2. Effects of Temporary and Permanent Technology Shocks in a Deterministic RBC Model Version (a) Figure 1 illustrates the impulse responses to a purely temporary (i.e., with a first-order autoregressive parameter equal to 0) positive 12/12/2022 University of Reading EC302 2022/23 Exam Paper - Questions 2/10 technology shock (in quarter 1 -- see bottom-right panel in the figure), of 1% (above the steady state) in a deterministic version of the RBC model. What are the effects of this shock on the endogenous variables in the model, namely, (log-)consumption (c, top-left panel in the figure), the capital stock (K, top-right panel) and hours of work (N, bottom-left panel)? (9 marks, 3 marks per each of the 3 endogenous variables) 0.7948 0.7947 0.7946 0.7945 0.7944 0.7943 0.7942 0.7941 0.794 10.288 10.286 10.284 10.282 10.28 10.278 10.276 10.274 10.272 10.27 0.7939 10.268 0 50 100 150 200 250 50 100 150 200 250 0.3365 0.336 0.3355 0.335 0.3345 0.334 0.3335 0.333 0.3325 0.332 + 0.3315 50 100 150 200 0.01 0.009 0.008 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0 50 100 150 200 250 Figure 1: Effects of a Purely Temporary (Impulse) Positive Technology Shock of 1% (in Quarter 1) in a Deterministic Version of the RBC Model (b) Figure 2 illustrates the impulse responses to an anticipated (in quarter 10 -- see bottom-right panel in the figure) permanent but not persistent (again, with a first-order autoregressive parameter equal to 0) positive technology shock of 1% (above the steady state) in a deterministic version of the real business cycle (RBC) model. What are the effects of this shock on the endogenous variables in the model, namely, (log-)consumption (c, top-left panel in the figure), the capital stock (K, top-right panel) and hours of work (N, bottom- left panel)? (9 marks, 3 marks per each of the 3 endogenous variables) answers lab class 8 end lesson 12/12/2022 University of Reading EC302 2022/23 Exam Paper - Questions 0.808 0.806 0.804 0.802 0.8- 0.798- 0.796 0.794 0.792 8F 50 0.3345 0.334 0.3335- 0.333 0.3325 0.332 0.3315 0.331 0.3305 0.33 100 8- N 150 √8 200 K 10.45 10.4 10.35 10.3 10.25 3/10 10.2 50 100 150 200 250 250 0.3295 50 100 150 200 250 0.01 0.009 0.008 0.007 0.006 0.005 0.004 0.003 0.002 0.001 50 100 150 200 250 Figure 2: Effects of an Anticipated Permanent Positive Technology Shock of 1% (in Quarter 10) in a Deterministic Version of the RBC Model (c) List and briefly explain the key similarities and differences in the panels of Figure 1 relative to the corresponding panels of Figure 2. (7 marks, 3 marks per each for the 2 key differences and 1 mark for the key similarity) 3. Effects of Monetary Expansion on Consumption and Investment in Christiano et al. (2011): DSGE versus VAR IRFS Figure 1 illustrates some of the key findings in Christiano, Trabandt and Walentin's (2011) chapter in the Handbook of Monetary Economics. Now we are not interested to check the "Hume- Friedman observation" we emphasized in class, but rather to compare what the impulse response functions (IRFS) simulated from their estimated medium-scale DSGE versus corresponding VAR models reproduced in the figure show with regard to the time path of real consumption and real investment. In particular, indicate in sufficient detail the similarities and differences between the DSGE and VAR mean trajectories (marked by squares versus solid line, respectively) and associated confidence intervals (marked by dashed limits versus grey shaded area, respectively). Provide an 12/12/2022 University of Reading EC302 2022/23 Exam Paper – Questions 4/10 interpretation for the effects of monetary expansion, reflected in the time path of the policy rate, the Federal funds rate (expressed in annual percentage rate, APR, terms) in this US case (compare also the relative magnitude of the effects in question). 352 Lawrence J. Christiano et al. (25 marks) Real GDP (%) Inflation (GDP deflator, APR) Federal funds rate (APR) 0.2 0.4 0.2 0 0.1 0.2 -0.2 ΟΙ -0.4 0 -0.1 -0.6 -0.2 0 5 10 0 5 10 0 5 10 Real consumption (%) Real investment (%) Capacity utilization (%) 1 1 0.2 0.5 0.5 0.1 O 0 0 -0.5 -0.1 0 5 10 0 5 10 0 5 10 Rel. price of investment (%) Hours worked per capita (%) Real wage (%) 0.3 0.2 0.05 0.2 0.15 0 0.1 0.1 -0.05 0.05 0 -0.1 0 -0.1 -0.15 0 5 10 0 5 10 0 5 10 VAR 95% VAR Mean Medium-sized DSGE model (mean, 95% probability interval) Figure 10 Dynamic responses of variables to a monetary policy shock. Figure 3: Impulse responses to an expansionary monetary policy shock in the Christiano-Trabandt-Walentin (2011) medium-scale NK model, % deviation from steady state Christiano-Trabandt-Walentin (2011), Handbook of Monetary Economics, Vol. 3A, Ch. 7, Fig. 10, p. 352. Section B Answer ONE question 4. Granger Causality Tests and Implied Ordering in a VAR Table 1 provides results from pairwise Granger causality tests based on the null hypothesis HO = noncausality performed on the (quarterly) natural log-difference of Euro Area (EA) real unit labour cost (diqEARULC), real GDP (dlqEAYER), price level (diqEAYED) and narrow real money balances (diqEAM1R). The respective test statistic probability value is reported. 12/12/2022 University of Reading EC302 2022/23 Exam Paper - Questions 5/10 For each of the four variables (i.e., for each of the four columns containing probability values), state whether the test suggests which variable Granger-causes another variable. Indicate these causality findings by arrows, going from the variable which Granger-causes the other variable. What possible ordering(s) would these Granger causality test results suggest for estimating a VAR with these four variables? Briefly justify your answer. (20 marks for each of the four variables plus 20 marks for a well-justified final answer based on the causality arrow diagrams) any colums cause rows Pairwise Granger Causality Test, p-values for HO=noncausality reported below Dependent Variable in Regression (in 4 columns below) DLQEARULC | DLQEAYER DLQEAYED DLQEAM1R Regressor (column below) DLQEARULC 0.8540 0.0622 0.5909 DLQEAYER 0.0164 0.0003 0.2562 DLQEAYED 0.9437 0.1070 0.0010 DLQEAM1R 0.4593 0.0036 0.8204 Table 1: Granger Causality Test Results for 4 Variables for the Euro Area, Quarterly Data, 1970:1-2010:4 Source: Our EA-US quarterly dataset used in the lab sessions. 12/12/2022

