MACECHJ/101/0/2012

Tutorial letter 101/0/2012 Macroeconomics HONOURS

MACECHJ Year Module

Department of Economics This tutorial letter contains important information about your module.

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CONTENTS 1 INTRODUCTION AND WELCOME .................................................................................... 3 2 PURPOSE OF AND OUTCOMES FOR THE MODULE ..................................................... 3 2.1 Purpose ............................................................................................................................... 3 2.2 Outcomes ............................................................................................................................ 3 3 LECTURER AND CONTACT DETAILS ............................................................................. 4 3.1 Lecturers ............................................................................................................................. 4 3.2 University contact details ..................................................................................................... 4 4 MODULE RELATED RESOURCES ................................................................................... 4 4.1 Tutorial Letters .................................................................................................................... 4 4.2 Prescribed textbook and Reader ......................................................................................... 5 5 STUDENT SUPPORT SERVICES FOR THE MODULE ..................................................... 5 5.1 Study groups ...................................................................................................................................... 5 5.2 myUnisa ............................................................................................................................................. 5 5.3 Discussion classes ............................................................................................................................ 6 6 MODULE SPECIFIC STUDY PLAN ................................................................................... 6 6.1 Introduction and overview ................................................................................................... 6 6.2 Keynes and the classics ...................................................................................................... 9 6.3 Keynesian economics: some interpretations of Keynes's work .......................................... 9 6.4 Later schools of thought in the classical tradition .............................................................. 11 6.5 Economic growth ............................................................................................................... 11 6.6 Inflation .............................................................................................................................. 12 6.7 Unemployment .................................................................................................................. 13 6.8 Reflection and overview .................................................................................................... 13 6.9 Study programme .............................................................................................................. 13 7 MODULE PRACTICAL WORK AND WORK INTEGRATED LEARNING ........................ 14 8 ASSESSMENT .................................................................................................................. 14 8.1 Assessment plan ............................................................................................................... 14 8.2 The assignments ............................................................................................................... 14 8.3 The examination ................................................................................................................ 17 8.4 Assignments ...................................................................................................................... 19 9 EXAMINATIONS ............................................................................................................... 46 10 OTHER ASSESSMENT METHODS ................................................................................. 48 11 FREQUENTLY ASKED QUESTIONS .............................................................................. 48

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3 LECTURERS AND UNIVERSITY CONTACT DETAILS

3.1 Lecturers The lecturers responsible for this course are as follows: Lecturer Building & office

number Telephone number e-Mail address

Prof D Hodge (course leader) Mr B Serfontein Prof E Ziramba

AJH 5-77 AJH 5-87 AJH 5-106

(012) 429-4075 (012) 429-4005 (012) 429-4486

hodged@unisa.ac.za serfofhb@unisa.ac.za zirame@unisa.ac.za

Only queries that are about the content of this course should be directed to us. Please have your study resources with you when you contact us. Administrative queries should be directed to the relevant Administrative department using the Unisa SMS or e-mail contact details (see also section 3.2 below). 3.2 University contact details If you need to contact the University about matters not related to the content of this course (such as registration and other administrative queries), please consult the publication my Studies @ Unisa that you received with your study package when you registered. This booklet contains information on how to contact the University (e.g. to whom you can send SMS or e-mail for different queries, important telephone and fax numbers, addresses and details of the times certain facilities are open). Always have your student number at hand when you contact the University. 4 MODULE RELATED RESOURCES PLEASE NOTE: Your lecturers cannot help you with missing study items. Please contact

the University by SMS or e-mail in this regard. 4.1 Tutorial letters The Department of Despatch should supply you with the following study resources for this course: • Tutorial Letter 101 • A Reader for macroeconomics (Reader for MACECHJ)

Apart from Tutorial Letter 101, you will also receive other tutorial letters during the year. These tutorial letters will not necessarily be available at the time of registration. Tutorial letters will be sent to you as soon as they are available or when they are needed (for instance, for feedback on assignments). If you have access to the Internet, you can view the tutorial letters for the courses for which you are registered on the University’s online campus, myUnisa, at http://my.unisa.ac.za.

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5.3 Discussion classes We intend to have discussion classes in this course in Pretoria in May and September. You will be notified of the dates and venues in a separate tutorial letter. 6 MODULE SPECIFIC STUDY PLAN VERY IMPORTANT: There is a lot of reading and studying to be done for this course. We do not expect you to necessarily master all the details of every topic. As you read and study the prescribed work, your main focus should be on identifying and understanding the main features of the different schools of thought, theories and models. In other words, your aim should be to get the BIG PICTURE by identifying and focusing on the most important aspects and issues in each case. For example, what are the main features of the original Keynes and the different interpretations of Keynes that followed his General Theory, orthodox monetarism, new classical economics etc? What are the views of new Keynesians on certain topics and how do they compare and contrast with those of the other schools of thought? What are the proximate and fundamental sources of economic growth? In other words, you need to extract the essential information from the much wider prescribed reading in each case. 6.1 Introduction and overview Snowdon and Vane: Preface, xiv-xvi; Chapter 1, 1-35. Reader: Unisa (2002). This course focuses on the development of macroeconomic thought since the 1930s. In section 6.1 of the course above, we start with an introduction to and overview of the main schools of thought. The prescribed reading here is from Snowdon and Vane (2005) and an edited chapter from the third-year study guide for ECS305-H (Economic Policy in South Africa) titled “The evolution of thinking on macroeconomic theory and policy” (Unisa 2002). The latter has been included in the Reader for Macroeconomics, since it also gives a useful summary of the ideas of some of the main schools of thought. Section 6.2 is entitled "Keynes and the classics" and studies the major debate and controversy generated by the publication of John Maynard Keynes's General theory of employment, interest and money (the General Theory) in 1936. Keynes started off by sketching what he believed to be the conventional view of how the economy functions at the macroeconomic level and called this the Classical theory. He then set about criticising this theory and replacing it with his own (allegedly more general) theory. You should be able to identify and explain the key features of the Classical theory as well as those of the General Theory. Moreover, you must be able to identify the main differences between Keynes and the Classical school. Note that you do not have to study the finer details of graphs and equations that you have already studied at the undergraduate level (e.g. the equations and the derivation of the multiplier). You must concentrate on the BIG PICTURE, try to FOCUS on the main issues and try to understand the LOGIC of the various arguments. At postgraduate level you have to read more widely than a textbook. In particular, you are expected to read some of the original works. At this level, we do not merely want you to know what Keynes or Hicks is supposed to have said. We want you to read what they actually said. As far as section 6.2 is concerned, you must read the 35 pages extracted from the General Theory, as well as Keynes's 1937 article in which he summarised his general theory of employment. It is not always easy reading, in fact, it is often quite difficult, but you must study these writings to see first-hand what Keynes actually wrote.

