# ECO7015 Contemporary Macroeconomics Homework

Subject Code & Title :- ECO7015 Contemporary Macroeconomics
Assignment Type :- Homework 2
Note 1: This is a group assignment. Students need to submit their answers in groups of two.
Note 2: The questions have different weights in the homework’s final mark, which is represented by its percentage thus the the percentages sum to 100%.
Note 3: If a question has sub questions those sub questions may also have different weights Those weights sum to 100 marks in each question.
Note 4: Complement your answers with a graphical representation whenever is appropriate.
ECO7015 Contemporary Macroeconomics Homework

1. Figure 1 offers a glimpse of the results in the Susceptible Infected Recovered (SIR) model and the simplest economic model of epidemics covered in the module in two equilibria decentralised and centralised. The calibration of all models assumes that β is adjusted such that the basic reproduction number is 3. All other parameters are as in the lectures.

(a) How should the red line be interpreted?
(b) Briefly explain why the red line differs so markedly from the other two lines.
(c) Briefly explain why the green and blue lines are different.

2. Figure 2 shows the evolution of key variables using an economic model of an epidemic similar to those studied in the module.The model has two groups of agents in every respect equal except in the probability of dying due to infection. We can think of the group of agents with a high probability of dying as comprised of old agents and the other as comprised of young agents. Figure 2 represents two scenarios a baseline scenario and another scenario that equals the baseline except that interactions between the two groups of agents are significantly lower exogenously. We can think of the latter scenario as one in which nursing homes are insulated. All scenarios correspond to decentralised equilibria.

ECO7015 Contemporary Macroeconomics Homework

(a) Briefly explain the different behaviour of young and old agents in Panel A and its implications.

(b) Briefly explain how the scenario in Panel B leads to different outcomes than Panel A.

3.Figure 3 shows the effects of a fall of 1% in government spending in the Real Business Cycle RBC model with capital accumulation under different calibrations of the persistence parameter of the shock. The solid line shows more persistence than the dashed line.

(a) Briefly explain why the response of labour supply is always negative.
(b) Briefly explain why the response of the capital stock depends on the persistence of the government spending shock.

ECO7015 Contemporary Macroeconomics Homework

4.Figure 4 shows the responses of employment and other key macroeconomic variables to a positive monetary policy shock under different values of the Frisch elasticity of labour supply ψ in the New Keynesian model. The Frisch elasticity controls the curvature of the disutility of working with a higher ψ implying a lower curvature. It is assumed that most prices cannot be updated every period.

(a) Briefly explain why the response of the output gap is positive and equal to the response of out put.
(b) The magnitude of the response of employment depends positively on the Frisch elasticity of labour supply. Briefly explain.
(c) The magnitude of the response of the real wage depends negatively on the Frisch elasticity of labour supply Briefly explain.
(d) The magnitude of the response of inflation depends negatively on the Frisch elasticity of labour supply. Briefly explain.

5. Figure 5 plots how the equilibrium aggregate capital stock and aggregate consumption in the Aiyagari model change with two parameters. In Panel A the parameter is θz, i.e., the weight on the mean-reverting process of the Ornstein-Uhlen beck process. In Panel B the parameter is φ i.e. the maximum borrowing possible.

(a) Briefly explain why the aggregate capital stock falls with θz in Panel A.
(b) Briefly explain why the aggregate capital stock increases with φ in Panel B.

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