Assignment Remit
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Programme Title
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Department of Economics
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Module Title
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LI Macroeconomics
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Module Code
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08 29189
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Assignment Title
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Assignment (Supplementary)
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Level
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LI
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Weighting
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50%
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Hand Out Date
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7th July
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Deadline Date & Time
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12th August
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12pm
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Feedback Post Date
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16th working day after the deadline date
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Assignment Format
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Other
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Assignment Length
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See below
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Submission Format
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Online
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Individual
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Module Learning Outcomes:
This assignment is designed to assess the following module learning outcomes. Your submission will be marked using the Grading Criteria given in the section below.
1. Demonstrate knowledge and critical understanding of the concepts of ‘comparative static analysis’ and ‘dynamic macroeconomic equilibrium’;
2. Use the theoretical models developed throughout the module to analyse the impact of shocks and macroeconomic policy on aggregate economic variables;
3. Critically evaluate these theoretical models with reference to empirical evidence, including macroeconomic policy examples.
Assignment:
This assessment requires you to use diagrams, introduced in the lectures and classes, to consider a particular policy issue. You should not use any alternative theories or additional reading to support your analysis and will not receive any credit for doing so.
You are not permitted to use any Generative Artificial Intelligence (e.g. ChatGPT) in preparing your answer. This must be individual work – plagiarism checks are performed on all submitted assignments. You should upload your answer to Canvas in the usual way, as either a Microsoft Word file or a PDF file.
Question 1
Since the Labour Government came to power in the UK in July 2024, they have highlighted the difficult fiscal circumstances and focussed on the importance of delivering growth to the economy.
Using the Solow Model of Economic Growth (as discussed in the lectures), explain the long run implications of a fiscal deficit where Government expenditure is being used to fund current consumption rather than capital investment. Explain how the steady state would be impacted by a reduction in the deficit. Explain the change in the steady state that would happen if the government switched spending towards capital investment (e.g. infrastructure). What would happen to the Solow Model steady state if the Government increased support for innovative industries by reducing tax rates on firms while, at the same time cutting back on Government current consumption so that the budget deficit is not affected.
(The answer should contain diagrams, any explanatory equations and a text explanation of the diagrammatic analysis which must not exceed 200 words. Equations do not count in the word limit).
Additional notes for Question 1
You should use appropriate diagrams (discussed in lectures and classes) to support your answers. You are not required to provide derivations of the diagrams that you use and will not receive any marks for such derivation. Providing an appropriate diagrammatic analysis with supporting equations, based on what has been discussed in the lectures, is the key aspect of an answer to the question. You should briefly explain why you are using the diagram, what are the changes that you are making to it and why, and what is the final result.
Question 2
In the fiscal year 2023/24, the UK government collected £1.1 trillion in tax revenue and spent £1.2 trillion on public services and other obligations. The government therefore ran a deficit of £121 billion, which was equivalent to 4.4% of GDP at the time. Suppose the government wishes to reduce the gap between revenue and spending by temporarily increasing taxes levied on households without adjusting government spending.
(a) Present a fully-labelled diagram to show how this scenario can be depicted in the Dynamic Model of Economic Fluctuations studied in the lecture slides (and Mankiw, 2022, Chapter 16). Assume that this situation can be modelled as a persistent demand shock which affects households for two quarterly time periods (t and t+1) and disappears thereafter. Further assume that the economy begins and ends in a long-run equilibrium position. (75%)
(b) Provide a short explanation (maximum 200 words) to accompany your diagram. (25%)
Additional notes for Question 2
The diagram must be your own, it should be hand-drawn and you should use a ruler where appropriate. You may hand-write or type the paragraph of explanation.