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markets play an important role and the presence of market failures requires appropriate govern-ment intervention. Another, more conventional or mainstream, variety of Keynesianism is called new Keynesian economics, which includes some aspects of new classical economics (see below), such as the idea that macroeconomics requires a solid microeconomic foundation. Most (but not all) members of the new Keynesian school also assume that expectations are formed rationally (see below). The new Keynesians are a heterogeneous group but they all tend to focus on market imperfections and wage and price rigidities. Certain aspects of this school will be examined in this course, the main purpose again being to get an overview of the core ideas and models. Having dealt with varieties of Keynesianism, we turn, in Section 6.4, to offshoots of classical economics. The first is orthodox monetarism, which is associated largely with Milton Friedman. An original article by Friedman (1968) on the role of monetary policy is included in the prescribed reading, along with the other sources that you have to study. Once again you have to focus on the key features of this particular line of thought, as well as the differences between orthodox monetarism and the other schools of thought. The other offshoot of classical economics dealt with in this section is the new classical school. A key aspect of this school is rational expectations. You have to study the prescribed sources to determine what is meant by "rational expectations", how it differs from other approaches towards including expectations in macroeconomic theories and which one of the various approaches is the most promising. Expectations are a key variable in macroeconomics and it is important to decide how best to include expectations in macroeconomic theory. The new classical assumption of perfectly competition and continuous market clearing equilibrium and their view of the labour market and aggregate supply will also be examined. In section 6.5, the focus shifts to the basic measurement of economic growth, the causes of economic growth, why growth rates differ between different countries and different regions, and on policies that can be applied to encourage economic growth. Much of macroeconomics, of course, is directly or indirectly related to the issue of the size and growth of total production, income and expenditure but in this section we focus a bit more narrowly on economic growth, a particularly topical issue in South Africa at present, especially in view of the various initiatives by the government to try to raise the country’s sustainable growth rate over the longer term. In this section of the course, compared with previous sections, there is an important shift of emphasis away from the concern with stabilisation policy over the short to medium term towards the causes and consequences of changes and regional differences in economic growth over the long run. Even small percentage changes in economic growth rates will result in large accumulated changes in output (and thus employment) if sustained over a long period of time. In this section you will study various models of economic growth and how thinking about the determinants of long run economic growth has changed over time. The articles by Collier and Gunning (1999) and Dube, Hausmann and Rodrik (2007) examine the possible factors determining or constraining growth in Africa and South Africa respectively. In this section and in sections 6.6 (inflation) and 6.7 (unemployment) we expect you to be aware of developments in the South African economy (or an economy with which you are more familiar) in these respects and to make a habit of reading the relevant financial and economic news media accordingly (for example, Business Day, The Financial Mail and Finance Week – some of these are accessible for free on the internet). Common sense may be used as far as these matters are concerned. Sections 6.6 and 6.7 cover the important topics of inflation and unemployment respectively. As with economic growth, most thinking in macroeconomics is concerned either directly or indirectly

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6.3.2 Orthodox Keynesianism (also called the neoclassical synthesis, “hydraulic Keynesianism” or simply the IS-LM model)

Snowdon and Vane: 15-24, 101-147. Reader: Unisa (2002). Coddington (1976). Hicks (1937). Krugman (2000). 6.3.3 Disequilibrium Keynesianism Snowdon and Vane: 71-75 (the modified general equilibrium approach). Reader: Coddington (1976). 6.3.4 The new Keynesian school Snowdon and Vane: chapter 7, 357-450. Although we strongly advise you to read the whole chapter, including the interview with Gregory Mankiw at the end of the chapter, your focus should be on the following chapter sections: 7.1 Fall and rise of Keynesian economics (357-358) 7.2 Keynesian resurgence (358-361) 7.3 New Keynesian economics (361-363) 7.4 Core propositions and features (363-366) 7.8 New Keynesian business cycle theory (396-401) 7.10 Stylized facts (408-409) 7.11 Policy implications (409-419; 422-423) 7.12 Criticisms (428-431) 7.13 Assessment (431-432) Reader: Krugman (2000). 6.3.5 The Post Keynesian school Snowdon and Vane: chapter 8, 451-473. Reader: Unisa (2002). Coddington (1976). The main feature of the Post Keynesian school of thought is that some of Keynes’s original ideas which led to his fundamental break with the old classical model have been either ignored or grossly distorted in the subsequent interpretations and modifications of his work, both by the orthodox (IS-LM) Keynesian school and the “new Keynesians”. Post Keynesians are unified in their attempts to return to the original essence of Keynes’s ideas although there is room for disagreement on exactly what this entails. Chapter 8 in Snowdon and Vane written by Paul Davidson, a leading Post Keynesian economist, is not an easy chapter to read and understand at first. Try to grasp the basic arguments presented by Davidson. In this regard you need to focus on the fundamental building blocks of Post Keynesian theory, namely:

the non-neutrality of money; the existence of non-ergodic uncertainty in some important decision-making aspects of

economic life; and the denial of the ever-present gross substitution axiom.

