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DEPARTMENT OF ECONOMICS
UNIVERSITY OF VICTORIA
FALL 2012
ECON 204 (A01): Intermediate Macroeconomics
ASSIGNMENT II
Instructions:
 Please drop your assignment in the department’s assignment box marked “ECON 204
(A01)” by no later than 4:00 pm, Thursday, November 22.
 Do not forget to print your name and student ID clearly on the front page and staple the
assignment securely.
 Show your all works – calculations, explanations and diagrams, where applicable.
Question 01 (Marks 10)
Is a protectionist trade policy effective in a small open economy? Describe your answer using a
diagram. List the ultimate consequences of such a policy.
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Question 02 (Marks 10)
What will happen to the trade balance and the real exchange rate of a small open economy when
government purchases increase, such as during a war? Does your answer depend on whether this is
a local war or a world war?
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Question 03 (Marks 10)
Consider how unemployment would affect the Solow growth model. Suppose that output is
produced according to the production function
, where is the capital, is the
lobour force, and is the natural rate of unemployment. The national saving rate is , the labour
force grows at rate , and capital depreciates at rate .
a) Express output per worker
) as a function of capital per worker
natural rate of unemployment. Describe the steady state of this economy.
and the
Output per worker:
In the SS
The unemployment rate entered the equation with the negative sign – an increase in
lower the capital per worker in the steady state.
b) Suppose that some change in government policy reduces the natural rate of unemployment.
Describe how this change affects output both immediately and over time. Is the steady state
effect on output larger or smaller than the immediate effect? Explain.
If goes down, checking the output per worker function we can say it is increasing
immediately the same level of . (we are making same level capital per worker assumption
for simplicity. As you understood, for more workers now the per labour capital should be
lower, as it take some times for capital accumulation).
In the mean time as the output increases so does the economy’s savings. The saving function
shifts upward - meaning an out of SS situation.
But, in the long run the economy approaches a higher level of SS – capital accumulation.
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.
When the impact would be larger – its little vague. If you rely on graphical solutions,
then it would depend on the shape of the production function. But if it is assumed
that in the beginning the marginal product of labour is high then in the long run the
output will be higher as immediate output increase accelerates savings and in the
longrun saving accelerates output again.
Question 04 (Marks 10)
In any city at any time, some of the stock of usable office space is vacant. This vacant office space is
unemployed capital. How would you explain this phenomenon? Is it a social problem?
The vacant office space problem is similar to unemployment problem; we can apply the same concept
to analyse why vacant office space exists. There is a rate of office separation: firms that occupy offices
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leave, either to move to different location or because they go out of business. There is a rate of office
finding as well.
These rates can go up if the there is a sectoral shifts in the economy. However, if any office space is
vacant for a long time – a result of many businesses gone out of business, then it can be an economy
problem.
This phenomenon should be treated as a social problem.
Question 05 (Marks 10)
Dr David Suzuki, an opponent of further economic growth, has argued that despite the fact that “in
the twentieth century the list of scientific and technological achievements has been absolutely
dazzling, the costs of such progress are so large that negative economic growth may be right for the
future”. Policies to achieve this include “rigorous reduction of waste, a questioning and distrustful
attitude toward technological progress, and braking demands on the globe’s resources”. Identify
some of the benefits and costs of economic growth, and evaluate Suzuki’s position. What
government policies would be needed to achieve his ends?
The costs and benefits of economic growth are well understood. In simple words: the main
benefit is that it increases standards of living of an economy, and main cost is that it requires
consumption sacrifice of the current generation (other social costs are inevitable).
Dr Suzuki emphasizes the costs of growth and pays scant attention to the benefits, and hence
the real question of whether the benefits are worth the costs is not addressed in the quote. He
says he is not calling for a return to “outhouse and dirt floors” but he questions the value of
benefits such as being able to choose between twenty different brands of toothpaste –
obviously not a complete characterization of the benefits. In any event, the policies he
recommends do not necessarily imply negative growth.
(There is no specific answer for this question, as you understood. Your answer with
logical analysis has been considered for marking with standard scale. )