Intermediate Macroeconomics Project description Answer all questions EC2015 Referred Coursework July 2014 Each question is worth 20 marks 1. Answer the following on US data using (a) Calculate the 12-month percentage increase in CPI, and plot against the unemployment rate. Do you see any evidence of a Phillips curve relationship? (b) Calculate the 12-month percentage increase in real GDP, consumption of each of durables, non-durables and of services, and plot them. Is there any relationship between them? Can you provide any explanation? (c) Calculate and graph the ratio of each of real residential investment, real non-residential investment and real inventory investment to real GDP. How do these components rank in terms of variability? Provide some explanation. 2. Consider a consumer who maximizes a utility function that depends on leisure and consumption, and who is subject to a budget constraint. The government imposes no tax on workers on wage rates up to a certain number of hours worked. Beyond this number of hours the government imposes a proportional tax rate. (a) Show that some workers might prefer not to reach the threshold where tax is paid, whereas workers with different utility functions would work beyond it. (b) What will be the effect of an increase in the tax rate? 3. Consider a one-period model with optimizing consumers and profit-maximizing producers who are price-takers. Suppose that there is government spending, with a balanced budget. and lump-sum taxation. (a) Show that the competitive equilibrium is efficient with lump-sum taxation, but not with proportional taxation. (b) What other examples of social inefficiency can you think of? 4. In the Solow model, suppose there is government spending G=gN where g is fixed, and N is the number of people, and S=s(Y-T), where T=G. Show with a diagram that there are two possible equilibria, but that only the larger is stable. What is the effect on growth rates of an increase in s? 5. Suppose that part of people’s time is taken up with a given level of childcare, so that this cuts into leisure and working time. Suppose now that government raises lump sum taxes to pay for this itself. From a consumer’s perspective, assuming that wages are unchanged, what will be the effect on the consumption/leisure tradeoff?