# ECMB06_Assignment_2_(Summer_2008).doc

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University of Toronto Scarborough

Economics for Management Studies

MGEB06H3

Jack Parkinson

Summer

Description

ECMB06 – All sections
Macroeconomic Theory and Policy: Assignment 2
Due: Wednesday, July 30 2008, (Must be submitted on or before 1:30 pm)
th
(Note: Assignments submitted after 1:30 pm on July 30 WILL NOT BE accepted under
ANY circumstance.)
Instructions:
• You can submit individual or group assignment.
• If you submit group assignment, there should be no more than FIVE students in your
group and you just have to submit ONE copy. WORK WITH STUDENTS BELONGS
TO THE SAME GROUP ONLY (they can belong to ANY section of ECMB06).
MAKING YOUR ANSWER(S) AVAILABLE TO OTHER GROUP(S) PRIOR TO
THE DUE DATE WILL CONSITITUTE AN ACADEMIC OFFENSE.
• A title page MUST be attached with your assignment; it MUST include your name(s)
and student number(s).
• Staple your assignment (Paper clip is not accepted).
• A PENALTY OF 10% OF THE TOTAL MARKS WILL BE IMPOSED IF YOU DO
NOT HAVE A TITLE PAGE OR STAPLE YOUR ASSIGNEMNT.
• Label your graph(s); otherwise, marks will be subtracted.
• No credit will be given if you do not show your work.
• Your answer should be structured in a way such that those know little about economics
will have no difficulty in understanding your argument/answer.
• Total marks: 100 points.
Question 1 (25 points) – Chapter 6
Our textbook describes a derivation of the constant long-run or steady state unemployment rate
that results given certain assumptions. Here we entertain how making alternative assumptions
impacts the constant long-run rate of unemployment.
Long term demographic trends in our nation imply it is not realistic to assume we will have a
constant labour force. Given this we assume:
• The labour force will decline by 0.1 % per year (a constant rate per year) over the
next several decades.
• The constant rate of job finding (f) represents the percentage of the unemployed (U)
who find employment (in each/any period).
• The constant rate of job separation1(s ) represents the percentage of the employed (E)
who separate from a job and join the unemployed (U) group (in each/any period).
• All new labour force entrants start out by joining the unemployed (U) group (prior to
finding a job).
a) In this case we assume that all retirees and others exiting the labour force do so by leaving
the unemployed group (rather than directly leaving from a job).
Define:
ECMB06 Assignment 2 (Summer 2008) 1 • The constant rate of joining 1J ) represents new labour force entrants expressed as a
percentage of the (existing) labour force.
• The constant rate of leaving (J 2 represents labour force exits expressed as a
percentage of the (existing) labour force.
Derive the constant long-run unemployment rate (UR). Hint: What must be true to make the
unemployment rate a constant number over time. (8 points)
b) In this case we assume all retirees and others exiting the labour force do so by leaving the
employed group (i.e. they leave directly from a job).
Define:
• The constant rate of joining 1J ) represents new labour force entrants expressed as a
percentage of the (existing) labour force.
• The constant rate of leaving (s 2 represents labour force exits expressed as a
percentage of the (existing) pool of employed persons.
Derive the constant long-run unemployment rate (UR). Hint: What must be true to make the
unemployment rate a constant number over time. (8 points)
c) Suppose the employment rate is expected to remain at 65%, the rate of job separation1(s ) is
4.1%, the rate of job finding (f) is 46%, and 5% of the labour force exits or leaves each
period - then what is the constant long-run unemployment rate equal to for parts A & B?
Note: You must clearly indicate which part you are referring to in your answer (part A or B).
In each case (A or B) what is the participation rate equal to? Is it realistic to assume the
employment rate will remain constant? Explain why/why not. (9 points)
Question 2 (25 points) – Chapters 3, 4, & 5
Suppose you are given the following information:
Home Foreign
Labour share of income 67% 60%
Technological growth rate (TFP growth) 1.33% 1.8%
Growth rate of capital accumulation 5% 3%
Growth rate of labour 6% 5%
Growth rate of money supply 10% 5.5%
Percentage change in velocity of money 1% 1.7%
In the questions:
• All the growth rates are annual growth rates.
• Exchange rate is quoted as the number of units of foreign currency needed to exchange for
(buy) one domestic currency unit,FC/DC
• Purchasing power parity holds.
a) Find the growth rate of output in both countries. (Hint:

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