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2. Effects of Temporary and Permanent Technology Shocks in a Deterministic RBC Model Version (a) Figure 1 illustrates the impulse responses to a purely temporary (i.e., with a first-order autoregressive parameter equal to 0) positive 12/12/2022 University of Reading EC302 2022/23 Exam Paper - Questions 2/10 technology

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2. Solow model with Human capital. Consider the following Solow growth model with human capital a la Mankiw, Romer and Weil (1992). "A Contribution to the Empirics of Economic Growth," Quar- terly Journal of Economics 107, 407-437. They treated physical and human capital symmetrically Production function: Y(t) = (A(t)L(t))¹-a-³H(t)³K(t)ª, a, 3 € (0, 1), a + ß < 1. Capital accumulation: K(t) = 8kY(t) — 5K(t), 6, 8k € (0,1). Technical progress: A(t) = est A(0). Population growth: L(t) = entL(0). Human capital accumulation: Ĥ(t) = 8HY(t) - 5H(t), 6, 8H € (0,1). Society invests SH and SK percent of its total income Y in human capital and physical capital, respectively. a. What is the long run (Balanced Growth Path) growth rate of output per capita. Does it depend on sh? 1 b. Write down the stationary system and find out the steady-state level of output, physical and human capital per unit of efficiency labor. Show the dynamics of this system. c. This model augmented with human capital can be tested empirically with cross- country data if we assume that all countries are in the steady-state. Derive a log-linear regression equation for output per worker in the long run. d. Discuss the empirical findings of Mankiw, Romer and Weil (1992). Also, what are the main concerns with their empirical strategy?

Use the outreg2-command to generate an Excel table called "2a" containing all results from the loops below. Do not report the constants in the output table. /* Code: */ local Controls "i.country_survey left right male young children_dummy rich university_degree immigrant moved_up" eststo clear foreach var in budget_health budget_defense { eststo: xi: reg `var' q1_to_q1 `Controls' } foreach var in budget_health budget_defense { eststo: xi: reg `var' q1_to_q5 `Controls' }

Exercise 3 You are given the below variables: Price of the good itself Input prices ii. iii. Technology Expectations iv. V. Number of sellers 2 NICA UNIVERSIT State if a change in each of the variables results in a movement along the supply curve or a shift to the curve. Use several arguments to support your answer. (25 marks)

Exercise 4 Analyze using examples The Circular-Flow Diagram. FIRMS Revenue (= GDP) Goods and services sold Factors of production Wages, rent, and profit (= GDP) MARKETS FOR GOODS AND SERVICES MARKETS FOR FACTORS OF PRODUCTION Spending (= GDP) Goods and services bought HOUSEHOLDS Labor, land, and capital Income (= GDP) Figure 1: Mankiw, N.G., 2017. Principles of macroeconomics. Boston: Cengage Learning. = Flow of inputs and outputs = Flow of dollars (25 marks)

1. Solow model. Consider the standard Solow growth model with technological progress (g) and pop- ulation growth (n), where g and n are positive and exogenous. Assume that the economy is initially on the balance growth path. Suddenly there is a one-time unex- pected and permanent downward jump in the number of workers due to a government repatriation program of illegal immigrants. Explain both the immediate and transitional effect of this jump on capital per ef- fective worker and output per effective worker. Draw the time path of output per capita and compare it to the case without the repatriation program.

Exercise 1 You are given the below information: Price of Ice-Cream Cone $0 1 2 3 st 4 5 6 Catherine 12 10 8 6 4 2 0 Nicholas 7 6 5 3 2 1 Draw the market demand curve and calculate the market demand for each price. (25 marks)

1. In the first four weeks of this course, you have learned about economic concepts such as supply and demand, scarcity, tradeoff decisions, international trade, opportunity cost, and compound growth. Think about the economic concepts you encountered in the readings for the first three weeks, or those you know about from previously learning or research. These could include concepts such as supply and demand, scarcity, tradeoff decisions, inflation, and opportunity costs. Choose at least one economic concept and describe how it is relevant to the scenario and your two budgets. Write your response to question 1 here.]

5. (9 Points) Consider a Solow economy that begins in steady state. Then a strong earthquake destroys half of the capital stock. Use a Solow diagram to explain how the economy evolves over time. Draw one graph showing the time path of the log level of output per worker (y) and another showing the time path of output per worker's growth rate ().