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You should then read the relevant sections from chapter 10 (there is some overlap between the topics of economic growth and the new political macroeconomics) followed by chapter 11 in the prescribed textbook, including the interviews, with the following chapter sections being the most pertinent:

10.16 The political economy and economic growth (556-562) 10.17 Political barriers to economic growth (562-564) 10.18 The size of nations (564-565) 11.1-11.6 (579-595): Read as background 11.7 Stylized facts (595-596) 11.8 Proximate vs. fundamental causes (596-598) 11.9 Harrod-Domar model (598-602) - only the main features and implications, not the

detail 11.10 Solow model (602-212) - only the main features and implications, not the detail 11.11 Sources (612-614) 11.12 Convergence (614-622) – focus on the possible causes of economic growth 11.13-11.15 Endogenous growth (622-632) 11.17 Fundamental causes (633-635) 11.18 Institutions (635-647) 11.19 Trade (647-652) 11.20 Geography (652-654) 11.21-11.22 Causes (654-659) The other articles in the Reader by Collier and Gunning (1999) and Dube, Hausmann and Rodrik (2007) give another perspective on the causes of and constraints on economic growth as applied to sub-Saharan Africa and South Africa in particular. Try to grasp the essential points and arguments made by these authors rather than get lost in the finer details. 6.6 Inflation 6.6.1 Definition and measurement Reader: Mohr and Fourie (2004). Smal (1998). 6.6.2 Costs and effects Snowdon and Vane: 247-249, 411-413. Reader: Mohr and Fourie (2004). Unisa (2002). Smal (1998). Solow (1975). 6.6.3 Causes Reader: Mohr and Fourie (2004). 6.6.4 Inflation targeting Snowdon and Vane: 413-419. Reader: Mohr and Fourie (2004).

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ASSIGNMENT 3 24 September SU7 6.6 inflation 25 September – 20 November 6.7 unemployment 6.8 reflection and overview EXAMINATION REVISION 21 November – EXAM 7 MODULE PRACTICAL WORK AND WORK INTEGRATED LEARNING There is no practical work or work integrated learning exercises for this module. 8 ASSESSMENT 8.1 Assessment plan Assessment comprises both formative and summative assessment. The assessment method (e.g. the type and difficulty of questions) in each case is decided by your course leader in consultation with the other members of the team for this course. Formative assessment in this course is the mark you get for your assignments throughout the year. There are three equally weighted assignments and the year mark for your assignments contributes 10 percent to your final mark. Summative assessment is the mark you get for your examination to be written in January/February 2013. The examination mark is 90 percent of your final mark. Thus your final mark depends on the marks you get for the assignments and the examination as follows: Year mark (10%) + Examination mark (90%) = Final mark (100%). 8.2 The assignments 8.2.1 Purpose of the assignments The assignments are the main vehicle for the learning process in this course. As you do the assignments, study the prescribed reading, discuss the work with fellow students or tutors, test your knowledge and understanding by answering the multiple choice questions, write drafts of your essays and modify these accordingly, you are actively engaged in learning. An important part of this process is revision after you get feedback on your assignments. You are encouraged to learn from your mistakes by going back over the work you have done for the assignments to see where you went wrong. You should do this as soon as you get feedback on an assignment in the form of your TL200 series. This means that ‘learning by doing’ rather than 'passing' or 'failing', is the key feature and intention of the assignments. Assignments are also used as an incentive for you to start your studies early, to study continuously throughout the year and as a way of awarding you a year mark accordingly. 8.2.2 Enquiries about assignments Administrative enquiries about assignments (e.g. whether or not the University has received your assignment or the date on which an assignment was returned to you) must be addressed to the Unisa SMS or e-mail address. You may also find information about the assignments on myUnisa. For queries you may have about the content of the assignment questions you may contact the lecturers for this course.

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Assignment Due date Date received Mark 1 30 April 05 May 55 2 09 July 19 July 32 3 24 Sept 20 Oct 0

Year mark = 2.90 out of 10 Calculation of year mark: (55 + 32 + 0) / 3 = 87 / 3 = 29% Divide this percentage by 10 to get the mark out of 10: 29 / 10 = 2.90 The marks were calculated as follows: Assignment 1 was received late, but within the one-week grace period. Thus there is no penalty. Assignment 2 was received late, but within the two-week partial penalty period. The mark earned is halved. Thus a mark of 64% is halved to 32%. Assignment 3 was received late, and after the three weeks past the due date deadline. The full penalty is applied and zero marks are awarded. Example B

Assignment Due date Date received Mark 1 30 April 20 May 28 2 09 July 15 July 64 3 24 Sept 24 Sept 76

Year mark = 5.60 out of 10 Calculation of year mark: (28 + 64 + 76) / 3 = 168 / 3 = 56 percent Divide this percentage by 10 to get the mark out of 10: 56 / 10 = 5.60 The marks were calculated as follows: Assignment 1 was received late, but within the two week partial penalty period. The mark earned is halved. Thus a mark of 56% is halved to 28%. Assignment 2 was received late, but within the one week grace period. Thus there is no penalty. Assignment 3 was submitted on time. Thus there is no penalty. The following are ways in which you can ensure that your assignments are received by the due date:

