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MGEB05 Assignment 1 (Winter 2024) 1 MGEB05 – LEC 01 Macroeconomic Theory and Policy Assignment 1 Due: On (or before) Friday, February 9, 2024, 5:00pm, Quercus (under MGEB05 Assignment 1) (Assignments submitted after 5:00pm on February 9 will NOT be accepted.) Instructions: • You can submit an individual or group assignment. If you submit a group assignment, there must be no more than FIVE students in your group, and you just submit ONE copy for the group.  If you are planning to submit a group assignment, make sure you form your group on Quercus (under HW-1 Group #) before submission. • Label your graph(s); otherwise, marks will be subtracted. • No credit will be given if you do not show your work (i.e., don’t simply say the answer is 3 write down enough of the steps you used to arrive at this answer). • Your answer should be structured in a way such that those that know little about economics will have no difficulty understanding your argument/answer. • DO NOT USE any notations or abbreviations that are not being used in lectures. If you use your own notations and/or abbreviations, you will receive a grade of zero for that question. • Total marks: 100 points. IMPORTANT: Assignment Upload Instructions: • Accepted file format: pdf • There are FOUR questions in this assignment, and you must upload a separate file for each question under Assignment 1 . Failure to do so will result in a 10 marks deduction from the overall assignment marks. • Save your files as follows: Question File name: Question 1 HW1-Q1.pdf Question 2 HW1-Q2.pdf Question 3 HW1-Q3.pdf Question 4 HW1-Q4.pdf You must use the file names above; otherwise, there will be 4 marks deduction for each incorrect file name. Assignment Signature Form Submission Instructions: There is no point attached to this submission, but you MUST submit the signature form to receive your assignment marks. This is an individual submission. • If you submit an individual assignment, complete the form and upload it. • If you are submitting a group assignment, ensure that all members of your group complete the form before submitting it. For example, if your group consists of 3 members , each member MUST upload their completed form under their own name . If a member fails to submit the "signed" form and/or if the information is incomplete, that member will receive a grade of ZERO for the entire assignment. For instance, in a group comprising students A, B, and C, student A needs to submit the completed form under their name, and students B and C should do the same. If student B fails to submit the form and/or submits an incomplete form, they will not receive credit for the assignment.

MGEB05 Assignment 1 (Winter 2024) 2 MGEB05 Assignment 1 Signature form For individual submission, check the box: Individual submission For group submission, put down your group number: Group Name Student number Signature To submit this signature form, please follow the instructions provided: 1) Complete the Signature Form : Fill out all required fields on the signature form. 2) Upload the Form : Upload the completed signature form to “ Assignment 1 Signature Form ” . 3) Important Information : While there are no points associated with this submission, it is essential to submit the signature form to receive your assignment marks. o This is an individual submission. o If you are submitting an individual assignment, ensure that you complete the form before submission. o If you are submitting a group assignment, collect the necessary information from all members of your group before submitting the completed form under your name. Note: • For group assignments, each group member must individually upload their completed form under their own name. o If a group member fails to submit the "signed" signature form or if the information is incomplete, that member will receive a grade of ZERO for the entire assignment. For example, if students A, B, and C form a group, student A should submit the completed form under their name, and students B and C should do the same. If student B fails to submit the form or submits an incomplete form, they will not receive credit for the assignment.

MGEB05 Assignment 1 (Winter 2024) 3 Question 1 (20 points) – Topic 1 ( save your answer as HW1-Q1.pdf ) The following table provides the economic data for an economy. Year Year 1 Year 2 Year 3 Price Quantity Price Quantity Price Quantity Good 1 22 160 26 200 27 180 Good 2 16 110 13 150 18 90 Good 3 68 130 72 150 60 150 Good 4 120 65 140 75 150 70 Good 5 65 70 58 80 60 90 Good 6 53 110 50 130 40 120 Here is some additional information about this economy that holds true for all 3 years: • Unless otherwise stated, the goods are produced within the economy and the goods are consumed by local sectors. • Good 1 was equally split among households, firms, government, and foreign businesses. • Households consumed 30% of Good 2, and all of which are produced abroad. The rest of Good 2 was bought by firms. • Good 3 was a pure consumption good; however, two-fifths of the good was purchased from abroad. • Good 4 was office supplies that were consumed only by firms and governments. Firms took 20% of the goods. The shares of Good 4 consumed between domestic government and foreign government were 50% and 30% respectively. • Like Good 4, Good 5 was also purchased by businesses and governments. The splits of Good 5 among firms, domestic government, and foreign governments were 20%, 60%, and 20% respectively. • While foreign consumers purchased 60% of Good 6, domestic consumers purchased half of the quantity purchased by their foreign counterpart. The remaining goods were bought by the government. • The government has chosen Year 3 as the base year. In the base year, both the GDP deflator and the CPI were normalized to 100. Based on the information given, complete the following table. Year 1 Year 2 Year 3 (Nominal) Consumption (Nominal) Investment (Nominal) Government spending (Nominal) Exports (Nominal) Imports Nominal GDP Real GDP GDP deflator Cost of consumption basket (in CPI) CPI Note: • The above table is reproduced on page 4 of this assignment (so that you can print it & fill it out). You must submit that page as your answer to Question 1 with your assignment for grading . • Also, on separate page(s), show your work! You are required to do both; otherwise, you will receive a grade of zero for this part of the question. Keep your answer to 2 decimal places if needed.

