inflation rate and the expected inflation rate that you are using.
• Provide two paragraphs of discussion about your results.

ADDITIONAL INSTRUCTIONS FOR THE CLASS

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• Discussion Questions (DQ)

Initial responses to the DQ should address all components of the questions asked, including a minimum of one scholarly source, and be at least 250 words. Successful responses are substantive (i.e., add something new to the discussion, engage others in the discussion, well-developed idea) and include at least one scholarly source. One or two-sentence responses, simple statements of agreement or “good post,” and responses that are off-topic will not count as substantive. Substantive responses should be at least 150 words. I encourage you to incorporate the readings from the week (as applicable) into your responses.

• Weekly Participation

Your initial responses to the mandatory DQ do not count toward participation and are graded separately. In addition to the DQ responses, you must post at least one reply to peers (or me) on three separate days, for a total of three replies. Participation posts do not require a scholarly source/citation (unless you cite someone else’s work). Part of your weekly participation includes viewing the weekly announcement and attesting to watching it in the comments. These announcements are made to ensure you understand everything that is due during the week.

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Familiarize yourself with the APA format and practice using it correctly. It is used for most writing assignments for your degree. Visit the Writing Center in the Student Success Center, under the Resources tab in Loud-cloud for APA paper templates, citation examples, tips, etc. Points will be deducted for poor use of APA format or absence of APA format (if required). Cite all sources of information! When in doubt, cite the source. Paraphrasing also requires a citation. I highly recommend using the APA Publication Manual, 6th edition.

• Use of Direct Quotes

I discourage over-utilization of direct quotes in DQs and assignments at the Master’s level and deduct points accordingly. As Masters’ level students, it is important that you be able to critically analyze and interpret information from journal articles and other resources. Simply restating someone else’s words does not demonstrate an understanding of the content or critical analysis of the content. It is best to paraphrase content and cite your source.

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For assignments that need to be submitted to Lopes Write, please be sure you have received your report and Similarity Index (SI) percentage BEFORE you do a “final submit” to me. Once you have received your report, please review it. This report will show you grammatical, punctuation, and spelling errors that can easily be fixed. Take the extra few minutes to review instead of getting counted off for these mistakes. Review your similarities. Did you forget to cite something? Did you not paraphrase well enough? Is your paper made up of someone else’s thoughts more than your own? Visit the Writing Center in the Student Success Center, under the Resources tab in Loud-cloud for tips on improving your paper and SI score.

• Late Policy

The university’s policy on late assignments is a 10% penalty PER DAY LATE. This also applies to late DQ replies. Please communicate with me if you anticipate having to submit an assignment late. I am happy to be flexible, with advance notice. We may be able to work out an extension based on extenuating circumstances. If you do not communicate with me before submitting an assignment late, the GCU late policy will be in effect. I do not accept assignments that are two or more weeks late unless we have worked out an extension. As per policy, no assignments are accepted after the last day of class. Any assignment submitted after midnight on the last day of class will not be accepted for grading.

• Communication

Communication is so very important. There are multiple ways to communicate with me: Questions to Instructor Forum: This is a great place to ask course content or assignment questions. If you have a question, there is a good chance one of your peers does as well. This is a public forum for the class. Individual Forum: This is a private forum to ask me questions or send me messages. This will be checked at least once every 24 hours.

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