MACRO ECONOMICS

The text outlines three kinds of unemployment: Frictional, Structural, and Cyclical. The Bureau of Labor Statistics describes a fourth kind, seasonal unemployment, as: “The seasonal fluctuations in the number of employed and unemployed people reflect not only the normal seasonal weather patterns that tend to be repeated year after year, but also the hiring (and layoff) patterns that accompany regular events such as the winter holiday season and the summer vacation season.” Of the four, structural unemployment is the most challenging for people.

In this discussion assignment, provide an example of each kind of unemployment you have either experienced or witnessed. Consider what you might personally do to avoid structural unemployment in your own career.

Please answer in 150 words or more

True or False. 25 Questions. 25 Points. Answer “True” or “False” by the statement in bold font.

1. A recession is usually described a fall in aggregate demand leading to decreased inflation and decreased output.

• A stagflation is usually described as fall in short run aggregate supply leading to increased inflation and decreased output.

• Given the behavior of inflation and output growth, the Covid 19 recession is behaving like a short run aggregate supply shock.

• Given the behavior of inflation and output growth, the Covid 19 recession is behaving like an aggregate demand shock.

• The Federal Reserve response to the pandemic and social distancing measures was to increase liquidity by lowering interest rates. This will drive inflation down and increase employment.

• The Paycheck Protection Plan, which provides quick loans to firms and banks, is an example of a fiscal stimulus.

• The yield spread inverted in June 2019, predicting a recession by or before June 2020.

• With regards to question 5, this is proof that bond markets can predict when global pandemics will hit.

• The Taylor Rule will never produce a negative interest rate target.

1. Okun’s Rule is not a good tool for forecasting GDP.

1. As mentioned in Hubbard and O’Brien, the classic example of a short run supply shock is a marked increase in oil prices as in the 1970s. Covid 19 is causing a similar supply shock to oil prices leading to potential stagflation.

1. Effective fiscal stimulus leads to increased deficits through higher government spending and/or lower taxation.

1. Effective monetary stimulus leads to increased lending through sharp increases in the money supply.

1. The strong correlation of the output gap to crime would indicate an uptick in criminal activity in 2020.

1. No central bank in the world is currently attempting negative interest rate policy.
2. As the Federal Reserve pushes more money into the economy, the supply of dollars increases, meaning relative to foreign currencies, and the US dollar should depreciate.

1. As the Global Pandemic deepens, foreign money holders worry about the safety of their foreign currency denominated assets, and begin demanding more dollar assets. This would lead the dollar to appreciate relative to foreign currencies.

1. After 2009, I recommended health care jobs to all my students, stating that, “After the Great Recession, it seems that health services is the only recession proof job.” This statement is still true today, during the Covid 19 pandemic as health workers have not been affected by record layoffs in March, April, and May of 2020[1].

1. The Earned Income Tax Credit, which gives a tax return bonus to employed households making low wages, continues to act as an effective ‘automatic stabilizer’ in the wake of the unemployment figures due to Covid 19 and social distancing rules.

• Unemployment Insurance, assuming the system is not overloaded, continues to act as an effective ‘automatic stabilizer’ in the wake of the unemployment figures due to Covid 19 and social distancing rules.

• Large health and life insurance claims in the wake of the Covid 19 Recession will lead to increased demand for liquidity (lending) by insurance carriers needing to pay out, pushing interest rates back up (consider the supply of loanable funds graphs).

• A large and deep enough pandemic, like the 1918 Flu, the Black Death, or the Justinian Plague, could shift the long run aggregate supply curve back through destruction of factors of production such as negative human capital and labor shocks.

• A negative long run aggregate supply curve would result in slower growth and higher inflation (try shifting the LRAS curve back and see).

• A ban on US tourists in the EU would lead to a decreased demand for the euro, meaning an appreciation of the dollar relative to the euro.

• A trade war between the US and China would mean a decrease in the demand for US dollar assets by Chinese investors and consumers, resulting in a depreciation of the US dollar to the Chinese yuan.

Mathematics. 5 Questions. 5 Points. Put your answer in bold text beside or underneath the question.

1. Fisher’s Equation. Suppose that in Quarter 2 2020 the supply of money grows by 20%, the velocity of money drops by -35%, and the real economy contracts by -10%. According to Fisher’s Equation, what is the predicted inflation rate for Quarter 2 of 2020 given these numbers?

• Taylor Rule. Suppose the Quarter 1 2020 federal funds rate was 0.25%. If the output gap is -7% and the inflation gap is -5%, according to the Taylor Rule, what is the Fed’s target rate for Quarter 2 of 2020?

• Real Interest Rates. If the commercial paper rate (the interest rate on bonds issued by private firms) is 0.2% in Quarter 2 of 2020 and the inflation rate is as was answered in question 1, what is the Real Interest Rate of holding commercial paper?

• Real GDP Growth. Quarter 1 2020 Real GDP was 18.9 trillion dollars. What is the growth rate from Quarter 1 2020 GDP to Quarter 2 2020 Real GDP if Quarter 2 Real GDP is 17.6 trillion dollars?

• The Yield Spread. The 10-year treasury rate in June 2020 was 0.73 while the 3-month treasury rate was .16. Calculate the yield spread as you did in Replication 2.