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8.3.3 Examination mark subminimum There is a sub-minimum of 40 percent for the examination. In other words, you must obtain at least 40% in the examination to pass the course, even if you have a year mark of (say) 90%. Put differently, if you obtain less than 40%, the year mark will not count. 8.4 The assignments 8.4.1 Assignment due dates The dates on which the assignments are due in 2012 are as follows: Assignment 01 30 April Assignment 02 09 July Assignment 03 24 September 8.4.2 Assignments 01 and 02: multiple-choice questions Assignments 01 and 02 each comprise 50 multiple choice questions. Many of the questions for Assignment 01 are revision type questions on work you are expected to have covered in economics at undergraduate level. Submission of Assignment 01 is required for admission to the examination. There is no negative marking of the multiple-choice questions. 8.4.3 Assignment 03: instructions for answering the essay questions For Assignment 03 you must answer two essay (or paragraph) questions. Only one of the essay questions will be assessed and marked. If you only complete an answer to one essay question and it is not the question selected for assessment, then you will get zero marks for that assignment. 8.4.4 Feedback on the assignments You will get feedback on the assignments in tutorial letters TL201, 202 and 203. TL201 and TL202 will contain page references to the prescribed reading for each of the 50 multiple choice questions. TL203 will contain feedback in the form of guideline answers to both essay questions in Assignment 03. The tutorial letters will be sent to you about three weeks after the due dates for the assignments. For Assignments 01 and 02 you should study the relevant prescribed reading again in the case of incorrect answers to see where you have gone wrong and thus how you could have got a better mark accordingly. For Assignment 03, you are expected to compare your marked essay to the guideline answer and the prescribed reading to see why you have got a particular mark and what you would need to do to improve your mark. You are also expected to compare your unmarked essay to the guideline answer as a self-assessment learning exercise.

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2. In the classical model of the labour market, voluntary unemployment will decrease if: [1] the leisure preference of workers decreases. [2] technological progress shifts the production function upwards. [3] real wages are set above the market equilibrium level. [4] All of the above. [5] None of the above.

3. Which of the following may result in involuntary unemployment according to the classical

theory?

[1] Wage and price controls. [2] Monopoly pricing power of firms. [3] Flexible wages and prices. [4] Incomplete information about job opportunities. [5] None of the above.

4. Which of the following is consistent with the classical explanation of the economy?

[1] Voluntary unemployment. [2] Frictional unemployment. [3] Full employment. [4] None of the above. [5] All of the above.

5. In the classical theory of employment and output:

[1] output determines employment which determines aggregate demand. [2] aggregate demand determines output which determines employment. [3] output determines aggregate demand which determines employment. [4] employment determines output which determines aggregate demand. [5] None of the above.

In questions 6-10 according to the classical theory:

6. The nominal demand for money will increase if:

[1] real output increases. [2] the price level increases. [3] nominal output increases. [4] None of the above. [5] All of the above.

7. An increase in the money supply will lead to:

[1] an increase in the nominal interest rate. [2] a decrease in the real interest rate. [3] an increase in the real interest rate. [4] a decrease in the nominal interest rate. [5] None of the above.

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13. According to Tobin (1993) an important distinction between classical and involuntary unemployment is that: [1] involuntary unemployment indicates an excess supply of labour while classical

unemployment does not. [2] involuntary unemployment is the unemployment at the natural rate of unemployment. [3] classical unemployment requires a decline in the real wage while involuntary

unemployment requires an increase in demand. [4] the removal of labour market regulations that restrict wages from falling can solve

involuntary unemployment but not classical unemployment. [5] involuntary unemployment is associated with real wages above while classical

unemployment is associated with real wages below their full employment equilibrium value.

14. With regards to the classical labor market Keynes argue that: a. workers will not withdraw their labour in the event of a small rise in the price level. b. even if nominal wages are flexible it will not bring about a decrease in real wages. c. labour is not in a position to determine real wages through nominal wage bargaining. [1] All of the above. [2] None of the above. [3] a b [4] a c [5] b c

15. Skidelsky (2011) argues that according to Keynes, labour will resist a decrease in nominal wages since: [1] they suffer from money illusion. [2] it decreases the real wage which is unacceptable to labour. [3] it changes the relative position of workers. [4] it leads to higher unemployment. [5] it lowers the price level.

16. According to Keynes involuntary unemployment can be dealt with: a. a decrease in nominal wages which causes a decrease in real wages and

consequently firms employ more workers. b. by ensuring that there is nominal wage flexibility in the economy. c. by decreasing real wages through an increase in the price level brought about by an

increase in aggregate demand. [1] All of the above. [2] None of the above. [3] a [4] b [5] c

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[1] All of the above. [2] None of the above. [3] a b [4] a c [5] b c

21. According to Keynes the volatility of investment spending is mainly due to: [1] changes in the interest rate. [2] the volatility of savings. [3] expectations of future profitability of investment. [4] changes in the marginal propensity to consume. [5] changes in fiscal policy.

22. According to Keynes, an increase in investment spending will have the following consequences: a. Savings will increase. b. Consumption spending will increase. c. Output will increase by more than the increase in investment spending. d. Employment will decrease. [1] All of the above. [2] a b [3] a b c [4] b c d [5] c d

23. The following behavioural function for consumption C = a + cY indicates that: [1] consumption is a negative function of output and income. [2] is a negative function of the interest rate. [3] depends on income and the marginal propensity to consume. [4] an increase in income cause an equal increase in consumption spending. [5] None of the above.

24. Regarding investment, Keynes argued that:

[1] investment will increase if there is an increase in saving. [2] expectations of future profitability leads to stability in investment spending. [3] the volatility of investment spending leads to fluctuations in employment. [4] All of the above. [5] None of the above.

25.

26.

27.

28.

