Recommended reading

1. Economics: Principles, Problems and Policies by Campbell R McConnell and Stanley L, Brue,15^th edition.,2002

2. Principles of Economics by Gregory Mankiw, Harcourt, 2^nd edition,2000

3. Daniels, J. D. and Radebaugh, L. H., (2007). International Business: Environments and Operations (11th Edition) Prentice Hall International Inc.

In addition, it will be important that students also keep up to date by referring to journals and newspapers such as: European Business Review, Strategic Management Journal, International Business Review, Harvard Business Review, The Economist, The Financial Times. Furthermore, students can also access a number of sources via the Internet, which will assist learning for this course: for example you can access sites such as: http://www.wbank.com, http://www.wto.org, http://www.tufts.edu, http://www.imf.org, www.doingbusiness.com (see file “Related Sites”)

You should explore the Internet for other sources, and as more information is put on the NET, some additional addresses/materials details may be forwarded to you.

14. Questions to monitor student’s academic achievement

1. “A fall in the income sensitivity of money demand makes fiscal policy relatively more

effective than monetary policy at stimulating output.” True or false? Briefly explain your

answer.

2. “Money is neutral when the aggregate supply curve is vertical.” True or false? Briefly explain

your answer.

3. “Observing that the natural rate of unemployment changes over time proves that there must

be hysteresis in unemployment.” True or false? Briefly explain your answer.

4. “The shoe-leather cost of anticipated inflation suggests that the optimal inflation rate is

negative.” True or false? Briefly explain your answer.

5. “An increase in total factor productivity (TFP) shifts the AS curve to the right.” True or false?

Briefly explain your answer.

6. “Inside lags are generally more of a problem for fiscal policy than they are for monetary

policy.” True or false? Briefly explain your answer.

7. “The existence of a real balance effect makes the AD curve flatter than it would otherwise

be.” True or false? Briefly explain your answer.

8. “A central bank faces a trade-off between stabilizing prices and stabilizing output when a

shock to aggregate demand occurs.” True or false? Briefly explain your answer.

9. “The expectation of a rise in the price of capital goods increases the user cost of capital.”

True or false? Briefly explain your answer.

10. “Reaching the Golden rule level of capital necessarily requires a short-term sacrifice of

consumption for a long-term gain of permanently higher consumption.” True or false? Briefly explain your answer.

11. Consider the Solow growth model, assuming positive population growth ( n > 0) and positive growth rate of technological progress ( g = 0 ).

(a) Derive the economy’s balanced growth path analytically and show in a diagram how the steady-state levels of capital and output in efficiency units of labour are determined. What are the growth rates of output and per-capita output on the balanced-growth path?

(b) Suppose that the rate of population growth increases. What is the effect on the steady-state levels of capital and output in efficiency units of labour? Plot the path of convergence to the

new steady state over time.

(c) Now suppose that an economy starting from its steady state experiences a plague that reduces its population, leaving its capital stock intact. Assume the population growth rate remains the same afterwards, and assume there is no technological progress (g= 0) for simplicity. Plot the paths of capital per worker, output per worker, real wages, and the real return to capital over time.

12. Consider the aggregate demand-aggregate supply (AD/AS) model.

(a) Using the IS/LM model, show graphically or algebraically how the aggregate demand curve is derived.

(b) Explain what it means for an economy to be in a liquidity trap. What effect does the existence of a liquidity trap have on the LM curve? Show how the liquidity trap changes the AD curve derived in part (a).

(c) Suppose there is a fall in inflation expectations. By using the IS/LM model, show how the AD curve is affected. Considering an economy in a liquidity trap, does this analysis help us

understand why central banks are anxious to avoid deflation?

13. Consider a closed economy with fixed prices and wages. Suppose the consumption function takes the form C  25  0.6(Y T) , where C is consumption, Y is income, and T is taxes. The investment function is I  65  r , where I is investment and r is the interest rate. The demand for money is given by M / P  4Y 15r , where M is the amount of money demanded and P is the price level. Assume that the price level is fixed at P  1. When government spending is G  50, and taxes are T  50 , and the money supply is M  850 , the equilibrium of the economy is Y  250 and r  10 .

(a) Suppose that government spending increases by 100 to G  150 , with this extra spending

financed by borrowing so there is no change in taxes or the money supply. Verify that the

new equilibrium is Y  400with r  50 . What is the deficit-financed government expenditure multiplier in this case?

(b) Now suppose that the same increase in government spending occurs, but this time it is

financed by an increase in taxes so that the budget remains balanced. Compute the new

equilibrium level of output and hence the balanced-budget government expenditure

multiplier.

(c) Suppose instead that the extra spending is financed by the central bank printing money for the

government (seigniorage). Compute the new equilibrium level of output in this case and the

associated government expenditure multiplier.

14. Answer eachof the following:

(a) What are the different types of unemployment? Briefly explain what causes of each type of

unemployment.

(b) Owing to search frictions, suppose a fraction f of the unemployed find work in a given time

period, while a fraction s of the employed lose their jobs. Find an expression for the steadystate frictional unemployment rate. Using this framework, explain how a rise in socialsecurity payments to the unemployed can affect the natural rate of unemployment.

(c) Assume that money wages are sticky. Derive the aggregate supply relationship between the

price level and output. What is the policy ineffectiveness proposition? Supposing that expectations are formed rationally, will the policy ineffectiveness proposition hold in an economy with sticky wages?

15. Consider the Fisher model of intertemporal consumption choice.

(a) Show how the consumer’s budget constraint is derived and give an interpretation. What is the

shape of the consumer’s indifference curves according to the model and what feature of

consumer preferences does this represent? Now show how the utility-maximizing

consumption plan is found using a diagram. Explain what determines whether the consumer

is a borrower or a lender.

(b) Write down the consumer’s budget constraint when the government levies lump-sum taxes.

Derive the government’s budget constraint and present the argument for the Ricardian

Equivalence proposition. Briefly discuss which assumptions of the model are important for

this result.

(c) What are the effects on current consumption of (i) a temporary tax rise with no change in

government spending; (ii) a temporary decrease in government spending; (iii) a permanent

decrease in government spending. What implications would your answers have for the fiscal

policy multipliers in these cases?

16. Consider a small open economy with fixed wages and prices.

(a) Show how the internal and external equilibria of the economy are determined (that is,

equilibrium in goods, money, and foreign exchange markets simultaneously). Your answer

should allow for the general case of imperfect capital mobility.

(b) Suppose that capital is perfectly mobile internationally. Consider an increase in the money

supply. What are the effects on output, the exchange rate, and the current account? Consider

separately the cases of the fixed and flexible exchange-rate regimes.

(c) Now suppose that there is zero international capital mobility. How is the effect of the moneysupply increase on output, the exchange rate, and the current account different in this case? Consider again both the fixed and the flexible exchange-rate regimes.

15. System of assessing student’s knowledge

Grades of the in-progress achievements of the student are the sum of ongoing control and a midterm grade.

The ongoing control of performance is a systematic check conducted by the teacher on the student’s academic achievement on each topic of the course.
The midterm is taken after covering the main chapters of the course.
The finalgrade comprises of the ongoing control grades and the final exam grade. Assessment of in-progress performance (rating of admission) is 60% of the final grade of the course. Final exam is 40% of the final grade of the course.
Assessment of student’s knowledge is carried out by the points-lettered rating system with the proper transformation into the traditional rating scale.

Date: 2016-01-03; view: 971