Nanyang Technological University HE4003 Advanced International Finance Problem Set 8 External Adjustment in Small and Large Economies 1. Consider a two-period, two- country, endowment economy. Let one of the countries be the United States (U) and the other Europe (E). Households in the United States have preferences described by the utility function ln C U 1 + ln C U 2 , (1) where C U 1 and C U 2 denote consumption of U.S. households in periods 1 and 2, respectively. Europeans have identical preferences, given by ln C E 1 + ln C E 2 , (2) where C E 1 and C E 2 denote consumption of European households in periods 1 and 2, respectively. Let QU 1 and QU 2 denote the U.S. endowments of goods in periods 1 and 2, respectively.

Similarly, let QE 1 and QE 2 denote the European endowments of goods in periods 1 and 2, respectively. Assume further that the endowments are non-storable, that the U.S. and Europe are of equal size, and that there is free capital mobility between the two economies. The United States starts period 1 with a zero net foreign asset position.

(a) Symmetric Equilibrium Suppose that QU 1 = QU 2 = QE 1 = QE 2 = 10. Calculate the equilibrium world interest rate, and the current accounts in the United States and Europe in period 1.

(b) US-Originated Contraction 1 Suppose that a contraction originates in the United States. Specifically, assume that QU 1 drops from 10 to 8. All other endowments (QU 2 , QE 1 , and QE 2 ) remain unchanged at 10. This contraction in output has two characteristics: First, it originates in the United States (the European endowments are unchanged.) Second, it is temporary (the U.S. endowment is expected to return to its normal value of 10 after one period). Calculate the equilibrium interest rate and the current accounts of the United States and Europe in period 1. Provide intuition. (c) US-Originated Contraction 2 Consider now a second type of contraction in which the U.S. endowment falls from 10 to 8 in the first period and is expected to continue to fall to 6 in the second period (QU 1 = 8 and QU 2 = 6). The endowments in Europe remain unchanged at 10 each period (QE 1 = QE 2 = 10). Like the one described in the previous item, this contraction originates in the United States. However, it differs from the one described in the previous in that it is more protracted. Calculate again the equilibrium interest rate and the two current accounts in period 1. Point out differences in the effects of the two types of contraction and provide intuition. (d) At the beginning of the great contraction of 2008, interest rates fell sharply around the world. What does the model above say about people’s expectations around 2008 regarding the future path of real activity

Aggregate demand and aggregate supply

Assignment 4 (Short-Answer and Algebraic Questions): (The numbers in square brackets give the breakdown of the points for various parts of each question. To receive full credit, please explain your answers. Total of 60 points plus 10 points extra credit.)

1. This questions is based on the article, “Signs of a slowdown,” published by The Economist on June 6, 2015. The article discusses the trends in the value of the yen and its consequences during 2012 and 2015. The average annual rate of inflation during 2013 and 2014 was 1.55 percent in both the US and Japan. Assume that the yen is the home currency so that the exchange rate is expressed in terms of US dollars per yen and the appreciation/depreciation is calculated as the percentage change of that exchange rate.
2. The article and its chart[2] show that the yen-dollar exchange rate at the end of 2012 was e₀ =1/87$/¥ and by the end of 2014 reached e₁ = 1/120$/¥. By what percentage did the yen depreciate vis-à-vis the dollar in nominal terms in those two years? [4] By what percentage did the yen depreciate vis-à-vis the dollar in real terms in those two years? [3]

Answer:

• [5]

Answer:

• The article points out that global trade of the main emerging markets except China and Hong Kong saw weaker exports in early 2015 compared to the situation during the same period in 2014. What were the causes of that sluggishness highlighted by the article? [7]

Answer:

• According to the article, in the situation prevailing in 2014 and early 2015, central banks were happy to see their currencies weaken. Why did this lead to exporting deflation to the rest of the world? [6]

Answer:

• Extra Points Question: The article states that “QE means that central banks are absorbing an awful lot of new government debt.” How does this help keep sovereign-bond yields low? What are the potential problems that this policy may cause for the world economy? [10]

Answer:

• This question is based on a speech, U.S. Economic Outlook and Monetary Policy, by the Fed Vice Chair Richard H. Clarida on May 21, 2020, at the New York Association for Business Economics. In that speech, Richard Clarida first lays out the economic outlook at the time and then discusses the Fed’s policy responses to the situation.
• In his speech, Clarida points out that while economic situation seemed dire at the time, financial conditions had improved considerably after mid-March. What was his explanation for this contrast between economic and financial circumstances? [6]

Answer:

• In his speech, Clarida mentioned a number of policy measures that the Fed had taken to reduce the economic and financial impact of the COVID-19 pandemic. Which measures that he mentioned were conventional and which ones were unconventional? [12]

Answer:

• China has a trade surplus and the People’s Bank of China (PBC, China’s central bank) purchases all the excess foreign currency earning of the country’s exporters. This policy is equivalent to bond purchases by the PBC through open market operations.
• What is the impact of the PBC’s policy of foreign currency purchase on the country’s money supply? [7]

Answer:

• If all foreign conditions are exogenous and the aggregate real income, the price level, and the future conditions of the Chinese economy (including the expected exchange rate) can be taken as given, what is the consequence of the policy for the current interest rate and the spot exchange rate in China? [10]

Answer:

[1] Hint: there is no such thing as a “recession proof job”. See Schumpeter’s work on Creative Destruction.

[2] The inverted scale used in the charts of the article is a fractional scale where the vertical axis label corresponds to the denominator of the fraction. So, a label of 120 corresponds to 1/120 dollars/yen.