Accordinincrease [1] The

hen[2] Tax

hol[3] Inc[4] All [5] No

In the IS a. an

in ub. an

invc. an

inv [1] All [2] a b[3] a c[4] b c[5] a

In the IScontract [1] in b[2] for

hig[3] for [4] No[5] All

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inv[3] an

rate[4] All [5] No

ng to Keyne the level

e money snce increaxation canlds. creased goof the abo

one of the a

S-LM mode

increase iunemploymincrease i

vestment spincrease i

vestment sp

of the abob c

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S-LM modionary fisc

both instanmonetary

gher. monetary

one of the aof the abo

ng out occu

increase iincrease

vestment spincrease

e rises. of the abo

one of the a

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supply cansed invest

n be decre

overnment ove. above.

el the end r

n the demment. n the demapending. in the supppending.

ove.

del, when al policy:

nces the dey policy the

policy inveabove. ove.

urs in the IS

n governmin govern

pending. in governm

ove.. above.

25

ollowing acand employ

n be incretment speneased to a

spending.

result of an

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and for mo

ply of mon

comparing

emand for e interest r

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26

29. Which of the following will decrease the impact of an expansionary monetary policy on the level of output? a. A high interest elasticity of investment spending. b. A high interest elasticity of the demand for money. c. A small multiplier. [1] a b [2] a c [3] b c [4] All of the above [5] None of the above

30. If the IS-LM model is modified by including perfectly flexible wages and prices, the following

general results are obtained: [1] An underemployment equilibrium is reached under all conditions. [2] The existence of involuntary unemployment is the norm. [3] The demand determined level of employment will not be at the full employment level. [4] The Keynes effect will ensure that full employment is reached. [5] None of the above.

31. In the IS-LM model with perfectly flexible wages and prices, involuntary unemployment occurs due to: [1] the Pigou effect. [2] the Keynes effect. [3] a low interest elasticity of investment spending. [4] the wealth effect. [5] All of the above.

32. Coddington classifies the IS-LM model as part of:

[1] Fundamentalist Keynesianism since it is a rejection of the reductionist program. [2] Hydraulic Keynesianism since it embodies the idea that there are stable relationships

between macroeconomic flows. [3] Reconstituted reductionism since it abandons equilibrium theorizing. [4] Hydraulic Keynesianism since it explains inflexible wages and prices as part of rational

behavior. [5] Fundamentalist Keynesianism since it incorporates rational expectations.

33.

34.

35.

36.

37.

Accordin [1] pol[2] a r

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hodox Keyn

ere is a stae rate of in

labour. provides t

nations. rmanently ation. of the abo

f the follow

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exible pricee principle

man’s ress will incre

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one of the a

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with a lowerflexible thent.

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27

llips curve:

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28

38. According to orthodox monetarists like Friedman:

[1] the velocity of circulation of the money stock (V) is constant. [2] an increase in the money supply leads to a fall in the interest rate and hence an

increase in investment spending. [3] increases in the money supply lead to increases in nominal income. [4] the money supply is mainly a function of the demand for credit. [5] All of the above.

39. Orthodox monetarists assert that changes in the price level are the result of prior changes in: [1] nominal income. [2] the interest rate. [3] the money supply. [4] the demand for money. [5] All of the above.

40. In terms of the IS-LM model, the extreme monetarist argument is that the:

[1] IS curve is horizontal. [2] LM curve is vertical. [3] IS curve is vertical. [4] LM curve is horizontal. [5] None of the above.

41. Which of the following summaries of empirical evidence best supports the orthodox monetarist position?

[1] Changes in the money supply bear no clear relationship to changes in the business

cycle. [2] The money supply rises on average during both economic contractions and expan-

sions. [3] The money supply increases at a faster rate during economic expansions than contrac-

tions. [4] The money supply increases at a faster rate during economic contractions than expan-

sions. [5] None of the above.

42. At the natural rate of unemployment:

[1] the inflation rate is rising. [2] real wage rates are rising. [3] the inflation rate is constant. [4] real wage rates are falling. [5] the inflation rate is zero.

43.

44.

45.

46.

47.

Friedmalowered:

[1] by [2] by [3] by [4] in t[5] No Which oinflation

[1] The[2] An

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rate[4] A c

infl[5] The

In Friedm

[1] inc[2] inc[3] low[4] inc[5] inc

In Friedm

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Monetar

[1] lea[2] lea[3] not[4] be [5] res

an’s concep:

stable molowering rpolicies th

the short ruone of the a

of the followare formed

e expectedincrease

ation rate.increase i

e. change in ation rate.e expected

man’s inter

crease bothcrease realwer the natcrease bothcrease real

man’s inter

th money aoney wagesal wages inal wages deoney wages

ry policies

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rpretation o

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29

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30

In questions 48-50, which statement best summarizes Friedman’s views on the role of monetary policy?

48. Monetary policy should best be conducted by:

[1] controlling the price level. [2] controlling the money supply. [3] targeting the exchange rate. [4] targeting the inflation rate. [5] All of the above.

49. Monetary policy can:

[1] counteract sharp fluctuations in output and employment. [2] generally be used to stabilize the business cycle over time. [3] increase growth and employment at the cost of a high rate of inflation in the long run. [4] prevent the occurrence of contractions in output and employment if used sensibly, such

as following a fixed monetary growth rate rule. [5] All of the above.

50. Monetary policy cannot:

[1] lower real interest rates in either the short or the long run. [2] lower the unemployment rate in the short run. [3] prevent inflation rising in the long run. [4] avoid engaging in successively larger open market operations. [5] lower nominal interest rates in the medium to longer term.

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32

2. Which of the following is (are) a feature of Lucas’s theory of the business cycle?

[1] Voluntary unemployment. [2] Perfect competition. [3] Announced changes in monetary policy have no effect on real output. [4] Only changes in relative prices affect employment and output. [5] All of the above.

