Final hand-in HW 29 NOV 2023

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Fall 2023 Eco 119: Final Hand-in HW Due by 11:59 p.m. on Sunday, December 10 in the Assignment folder on coursesite . Solutions will be posted. Final Test: 7-9 P.M. on Saturday, December 16 in RBC 184 . The test will be out of about 85 points. Ch. 9-13 will be covered , which means you really need to know extended IS-LM model of ch. 6, WS-PS model of ch. 7, and the PC of ch. 8 as they provide the background of the IS-LM-“PC” model. 1. a. The "Raise the Wage Act of 2023," introduced in the U.S. House of Representatives and U.S. Senate on July 25, 2023, would gradually raise the federal minimum wage to $17 an hour by 2028. The bill would also gradually raise and then eliminate subminimum wages for tipped workers, workers with disabilities, and youth workers, so that all workers covered by the Fair Labor Standards Act (FLSA) would be at the same wage level; for more information, see https://www.epi.org/publication/rtwa-2023-impact-fact-sheet / Cet. par., show what this “shock” will do, using the WS-PS graph . Present and use the expression for u n and the equation that relates u n and Y n to explain what will happen to both u n and Y n . Make all your assumptions clear. b. What type of shock is described above? Show its effects, cet. par., using the IS-LM-“PC” model . Assume that before this shock; we were in full MR eqm; π e = π bar . Describe what would have occurred for two periods of the MR, and what the Fed was doing and why. Did workers have Bargaining Power (BP)? Why or why not? Who eventually does what and why: provide appropriate names for equation and macro policy used. Provide the special term used to describe the ultimate changes in Y and π . 2. A headline on 1 November 2023 from the Financial Times read "US Federal Reserve holds interest rates at 22- year high." The article goes on to say that the Fed "kept open the possibility of additional monetary tightening amid mounting evidence the US economy remains strong." a. Inflation (measured by the CPI) peaked at 9.1% in June 2022 and has been falling since, to about 3% in October 2023 (see https://www.bls.gov/opub/ted/2023/consumer-prices-up-3-0-percent-over-the-year-ended-june-2023.htm ). Use the IS-LM-“PC” model to show where the US was in June 2022 (that is, what type of a gap existed) and what has been happening subsequently. Calculations are not necessary. Assume that inflation expectations were de- anchored. Use directional arrows in the “Fed” equation to describe what the Fed has been doing. Show and explain in your graph and treat the Fed policy as "cet. par.," so you can ignore any other shocks that have been occurring. b. Why might a recession (a “hard landing”) be necessary to get π to 2%? [From the FT article above: "We are committed to ... bring down inflation to 2%."] Assume that this is the case in your graph and show what would need to happen. 3. The US is functioning at Y n during periods t and t-1; individuals form their expectations such that π e t = π t-1 ; Values of variables: π t-1 = 1.5% and r n = 3.5%. a. Is the US functioning at its full MR eqm? Why or why not? List 3 characteristics of the full MR eqm. What is π t ? What is π e t ? What is the initial i? b. As the US heads into warmer months next year, many households and firms will undoubtedly remember the wildfires and severe heat waves of the summer of 2023. Let's assume that the effect is rising uncertainty and falling sentiment; which variables in our model would be affected, cet. par.? Use the IS-LM-“PC” graph to examine the SR and MR effects of these shocks, cet. par. Provide: the “PC” equation and indicate and provide the name of the output gap created. Provide values for π, π e , and i during two periods of the MR (t+1 and t+2) if the absolute value of the change in π is 0.5%; setting up a table may be helpful but is not required . Use directional arrows to describe what the Fed is doing during periods t+1 and t+2 and when it ultimately acts in period t+3 to “stabilize π .” Use directional arrows to show changes in all IS components from original to new full MR eqm. 4. According to the Bureau of Labor Statistics, US u in October 2023 was 3.9%; according to the Bureau of Economic Analysis (BEA), the US real GDP growth rate, g yt , was 4.9% in the third quarter of 2023 (annualized, preliminary data); and the US trend rate of growth, g y bar, is estimated to be 3% (annualized; text, p. 180). a. Assuming no shock, use the Okun’s Law (OL) graph and equation to show where the US economy is functioning, and then predict what will happen to the US u given the data above: that is, will u rise, fall or stay at 3.9%? No calculation necessary. Explain your answer. b. Noting the tight labour market, many analysts have suggested that President Biden adopt a more lenient immigration program. Cet. par., what would this do to the OL graph? [ Hint : what are the components of g y bar?]

