Topic: Define the policy of quantitative easing

Part I (Short Essays = 60 marks): Answer four and only four of the five questions below. Each is worth 15 marks. Each question is based on a topic covered in the module and can be answered by consulting the learning resources for that topic. Resources consist of lecture slides + recordings, the textbook and any additional readings posted on Moodle by the lecturers. It is your responsibility to identify the topic and make use of the relevant resource(s) in composing your answer. While you may consult resources other than those provided via Moodle, verifying the credibility and relevance of such resources is your own responsibility, along with the risk that they might lead you to provide incorrect answers.

Your answers will be assessed on the following criteria

Knowledge and Understanding: Does the answer show that you have understood the question in the proper context of the topic to which it relates? Does your answer reflect a good grasp of the material covered by the learning resources?  

Analysis and Application: If the question is related to one of the models taught in the module, has the model been applied correctly? If a diagram has been used in the answer, has the diagram been drawn and labelled correctly?

Communication and Structure: Is the answer clearly written? Does it flow smoothly and logically? If a diagram or equation is used in the answer, are they properly integrated into the text with an accompanying explanation?

  1. ‘Lower wages incentivise the poor to work more hours, whereas higher wages incentivise the rich to work more hours.’ Analyse this assertion.
  • Explain why a proportional tax on wages is distortionary, making individuals worse off than raising the equivalent tax revenue from a lump sum tax.  
  • How worried should we be about the rise in the ratio of government debt to GDP? Are we imposing too high a tax burden on future generations?
  • Define the policy of quantitative easing. Is this a policy that is consistent with the underlying assumptions behind the Real Business Cycle model, the Keynesian Coordination Failure Model or the Small Open Economy model? Why or why not?
  • The UK current account surplus during 2019 was -3.1% of GDP, during the first quarter of 2020 was -3.4% and averaged -2.7% during the second and third quarters of 2020. Considering the large negative impact of the pandemic in the UK economy what would the Small Open Economy model predict and why? What do you think best explains the pattern we observe?

Part II (Exercises = 40 marks) Answer one and only one of the two questions below. Each question is worth 40 marks, with sub-questions marked as indicated. The word count will only apply to sub-questions that ask for explanations or discussion. The same criteria as used in Part I will be applied to marking such questions. On mathematical sub-questions, show all the steps in your derivation or calculations in a systematic and orderly way.  Also, round of numerical values to two digits if needed.

  1. You are a newly hired economist working at the Treasury in early March 2020. Government ministers have been briefed that the growing Covid pandemic is likely to last at least four quarters. You have been tasked with modelling the potential immediate impact in the second quarter of 2020 of Covid and government plans to lockdown parts of the economy. Base your analysis on the Real Business Cycle model we studied in this module using appropriate diagrams:
  1. Analyse the predicted impact of the crisis on wages, employment, output, interest rates, average labour productivity and the price level.    [16 marks]
  2. According to the model, what is the likely impact of the crisis on investment? Why?                                                                                    [6 marks]
  3. What impact will the crisis have on consumption? Should we expect a difference between the behaviour of durable vs nondurable consumption? Explain.                                                                                          [6 marks]
  4. To contend with the crisis the government and the Bank of England discuss plans to increase government spending and increase the money supply. Use appropriate graphs from the Real Business Cycle model to explain what impact these policies might have on on wages, employment, output, interest rates, average labour productivity and the price level. You may assume that money demand is much more sensitive to interest rates than to output.                                                                                        [12 marks]
  • Evaluate the following statement. People do not save enough or invest enough in their education. What would be the arguments for and against government policies that encourage and increase in private savings and more investment in education. Hint: Using appropriate equations and graphs, consider the implications of both the Solow growth model and the endogenous growth model, but also their limitations when addressing these questions.                                                           [40 marks]

Type of assignment: Coursework

Subject: Economics

Pages: 8/2200

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