Homework Fall 2018

Course Title: Introduction to Macroeconomics (BCOR 240)

Date released: December 10, 2018.
Due date: Wednesday 2nd of January 2019
Please contact your tutor for the details of handing your
graded homework.

INSTRUCTIONS
1. Individual work.
2. Plagiarism/cheating sanctions of TBS will be firmly applied (see TBS
Handbook).

EXERCISE 1 (10 marks)

In their 2018 paper entitled “Money growth and inflation: new evidence from nonlinear and asymmetric
analysis”, the authors namely Pr. N. Khraief and Pr. A. Cooray use the data of USA, UK and Japan
from 1950 to 2014 to analyze the response of the inflation rate to money growth shocks. Based on the
3 plots below and your course’s knowledge (including the case study ‘Inflation and money growth’
from the Inflation chapter), do you think that the money growth determines the rate of inflation in the
long run as stated by the quantity theory of money? Argue your position for each one of the 3 countries.
Exercise 2 (20 marks)
Real wages and productivity in Tunisia:
1. Explain why labor productivity is a key determinant of real wages in the long run? Use a
standard Cobb-Douglas production function to support your argument.
2. The following ITCEQ graph shows the evolution of productivity/real wages. Note that a
decrease of the graph Index is an evidence that real wages are outpacing productivity and that
the sector Administration refers to the public -administrative, education and health- services.
Based on this graph, do you believe that the latest public sector strikes –demanding higher
wages- are justified? If no, what would justify these strikes?
 3. The World Development Report 2018 issued by the World Bank is devoted to education and
learning, it is entitled ‘Learning to realize education’s promise’. The attached Figure 3.4 shows
the performance of Tunisia in the worldwide standard test PISA (Programme for International
Student Assessment) for 15-year old students. Based on this Figure and the text below extracted
from the same report, find a rationale for the relationship quality education and GDP growth.
Use the decomposition of growth into the 3 standard growth components resulting from a Cobb-
Douglas production function and insights from Problem 7 page 32 (about Human Capital) of
the GDP chapter.

“…Although some countries are making progress on learning, their progress is typically slow. Even
the middle-income countries that are catching up to the top performers are doing so very slowly.
Indonesia has registered significant gains on PISA over the last 10–15 years. And yet, even assuming
it can sustain its 2003–15 rate of improvement, Indonesia won’t reach the OECD average score in
mathematics for another 48 years; in reading, for 73. For other countries, the wait could be even
longer: based on current trends, it would take Tunisia over 180 years to reach the OECD average for
math and Brazil over 260 years to reach the OECD average for reading…”
“…Education raises human capital, productivity, incomes, employability, and economic growth. But
its benefits go far beyond these monetary gains: education also makes people healthier and gives them
more control over their lives.….”

Exercise 3 (10 marks)

Use the text below to estimate the Tunisian Okun’s law. Note that potential growth refers to the long
run real GDP growth or full employment or natural growth.
Source: IMF Country Report for Tunisia, June 2018.
“The Challenge of Raising Growth to Reduce Unemployment.
Cutting unemployment by one-fourth requires 5 percent real GDP growth, sustained over five years.
This estimate shows the order of magnitude of Tunisia’s economic most important challenge. This
challenge is made harder by the country’s strong labor force growth (projected at an annual 1.5 percent
of GDP by the Tunisia Statistic Institute) and a comparatively low elasticity of jobs creation to growth
(assumed in a range between 0.36 and to 0.50, with the boundaries being the values for Morocco and
the MENA region, respectively)…
... Accelerated reforms and decisive policies are needed to stabilize the economy. Growth could pick up
to 2.4 percent in 2018 and then gradually approach its potential of 4 percent. Tighter fiscal and
monetary policies are needed to reduce inflation and debt—with continued exchange rate flexibility—
to rebuild international reserves…
 The unemployment rate remains high at 15 percent, especially affecting the youth, women, and the
population of the interior regions….”

PROBLEM I (12 marks for each one of the 5 cases chosen)

Use an AD-AS graph or/and an IS-LM graph to analyze the short run and the long run impacts of the
following shocks on the real GDP (Y), the unemployment rate (UR) , and the overall level of prices (P).
Keep the closed economy assumption seen in class and interpret in few sentences the findings of your
graphs. Argue your choice of Demand and/or Supply shock, IS and/or LM shock. Choose only 5 cases.

