Report • This is an open book assessment item. No generative AI such as ChatGPT per- mitted. • This is an individual assessment item — group work is not permitted. • You have until 11.00h AEST on Oct 18, 2024 to 1) download and 2) work on the assessment item and to 3) upload your report. You are required to upload your report as a single, legible pdf file to the relevant TurnitIn folder. Please type your report with the possible exception of graphs. • Please keep your pdf file reasonably small (say ≤ 5MB). • You may email your pdf file to [email protected] as proof of your time of submission if you experience technical difficulties with uploading it. You then still have to upload the same pdf file to TurnitIn as soon as possible. • File formats other than pdf are not permitted. You may not submit multiple files. • Where an extension has not been approved, the following penalties apply to late or non-submission: A penalty of 10% of the maximum possible mark will be deducted per 24 hours from the time submission is due for up to 7 calendar days. Each 24 hour block is recorded from the time the submission is due. After 7 days, any submission will receive a mark of 0 unless an extension has been approved. • By undertaking this assignment you will be deemed to have made the following declaration: “I certify that – my submission is entirely my own original work, and no part of my answers has been copied from any other source or person except where due acknowl- edgement is made, – no part of the work has been previously submitted for assessment in this or any other institution, – I have neither given nor received any unauthorized assistance on this assess- ment item, and – I am familiar with and understand the implications of UQ’s policies relating to academic integrity and student conduct.” 1 ECON 7520 SEMESTER 2, 2024 In Lecture 5, we discussed the relation between fiscal deficits and current account imbalances. In our discussion, we assumed that the representative household has the utility function ln(C1) + ln(C2). (1) Consider now that the representative household is better modeled by a utility function of the form ln(C1 + αG1) + ln(C2 + αG2), (2) where α ∈ [0, 1] is a parameter and G1 and G2 are government expenditures in period 1 and 2, respectively. The household takes government expenditures as exogenously given. Write a report of up to approximately 1,000 words that answers the following questions. (a) In the baseline model of Lecture 5, the Ricardian equivalence holds. Does the Ricar- dian equivalence continue to hold even if the representative household is modeled by a utility function of the form (2)? (b) Consider that the government changes the timing of some government expenditures. In particular, assume that the government changes G1 by ∆G1 = ∆G 6= 0 and G2 by ∆G2 = −(1 + r1)∆G, where r1 denotes the interest rate on assets held between periods 1 and 2. For example, if ∆G < 0 then the government effectively postpones some spending by one period. Discuss how such a change in the government ex- penditure stream affects the consumption and current account balance. How does it affect your answer that (2) rather than (1) models the representative household? Structure. Structure your report into the 6 sections indicated in green below. Make sure to address all of the following bullet points: • Include a word count of your report (excluding equations, figures and references). • Consider including appropriate figure(s). • Introduction – Include a brief preview of your main findings. – Be concise. This section should be relatively short. • Model – Develop an appropriate model to answer (a) and (b) from above. – Include appropriate mathematical equations. • Real-world country – This section will be very brief. 2 ECON 7520 SEMESTER 2, 2024 – Name a real-world country to which your model might apply. – Explain in one sentence why your model is appropriate for the country. • Equilibrium – Derive the equilibrium of your model. – Include appropriate mathematical equations. – Discuss the equilibrium and provide economic intuition for your results. • Ricardian Equivalence – Answer (a) from above. – Provide economic intuition for your answer. • Policy Analysis – Answer (b) from above. – Include appropriate mathematical equations. – Provide economic intuition for your results. Marking. The grade of your report will be based on the thoughtfulness and clarity of logics in your explanations. Arguments that go beyond the lecture notes are viewed as an important way to demonstrate thoughtfulness (i.e. it is generally a good idea to leave more space/words to such arguments). Providing a concise and clear intuition for a result also demonstrates thoughtfulness. The following mark-breakdown is anticipated: • Introduction (10%) • Model (20%). • Real-world country (5%). • Equilibrium (25%). • Ricardian Equivalence (15%). • Policy analysis (25%).