3. Which of the following is (are) a feature of new classical economics but not orthodox monetarism?

[1] The possibility of a short-run trade-off between inflation and unemployment. [2] A vertical long-run aggregate supply curve at the natural rate of unemployment. [3] Long run neutrality of money. [4] Continuous market clearing equilibrium. [5] None of the above.

4. In the context of new classical models, Walrasian general equilibrium means that: [1] there is continuous optimising equilibrium in all markets. [2] voluntary unemployment cannot occur. [3] no trade-off between inflation and unemployment is possible. [4] money is always neutral. [5] All of the above.

5. The weak version of the rational expectations hypothesis implies that:

[1] irrelevant information is ignored in forming expectations. [2] workers, consumers and firms are utility and profit maximizers. [3] expectations are conditional on current information. [4] there is no serial correlation of forecast errors over time. [5] All of the above.

6. The weak version of the rational expectations hypothesis implies that workers, consumers and firms:

[1] have perfect foresight. [2] know the true model of the economy (or relevant part thereof). [3] make use of all available information. [4] know the probability distribution of outcomes following relevant events (such as a

change in monetary policy). [5] None of the above.

7.

8.

9.

10.

11.

The stroand firm

[1] hav[2] do [3] for

the[4] All [5] No

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wo[3] inv

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ow[2] out[3] out[4] All [5] No

ong versions:

ve perfect not make m expecta

e economyof the abo

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33

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34

12. Lucas’s monetary theory of the business cycle: [1] explains why output and inflation are procyclical. [2] assumes that economic agents do not have perfect information about the economy. [3] assumes that prices and wages are perfectly flexible. [4] demonstrates the circumstances under which money is not neutral. [5] All of the above.

13. According to Lucas’s theory of the business cycle, an expansionary monetary policy will: [1] only affect the level of output and unemployment in the long run. [2] only affect the natural rate of unemployment in the short run if it is unanticipated. [3] have a greater affect on output, the smaller is the deviation of the actual from the

expected price level. [4] All of the above. [5] None of the above.

14. Which of the following is not a policy implication of new classical theory?

[1] Only transparent and well communicated changes in monetary policy will have any

effect on output and unemployment in the short run. [2] Only a rule based framework for monetary policy (such as inflation targeting) can have

any effect on output and unemployment in the short run. [3] Fiscal policy is more effective than monetary policy in influencing output and

unemployment in the short run. [4] The more credible is the central bank, the less is the output sacrifice necessary to bring

down inflation. [5] None of the above.

15. According to the dynamic time inconsistency analysis of Kydland and Prescott, discretionary monetary policy: [1] tempts the central bank to deviate from announced policy commitments in the future. [2] is more likely than a monetary rule to achieve the optimal combination of inflation and

unemployment. [3] can keep unemployment below the natural rate but only at the cost of higher inflation. [4] will ultimately lead to higher inflation and higher unemployment than would be the case

if the central bank committed itself to a monetary rule consistent with price stability. [5] None of the above.

16. According to the time inconsistency model of Barro and Gordon, discretionary monetary policy is constrained by: [1] the central bank’s desire to maintain credibility. [2] the trade-off between current output gains from cheating and the future costs thereof. [3] the central bank’s preference for lower unemployment now at the cost of higher inflation

and unemployment in the future. [4] All of the above. [5] None of the above.

17.

18.

19.

20.

21.

The inflaBank is [1] dis[2] goa[3] ins[4] a m[5] All

The empassociat [1] low[2] low[3] low[4] no [5] No

Accordin [1] inc[2] low[3] imp[4] inc[5] All The Luc [1] bec

imp[2] pol

theacc

[3] becthe

[4] uncfun

[5] All

Which oclassica [1] The[2] The[3] Co[4] Vo[5] The

ation targean exampl

scretionary al indepen

strument inmoney supof the abo

pirical evidted with:

wer inflationwer inflationwer inflation

significantone of the a

ng to new c

crease aggwer the supprove the f

crease the of the abo

cas critique

cause exppossible. licy changee equationcount of thcause ratioe effects ofcertainty ndamentallof the abo

of the followl economic

e rational ee neutrality

ontinuous oluntary unee policy ine

eting framele of:

policy. dence. dependenply growth

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dence rega

n. n and highn and lowet differenceabove.

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ove.

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es lead to s being eis are unreonal econof such chanabout poy flawed a

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35

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conomists

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36

22. The outcomes of the Reagan (USA) and Thatcher (UK) deflations in 1980-82 throws doubt on which of the following features of new classical economics? [1] The policy ineffectiveness proposition. [2] Monetary equilibrium business cycle theory. [3] The neutrality of money. [4] The signal extraction problem. [5] All of the above.

23. The main contribution of new classical economics to the development of macroeconomics appears to have been: [1] rational expectations and dynamic time inconsistency policy analysis. [2] the concept of the natural rate of unemployment. [3] the policy ineffectiveness proposition. [4] equilibrium business cycle theory. [5] All of the above.

24. Krugman (2000) [see Reader] argues that the search for micro-foundations for the aggregate supply function has only really succeeded with regard to:

[1] the Lucas signal extraction confusion model. [2] price stickiness. [3] the natural rate hypothesis. [4] the permanent income/life-cycle approach. [5] All of the above.

25. Krugman (2000) argues that macroeconomic models that are more fully specified with regard to the rationality postulate and their micro-foundations: [1] are superior to simpler ad hoc models such as the IS-LM model. [2] are more realistic and thus a better guide to policy than cruder ad hoc models. [3] have not been very successful empirically and should thus be ignored in favour of IS-

LM models. [4] have not succeeded because they are too complicated and thus contain logical

inconsistencies. [5] None of the above.