Case Country economy Shock + Stabilization Policy

1 USA 2008 Financial crisis + Fiscal stimulus + Accommodative monetary policy
2 UK Brexit effective March 29 2019 + Stabilization policy
3 EU 2009 sovereign debt crisis
4 Qatar Exit from the OPEC oil cartel after 60 years of membership, effective January 1 2019
(assume adverse supply shock in the short run)
5 Syria The civil war, since 2011
6 Venezuela 2018 estimated inflation rate is 1 370 000%: a humanitarian crisis + stabilization
policy
7 Yemen The hunger and humanitarian crisis since 2015
8 China Recent US tariffs on Chinese imports (assume for China an adverse demand shock and
an adverse shock for the IS curve)
9 Tunisia* Contractionary monetary policy, June 13 2018

* PRESS RELEASE OF THE CENTRAL BANK OF TUNISIA EXECUTIVE BOARD MEETING

HELD ON 13 JUNE 2018
The Executive Board of the Central Bank of Tunisia held its periodic meeting on 13 June 2018 and
examined the different issues scheduled in its agenda. It reviewed the latest data on the economic
activity and trend in the main economic, monetary and financial indicators as well as development of
transactions on the money market and the foreign exchange market.
The Board considered also the deliberations of the Monetary Policy Committee held on 11 June and
examined its recommendations.
In this context, and concerning trend in prices, the Board expressed his ongoing concern about the
inflationary pressures as the inflation rate stood at a high level for the second month in a row and the
increase in the consumer price index came to 7.7% in annual shift at the end of May of this year. These
pressures are likely to be intensified over the forthcoming period given the expected developments of a
range of conjunctural proactive indicators, in particular the expected rise in the world prices of raw
materials, mainly energy.
In this regard, the Board stressed that persisting inflationary pressures are but a threat to the recent
recovery of the economy and the purchasing power as well. This requires appropriate proactive
measures to reduce its drawbacks by tuning monetary policy on the basis of the interest rate. The Board
discussed also a set of practical proposals aiming to rationalize loans to non-productive activities on
the one hand and support intervention of the Central Bank on the money market by developing
refinancing mechanisms and directing them more effectively to boost investment and productive sectors
on the other hand.
Furthermore, the Board examined a draft circular on inter-bank money market mechanisms aiming to
develop transactions and support market competitiveness and deepening.
Following discussion and deliberation of the aforementioned points, the Board decided to raise the
Central Bank's key interest rate by 100 basis points, up from 5.75% to 6.75% annually.
The Board also decided to open a new refinancing window for banks within the framework of the call
for bids mechanisms into effect, by granting six-month facility to refinancing investment loans in new
projects.

HAPPY LEARNING
Figure 3.4 Learningoutcomesvarygreatlyacrosscountriesandeconomies—
inseveralcountries,the75thpercentileofPISAtesttakersperformsbelowthe
25thpercentileoftheOECDaverage
Performance of 25th, 50th, and 75th percentiles in 2015 PISA assessment, participating non-OECD economies and selected
OECD economies

a. Reading b. Mathematics
Percentile Percentile
25th 50th 75th 25th 50th 75th
OECD average OECD average
Singapore Singapore
Finland Hong Kong SAR, China
Hong Kong SAR, China Taiwan, China
Korea, Rep. Macao SAR, China
Macao SAR, China China (B-S-J-G)
Poland Korea, Rep.
Taiwan, China Finland
China (B-S-J-G) Poland
Russian Federation Russian Federation
Latvia Vietnam
Croatia Malta
Vietnam Latvia
Lithuania Lithuania
Chile Croatia
Malta Kazakhstan
Cyprus Malaysia
Bulgaria Romania
Uruguay Bulgaria
Malaysia Cyprus
Romania United Arab Emirates
United Arab Emirates Chile
Turkey Moldova
Trinidad and Tobago Turkey
Argentina Montenegro
Montenegro Uruguay
Costa Rica Trinidad and Tobago
Colombia Albania
Kazakhstan Thailand
Mexico Mexico
Moldova Argentina
Jordan Georgia
Thailand Costa Rica
Albania Qatar
Brazil Lebanon
Georgia Colombia
Qatar Peru
Peru Jordan
Indonesia Indonesia
Tunisia Brazil
Dominican Republic Macedonia, FYR
Macedonia, FYR Tunisia
Kosovo Kosovo
Algeria Algeria
Lebanon Dominican Republic
300 400 500 600 300 400 500 600
Score Score
Non-OECD OECD OECD interquartile range

Source: WDR 2018 team, using data from Programme for International Student Assessment (PISA) collected in 2015 (OECD 2016a). Data at http://bit.do
/WDR2018-Fig_3-4.
Note: PISA 2015 defines baseline levels of proficiency at a score of 407 for reading and 420 for mathematics. China (B-S-J-G) = China (Beijing-Shanghai-
Jiangsu-Guangdong).

basic literacy proficiency by the lower secondary
level, whereas the population of Bolivia needs six
more years to attain even close to the same profi-
ciency. Similarly, among 18- to 37-year-olds in Nigeria,
only 19 percent of primary completers can read; in
Tanzania, 80 percent can.18
In some countries, large proportions of “educated”
working adults are effectively low-skilled. Nearly 80
percent of Ghana’s working-age population and over 60
percent of Kenya’s have just level 1 literacy or below—
that is, their literacy proficiency is limited to under-
standing basic texts, but they are not able to integrate,
evaluate, or interpret information from a variety of text
materials (figure 3.5).19 This contrasts with the average
for high-income countries, where only 15 percent of the
working-age population is at level 1 or below. Individuals

76 | World Development Report 2018