Econ 385 Intermediate Macroeconomics I

Homework Assignment #2
Malik Shukayev

Due on Monday March 26 at 1 PM

Abstract
As always with my homework questions or exam questions, please
make sure to answer the question posed, and show/explain your work, so
that my TA or I see the chain of your reasoning.

1 The comparison of labour market dynamics in

Canada and USA
Your top manager has to give a short presentation about the state of the Cana-
dian labour market at the Federal Reserve Bank of USA. She asked you, one of
her best researchers, to create …ve (well formatted and properly labeled) data
slides comparing the labour market developments in Canada and USA over the
last two decades. She also told you that she will not have any time to edit your
charts, or think about their interpretation before her presentation. This means
you should provide not only the best looking charts, but also a brief (bullet-
point) summary of main …ndings for each chart. You decided to limit your
attention to the period between January 2000 and February 2018, and create
the following charts:

1. A chart plotting the unemployment rates in Canada and USA between

January 2000 and February 2018. (5 points)

2. A chart plotting the employment rates in Canada and USA between Jan-
uary 2000 and February 2018. The employment rate (or ratio) is reported
as the ratio of employed people to the entire population over 15 years old
in Canada, and over 16 years old in USA. (5 points)

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 3. A chart plotting the labour force participation rates for all individuals
over 15 years in Canada and over 16 years in USA (this is how data are
reported in Canada and USA). (5 points)

4. A chart plotting the labour force participation rates for women over 15
years in Canada and over 16 years in USA (this is how data are reported
in Canada and USA). (5 points)

5. Another plot of your choice comparing the labour market developments in

Canada and USA. Surprise me here with your choice. The labour
participation rate for men will not surprise me! (5 bonus points).

You need to …nd the appropriate data series at the Statistics Canada website
and at the FRED database of St.Louis Fed. Once you create the properly
formatted and labeled charts in Excel, copy and paste them into a Word …le
for submission. Your can include additional comments and discussion of each
chart into the word …le, so that your manager has an easier time to understand
the signi…cance of each individual chart and of the whole presentation. Please
submit the colour print out of the presentation together with the rest of your
homework 2 writeup. If you work in a group of students please submit one
report per group and indicate clearly your group members. Your report will be
graded on the basis of how good my TA feels about your charts and summary
points. It is certainly a subjective metric, but this is what you should expect
from your manager anyway.

2 Finding the aggregate consumption and sav-

ings
Assume an economy of Chapter 9 (with two periods but no real investment)
with 1000 consumers. Each consumer has income y = 100 in the current period
and y 0 = 120 in the future period. The lump-sum taxes paid by each consumer
are t = 20 in the current period and t0 = 40 in the future period. The market
real interest rate is 7:5% (i.e. r = 0:075). Of the 1000 consumers, 500 consume
120 units (per person) in the future, while 500 consume 40 units (per person)
in the future.
a. Determine each consumer’s current consumption and current saving (the
numbers) (4 points).

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 b. Determine aggregate private saving and the aggregate consumption in
each period (the numbers) (4 points).
c. Suppose the current taxes increase to 30 for each consumer (assuming no
corresponding decrease in future taxes, so that Ricardian Equivalence Theorem
does not apply), but the consumers do not change their future consumption
plans. Repeat parts (a) and (b) and …nd the new results. (8 points)
d. If consumers could revise their future consumption plans in order to
accommodate the increase in taxes, what do you think would happen with their
future consumption and their current savings? Please explain carefully. (4
points)

3 Understanding the optimal investment

1. What is the e¤ect of an increase in the depreciation rate, ; on the rep-
resentative …rm’s investment decision? Remember that the depreciation
rate is de…ned as the rate at which the capital stock wears out each pe-
riod, K 0 = (1 )K + I: Will the optimal amount of investment go up, or
down, or will the e¤ect be indeterminate, when increases, but all other
variables are held constant? Explain carefully. (7 points)

2. Suppose that we modify the model of the …rm’s investment behaviour by

supposing that any capital the …rm has remaining at the end of the future
0
period can be sold at the price PK (in our model of chapter 11, we had
assumed that capital could be sold at the end of the future period at a
price of one, in terms of consumption goods).
0
a. Write an explicit formula showing how the price PK a¤ects the optimal
investment rule of the …rm. (7 points)
0 0
b. Suppose that we interpret PK as the …rm’s stock price. If PK rises,
what e¤ect does this have on the …rm’s investment? What does this imply
about the relationship between investment expenditures and stock prices?
(6 points)

4 Analyzing a change in consumers’preferences

Suppose there is a shift in the representative consumer’s preference, namely, the
consumer prefers, given the market real interest rate, to consume less current

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 leisure and more current consumption goods.
Determine the e¤ect of this on current aggregate output, current employ-
ment, the current real wage, current consumption, and current investment. Ex-
plain your results by referring to possible shifts in the curves describing the
labour market equilibrium and the goods market equilibrium. (20 points)

5 Deriving the optimal investment formula

Suppose that the …rm produces output only from capital (no labour needed).
Current output is given by Y = zK and future output is given by Y 0 =
0
0
z K ; where 0 < < 1:
a. Determine the optimal investment for the …rm as a function of other
relevant variables and parameters, including the real interest rate r; and the
depreciation rate . Is optimal investment increasing or decreasing in the real
interest rate, future total factor productivity and the depreciation rate? (12
points)
b. Assuming that K = 10; z = 3; = 0:3 z 0 = 4; = 0:1; r = 0:08; …nd the
0
values of the optimal capital K and the optimal investment, I. (4 points)
c. If the current productivity, z; doubles (z = 6) what would happen to the
optimal investment, I ? (4 points)

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