Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Fei–Ranis model of economic growth wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Fear of floating wikipedia , lookup
Non-monetary economy wikipedia , lookup
Exchange rate wikipedia , lookup
Okishio's theorem wikipedia , lookup
Pensions crisis wikipedia , lookup
Refusal of work wikipedia , lookup
Real bills doctrine wikipedia , lookup
Homework 3 Economics 215 Intermediate Macroeconomics Assigned: Monday, April 23, 2002 Due: Friday, May 3, 2002 1. Consider an economy, in which there is a proportional tax on labor income, . W When a worker is paid a pre-tax real wage, , the government collects a P W W fraction, , and the government keeps an after tax real wage wAT = (1-) . P P Since the after tax real wage is the reward that workers keep for their work, the labor supply is an increasing function of the after tax real wage, 2 LS = 4 w AT . Since the pre-tax real wage is the cost of labor for employers, employers choose labor supply so that the pre-tax real wage is equal to the marginal product of labor. In the economy, the production function is Cobb-Douglas with capital, K=1, and technology, T=1: 1 . Q L MPL 12 L a. Calculate the equilibrium labor, output, and the pre-tax real wage when = 0, .15, .5, and .9 W b. Government revenue is equal to L. Calculate government revenue P when the tax rate is = 0, .15, .5, and .9. 2. Assume that the demand for M1 in Hong Kong was given by the equation PQ . Hong Kong’s central bank, the Hong Kong monetary M 1D 2 100i authority operates a fixed exchange rate. This implies that the interest rate in Hong Kong will be determined by the US interest rate denoted i*. Thus, a credible fixed exchange rate implies i = i*. a. In 2001, the average interest rate in the US was about i* = .04. In 2002, the interest rate is about i* = .01. Calculate the velocity of money in HK in 2001 and 2002. (Reminder: The velocity of money is the ratio of nominal GDP to M1). b. For each dollar of demand deposits acquired by banks in HK, the banks want to keep rd = $.10 on reserve. For each dollar in demand deposits/checking accounts HK, households want to keep $.20 in cash. Calculate the money multiplier in Hong Kong (Reminder: The money multiplier is the ratio of M1 to Mh). c. The nominal GDP (measured in HK dollars) in Hong Kong was HK$1.3 Trillion in 2001 and is projected at $1.22 Trillion in 2002. Calculate M1 and Mh in 2001 and 2002. The exchange rate with the US dollar is E = 7.8. Calculate the change in the HKMA’s holding of foreign currency assets (measured in US dollars) between 2001 and 2002. 3. The Central Government is in the process of constructing a 5-year plan. Assume that the government has zero debt and plans to finish 5 years from now with zero debt. This implies that the present value of government outlays must equal the present value of government revenues G I G1 G I G4 TX 1 TX 4 G I G 1 ..... 4 TX ... 4 1 r 1 r (1 r ) (1 r ) 4 In each year, the government plans to spend 250 billion RMB (in constant price terms) on government consumption and investment G+IG = 250 in every period of the 5 year plan. Beginning next year, the government plan implies constant tax revenue, TX TX 1 TX 2 TX 3 TX 4 If the government runs a balanced budget today, TX= 250, then the present value condition implies that it will run a balanced budget in the future TX 250 . Calculate the level of taxes TX that the government must collect in the future if the government runs a deficit this year of G+IG-TX =100 when r = .1. (Hint: 1 1 1 1 1 r (1 r ) 5 ). ... 4 1 1 r ( 1 r ) 1 1 r 4. The attached schedule shows a long term forecast for real government revenues and real government outlays over the next 10 years. Assume that the government begins with an outstanding set of assets of 200. This implies an initial negative government debt equal to DG-1 = -200. Use the attached spreadsheet to project the government’s debt over the next 10 years under the assumption that real interest rates are constant and equal to r = .05. II G G 500 525 551 579 608 638 670 704 739 776 TX 200 210 221 232 243 255 268 281 295 310 650 676 703 731 760 791 822 855 890 925 D G1 G DD^G -200