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MGEB05 Assignment 1 (Winter 2024) 4 Submit this page for grading; otherwise, you will receive a grade of ZERO for Question 1. Year 1 Year 2 Year 3 (Nominal) Consumption (Nominal) Investment (Nominal) Government spending (Nominal) Exports (Nominal) Imports Nominal GDP Real GDP GDP deflator Cost of the consumption basket (in CPI) CPI

MGEB05 Assignment 1 (Winter 2024) 5 Question 2 (30 points) – Topic 2 ( save your answer as HW1-Q2.pdf ) A closed economy can be described by the long-run classical model: Y = 4K ⅓ L ⅔ C = 8700 + 0.75(Y – T) – 200r I(r) = 7500 – 300r MPK = ( 4 3 ) ? −⅔ ? ⅔ MPL = ( 8 3 ) ? ⅓ ? −⅓ Note: r is measured in percentage points (i.e., if r = 5, then r = 5%). Keep your answer to 3 decimal places or fractions if needed. The government sets the income tax rate to 11.25% of (long-run) output and runs a balanced budget. Initially, the economy is endowed with 64000 units of capital and 8000 workers. a) Find the equilibrium levels of output, real interest rate, and investment. Also, find the equilibrium real wage for labour and real rental price of capital. (7 points) Suppose the wildfires have caused damage to a significant stock of capital. As a result, the stock of capital dropped by 21125 units. b) Redo part (a). (7 points) c) Show your answers for parts (a) & (b) in three diagrams that depict the loanable funds market, the labour market, and the rental market for capital in long-run equilibrium. Be sure to identify which points on your diagrams are the long-run equilibria for part (a) & (b) respectively. No written explanation is required. (9 points) d) (Continued from part b) Suppose the government wants to keep the (equilibrium) level of real interest rate to 5% via a change in government spending. Find the level of government spending that could achieve this goal. What happens to the budget balance (i.e., increase or decrease, and by how much)? (7 points) Question 3 (25 points) – Topics 2 & 3 ( save your answer as HW1-Q3.pdf ) Canada is a closed economy and is in its long-run equilibrium initially. The contribution limit of Tax- Free Savings Account (TFSA) has been increased to $7000 in 2024. a) In the context of the long-run classical model, examine the effects of the above event on the following variables in the long run: • output • real interest rate • national savings • real wage • aggregate price level Explain your answer with the aids of ONE diagram for the market of loanable funds and ONE diagram for the labour market. (20 points) b) Based on your answer in part (a), what happens to the level of output in the steady state (i.e., the very long run)? Explain. (5 points)

MGEB05 Assignment 1 (Winter 2024) 6 Question 4 (25 points) – Topics 1, 2, & 3 ( save your answer as HW1-Q4.pdf ) Each part of the question is NOT related to other parts. a) To address the tight labour market, the government is contemplating revising its labour policy by lowering the minimum legal working age. At the same time, the adoption of greener production methods has made some of the country’s machinery and equipment obsolete. What happens to the country’s long -run equilibrium real rental price of capital? Explain and support your analysis by ONE rental market for capital diagram. (10 points) b) Suppose due to the recent troubles in the banking sector, the public loses confidence in holding their wealth in the form of bonds and stocks and decides to hold a larger portion of their wealth in cash. This shift could lead to a change in the price level. If the central bank aims to achieve price stability, what actions should it take? Explain. (5 points) c) Use the quantity equation to explain the long-run effect of the introduction of mobile payment apps on the velocity of money and the price level. (5 points) d) Suppose the labour force and (physical) capital stock are growing at 4.5% and 3% respectively, and the labour share of income is two-thirds. In addition, the total factor productivity is increasing at 1.2%. If the velocity of money is rising at 2% and the central bank wants to obtain a target of inflation at 2.5%, what is the monetary growth rate chosen by the central bank? (5 points) Note: All the growth rates are annual rates.

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