ECON3011: Euler Equation - Solow Model and the Romer Model - Economics Assignment Help

    Assignment Task - 

Commence 

Please submit each question in the pdf format separately to Turnitin. There will be a separate link for the Excel (or equivalent) files you used for question 1.
Please note that the answers should be typed. Turnitin does not accept handwritten assignments.

Consider the following model combining the Solow model and the Romer model:

What type of model is that?  Find the growth rate of knowledge in the economy.  Find the growth rate of output per person. Find the growth rate of consumption per person.

Using Excel or the similar software find the values of At , Kt , output per person yt and consumption per person in periods 1, 5, 10, 20, 50, 100 and 200. What are the growth rates of these variables from period 0 to period 1, from period 4 to period 5, from period 9 to period 10, from period 19 to period 20, from period 49 to period 50, from period 99 to period 100 and from period 199 to period 200?

Plot output per person from period 0 to period 200 on a graph.

d) Compare two economies: one with parameter values as in b) and the other one with the same parameter values except for the initial set of knowledge A0 = 5. Briefly explain what will be the differences in the growth rates of knowledge, capital and output per worker? 

e) The government believes that the growth rate of output per worker is low and thinks about the measures that would increase it. There are two options available: (i) increasing the share of workers employed in the research sector and (b) increasing the investment rate. The government can choose only one option. Which option would you recommend and why?

Question 2 
Part 1
For this question assume that inflation is zero. Consider a 2-period economy. Assume that consumer’s lifetime utility is given by
U = log c1 + 0.8 log c2 (1)
Assume that the consumer starts period 1 with the initial wealth of 50,000.
The consumer gets labour income yt − Tt

in period t (t=1,2).

y1 = 20,000, y2 = 120,000, T1 = 5,000, T2 = 31,500 and R=0.05 (2)

Initially assume that there are no borrowing constraints.

a. Write down the Euler equation (with all values substituted) and explain its meaning. Write the intertemporal budget constraint and explain its meaning. 

b. Solve consumer’s problem of maximizing lifetime utility subject to the intertemporal budget constraint. Is the present value of consumption in the first and the second periods the same? Explain why. 

c. If for some reason the consumer were facing the borrowing constraint, would it be binding? Explain. (2 marks)

d. Answer a.-c. for the case when β=0.95 instead of 0.8 and R=0.5 instead of 0.05. (note that you don’t have to repeat the explanation of the Euler equation and the intertemporal budget constraint.)

Part 2
Now suppose that there are two types of consumers in the economy: type 1 and type 2. Both types have the same life-time utility (1), the same labour income, taxes and the interest rate (outlined in (2)) but the first type has initial financial wealth of 50,000 and the second type does not. Assume that the banks require collateral for the loans and given that the second type does not have any initial financial wealth, this consumer faces borrowing constraints.

a. Is the constraint facing type 2 consumer binding? (2 marks) How much would the type 2 consumer consume in the first and second periods? 

Suppose that the total population size is equal to 1. Suppose further that a fraction μ of the total population is type 1 consumers and a fraction (1- μ) is type 2 consumers.

Derive the economy’s aggregate consumption function for period 1, that is, derive an expression for total consumption c1 total = μc1 type1 + (1 − μ)c1

c. Assume that the government plans spending of 10,000 in period 1 and 15,750 in period 2. The initial debt is 10,000. The taxes collected from consumers are 5,000 in period 1 and 31,500 in period 2. Is the government budget constrain satisfied? Explain. 

d. Assume that in the economy described in this part, the government decides to build some new roads in period one which requires an increase in spending from 10,000
to 15,000. The government decides whether to use tax finance or debt finance for this extra spending in period 1. If you are an economic expert and are asked for advice, what would you recommend and why?

Comment on the following statement “If the real interest rate falls from 5% (0.05) to 1% ( 0.01), the government will be able to decrease current taxes without the need to increase taxes in the future”.

Question 3 

Write an 800- word essay on the following topic:

‘How effective do you think the new Basel III financial regulations be in preventing another financial crisis?’

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