26. A fundamental challenge faced by Keynesians during the 1970s was:

[1] the incorporation of expectations in their models. [2] the modification of the standard Phillips curve. [3] the incorporation of supply shocks in their model. [4] providing micro foundations for non-market clearing. [5] None of the above.

27.

28.

26.

27.

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38

Questions 31 to 40 refer to the diagram on page 397 of the text book. 31. According to this version of the new Keynesian business cycle theory the above events

caused a:

[1] leftward shift of the aggregate demand curve. [2] rightward shift of the aggregate demand curve. [3] leftward shift of the long run aggregate supply curve. [4] rightward shift of the short run aggregate supply curve. [5] None of the above.

32. If prices are fully flexible:

[1] the aggregate demand curve does not shift and the economy stays at point E0 in diagram (a).

[2] the aggregate demand curve shifts to the left and the economy stays at point E1 in diagram (a).

[3] the aggregate demand curve shifts to the left and the economy moves to point E2 in diagram (a).

[4] the short run aggregate supply curve shifts downwards and the economy moves to point E2 in diagram (a).

[5] the long run aggregate supply curve shifts to the left and the economy moves to point E1 in diagram (a).

33. Nominal price rigidity at point E1 arises:

[1] because firms have some control over the price of their products. [2] due to near-rational behaviour by firms. [3] due to coordination problems between firms. [4] due to the existence of menu costs. [5] All of the above.

34. The reason firms move off their notional demand for labour curve is:

[1] because wages are fully flexible. [2] because prices are fully flexible. [3] because wages are only rigid upwards. [4] because wages are only flexible downwards. [5] None of the above.

35. Involuntary unemployment increases:

[1] due to wage rigidity. [2] since the decrease in output decreases the demand for labour. [3] since the lower real wage decreases the supply of labour. [4] None of the above. [5] All of the above.

36.

37.

38.

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41. Skidelsky (2011) argue that a contributing factor to the severity of the Great Recession was caused by: [1] the rigidity or prices and wages that impeded the adjustment of the economy. [2] an increase in the marginal efficiency of investment due to a loss of confidence. [3] increased liquidity preference. [4] wrong expectations. [5] flexible prices and wages.

42. Credit market imperfections can increase the severity of a recession since: [1] there is symmetric information about creditors. [2] credit rationing takes place. [3] cost of credit declines. [4] financial institutions are less risk averse. [5] None of the above.

43. In considering the impact of menu cost on the economy Mankiw argue that: [1] menu costs are an important cause of nominal wage rigidity. [2] since menu cost are an insignificant cost for the firm it has very little impact on the

economy. [3] menu cost as an explanation of price rigidity can be ignored. [4] it has a large external cost on the economy. [5] None of the above.

44. On the issue of the natural rate of unemployment Mankiw argue that: [1] the concept full employment is a better concept to use. [2] it can be influenced by monetary policy. [3] the economy automatically moves to it in the short run. [4] it is influenced by labour market policies. [5] it is a concept that should be ignored.

45. Which of the following is not part of new Keynesian policies? [1] A more flexible labour market where the power of labour is reduced. [2] Steering away from “fine tuning” in favour of “coarse tuning”. [3] Fiscal policy measures are to be used in deep recessions. [4] Designing fiscal and monetary fixed rules based polices to deal with a changing

economy. [5] Credibility of monetary policy.

46.

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42

8.7 Assignment 03

ASSIGNMENT 03

DUE DATE: 24 September 2012

UNIQUE NUMBER: 320528

For Assignment 03 you must answer two essay questions. Only one of the essay questions will be assessed and marked. If you only complete an answer to one essay question and it is not the question selected for assessment, then you will get zero marks for that assignment. Each essay should be a maximum of 5 pages, using double-spacing and a minimum 12 font print size (1 800 words). Note that your essays will only be marked up to the maximum 5 pages (1 800 words) allowed. Anything written beyond this will not be marked. Our assessment of your essay will depend on how well you extract the essential issues and arguments from what you have read and integrate this in a well-structured essay in your own words. We are not interested in seeing if you can copy or barely paraphrase large chunks of the prescribed reading in a cut-and-paste fashion in the hope that you will include something relevant. The mark you get will thus reflect how well you have understood and integrated the essential ideas in your essay, as expressed in your own words. To encourage you to write in your own words, you are instructed not to include any quotes from the prescribed reading in your essays. Any such quotes will be ignored. Before attempting to answer the essay questions, please also read the sections on plagiarism and guidelines on how to write a good essay below: 8.7.1 Plagiarism Plagiarism is the act of taking words, ideas and thoughts of others and passing them off as your own. It is a form of theft which involves a number of dishonest academic activities. Please read the relevant sections of the University’s Disciplinary Code for Students and the Policy on Copyright Infringement and Plagiarism. 8.7.2 Guidelines Here are some general guidelines as to what we are looking for in a good essay:

# While you will obviously derive most of your ideas from the prescribed readings, you must

express them in your own words. Essays with large sections copied or paraphrased from the literature are unacceptable and will receive few marks, if any. We are going to be quite strict about this. Unless you express (or at least try to express) yourself in your own words, it is obviously impossible for us to assess your understanding of the content. Also, essay-writing is an important and useful skill in itself and an essential part of a postgraduate course.

# An essay should be focussed on answering the question, have a clear logical structure and your argument should be systematically developed. Hence, sentences and paragraphs should follow logically on one another. A collection of more or less disjointed

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all the authors' names in the text when there is more than one author. The abbreviation et al indicates that there are also other authors. The important point here is that the Harvard method requires you to add a detailed bibliography at the end of the text. In this bibliography all the authors' names will be listed. Note that where an assignment comprises more than one essay question, each essay should have its own bibliography. The rules concerning the presentation of a bibliography are set out in sections 8.7.3 and 8.7.4 below, including how to reference articles in the Reader. # Quotations, using quotation marks, are often used to enhance an essay. However, in this

course (unlike perhaps in other courses) we do not want you to use any quotations. We want to see if you can present the ideas of an author in your own words. Note, however, that you must still acknowledge the ideas and arguments of an author even when you present them in your own words without quoting verbatim. Use the system and rules for referencing your sources in the text and the bibliography as explained above.