2 5. a. Derive the LR eqm or Steady-State (SS) values of Y/N and K/N (aka Y*/N and K*/N) if the production function is Y=K 2/7 N 5/7 . Does this production function exhibit the characteristics it should? Graph the LR eqm or SS in the appropriate space. b. What changes would you need to make to the production function above if we wanted to examine the role of Technological Progress (TP) and changing N in affecting living standards? Use this revised production function to derive the LR eqm or SS values of Y/AN and K/AN. Provide the growth rates of the following variables in the SS (aka Balanced Growth): output per worker or Y/N; Y; Y/NA; K per effective worker; and K per worker. 6. Are the following statements True, False, or Uncertain ? Explain and follow the instructions: a. “Crowding out” refers to the fall in firm spending that follows–and perfectly offsets–a rise a government spending such that Y does not change. This fall in firm spending is caused by a rise in the risk premium. Explanation only, with necessary assumptions: no graph or calculations required. b. 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 Steady-State (SS) level of Y/NA. Appropriate graph required. c. In the Solow Growth Model with TP , a one-time increase in s will increase the rate of growth of Y/N permanently, whereas in the Basic Solow Growth Model , a one-time increase in s will lead only to a temporarily higher rate of growth in Y/N. Log-scale figures required. d. If the rate of depreciation falls, cet. par., then the (K*/N) GR will increase. Mankiw Golden Rule (GR) graph required , 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. ***** Readings questions: You have a choice -- there are two videos and one article, all available on coursesite. Choose any ONE and then answer the questions below based on your choice. Questions based on the Financial Times article "Here's what we know about generative AI's impact on white- collar work," 10 November 2023. a. OpenAI has estimated that the jobs most at risk from the new "wave of AI" are those with the highest wages: someone earning a six-figure salary is about "three times as exposed as someone making $30,000." Did McKinsey agree with this finding? What happened to the earnings of freelancing copywriters and graphic designers, and what does this mean for their future employment and earnings? b. Summarize the findings of a recent Harvard Business School study that looks at the effects of giving CPT-4 to employees at Boston Consulting Group, that is, who benefitted and who was hurt? What is the intuition of this result; that is, explain why this pattern is common in generative AI studies. Where does GPT not do well, and how did "cyborgs" and "centaurs" "buck that trend"? c. List, and briefly explain, three conclusions that we can draw from these studies. In your opinion, what job(s) will be (at least for now) the "safest"? Questions based on the video “Does the US have a productivity problem," CNBC, 25 August 2023. a. Explain why productivity data is flawed and why it is very volatile on a quarterly basis. Explain how a downturn might affect the productivity data. How have the following events -- the Pandemic; the "Great Resignation;" Working From Home (WFH); and labour hoarding -- affected US productivity data? Why is productivity hard to measure in the service economy? b. The productivity growth slowdown (PGS) is not a new problem, but the "downtrend" now is different according to several of the speakers. Do you believe that the PGS is different now? Why or why not? c. The “Robert Solow Paradox” is discussed in the video by several speakers. What is it and has it been resolved in the past? How might it be resolved in the near future? Question based on the video "How to Save the Planet: Degrowth versus Green Growth," Youtube video, 2 September 2022. Based on what you learned in this video, write (about one page) in which you explain which approach-- "Degrowth" or "Green Growth"--is a better way to "Save the Planet." What will be the biggest hurdles to overcome if an economy chooses this approach, and will living standards suffer?

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