# You may find it useful to go through the following steps in preparation for an essay:

(a) Think carefully about the question and make sure what is required from you. You have to focus on the question.

(b) Study the various prescribed readings (and any other sources you find useful), making

notes in the process.

(c) Devise a logical structure for your essay. In other words, decide which issues you want to discuss and in which order. Essays generally take the form of an introduction-body-conclusion. Note that it is not necessary to have a table of contents but you may want to give headings to the main sections of your essay.

(d) Write a first draft of your essay. In order to keep yourself from copying or

paraphrasing the literature, consult only your notes, keeping your books as much as possible closed.

(e) You will find that you only start to get a grip on a topic once being forced to write about

it. In the light of the insights which you gained in the process of writing your first draft, adapt the logical structure and wording of your essay where necessary. You may need to write a number of drafts of your essay before you are happy with it.

(f) Write the final draft. Your assignment must be proofread before you submit it. You

must obviously proofread it yourself, but you should also acquire the habit of getting somebody else to proofread it as well. Spelling, typing and grammatical errors create a bad impression.

Remember, the three key words are FOCUS, STRUCTURE and LOGIC! 8.7.3 Rules for presenting a bibliography We want you to take care in presenting your bibliography. The bibliography must be arranged alphabetically according to author's surname. The date of publication appears immediately after the author's name. If the bibliographical entry is a book, the name of the book must be underlined or italicised. The place of publication and the publisher's name must be specified. If the entry is a journal article, the title of the article included and the name of the journal must be provided. The name of the journal must be underlined or italicised. The volume of the journal and the page references must also be provided.

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46

(2) What factors do you think have constrained economic growth in South Africa since 1994? In your explanation, distinguish between what you regard have been the proximate and fundamental factors in this regard. (100)

Prescribed reading: Snowdon and Vane (2005): 556-565, 579-694 (including the interviews

with Robert Solow and Paul Romer). Reader: Mohr and Fourie (2004). Dube, Hausmann and Rodrik (2007). (3) (a) What aspects of the course, study material and your learning experience would you like

to improve? How? (b) Do the assignment tasks reflect the learning outcomes and assessment criteria? (c) Did completing this assignment and consulting the relevant sources improve your

competence? Name a few competencies that you think should be developed further to enhance your graduateness and employability. (20)

9 EXAMINATIONS For general examination guidelines, including preparation for the examination, please read the my Studies @ Unisa brochure. 9.1 Examination period This module is offered as a year course from March until the end of November. The examination is in January/February 2013. You will get further information from the Examination Section later in the year about the examination generally, examination venues, dates and times. 9.2 Examination paper The main features of the examination paper are: It is a three hour paper and is divided into three sections (A, B and C). Each section has two questions (with possible subdivisions). You must answer one question from each section. All questions are weighted equally for a total of 100 marks. 9.3 Previous examination papers An example of a recent examination paper will be included in TL203 with the guideline answers for Assignment 03. 9.4 Possible examination questions To help you to focus on the important issues and to assist you in preparing for the examination, we give you a list of possible examination questions and the approximate weight of each question, bearing in mind that the three-hour examination will carry a total of 100 marks. REMEMBER, however, that you FIRST HAVE TO CONCENTRATE ON THE ASSIGNMENTS TO PREPARE FOR THE EXAMINATION. The assignment questions, of course, are also possible examination questions. Also note that the questions will not necessarily be formulated exactly as in this list or in the assignments.

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48

15. Compare and contrast the main features of new classical economics and new Keynesian economics. (30)

16. What are the “classical” elements of new classical economics? (10) 17. What are the “Keynesian” elements of new Keynesian economics? (10) 18. What are the main policy implications of new classical economics? Discuss briefly. (15) 19. What are the main policy implications of new Keynesian economics? Discuss briefly. (10) 20. Explain what is meant by rational expectations and contrast the rational expectations

approach with other approaches to the study of expectations. (20) 21. What is the main thrust of the Solow model (one paragraph)? Briefly discuss the main

problems with this model and the main features of the endogenous growth models that emerged during the past few decades. (20)

22. Write an essay on economic growth in South Africa in which you discuss (a) the

measurement of economic growth (b) economic growth in recent years,(c) the possible constraints on economic growth and (d) the possibility of achieving a sustained average annual growth rate of 6 per cent or more. (30)

23. Write an essay on the causes of economic growth, distinguishing between the proximate and

fundamental sources of growth. Also explain the main ideas behind theories of endogenous growth. (30)

24. Write an essay on the costs or consequences of inflation with reference to pure and impure

inflation and anticipated and unanticipated inflation. Is inflation a serious problem? Should the central bank (e.g. the South African Reserve Bank) do everything in its power to combat inflation? (30)

25. Write an essay on the costs of inflation in which you distinguish between different types of

cost and try to isolate the possible impact of inflation on total production, income and employment in the economy. (30)

26. Given the relative costs of inflation and other macroeconomic problems, as well as the extent

of these problems in South Africa today, do you think that inflation targeting is an appropriate framework for monetary policy in South Africa? Discuss. (15)

10 OTHER ASSESSMENT METHODS There are no other assessment methods for this module. 11 FREQUENTLY ASKED QUESTIONS The my Studies @ Unisa brochure contains an A-Z guide of the most relevant study information. Wishing you all the best with your studies and for the examination! THE MACROECONOMICS HONOURS TEAM