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National Economic Policy Assignment

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MAE312 T1 2021 Assignment
This assignment is due on Friday 21 May 2021 by 8 pm AEST sharp.
It is worth 20% of your total grade for this unit.
Read the following notes carefully before starting the assignment.
• An electronic copy of your answers must be submitted on CloudDeakin.
• No referencing is required for citation from the textbook.
• Answer all three questions in this assignment.
• Do not scan/copy diagrams from the textbook, or any online or print sources.
You must draw diagrams by yourself. You can scan your drawing if necessary.
• The 1500 word limit is not binding. But keep in mind that a long answer is not
necessarily a good one; a good answer is concise and to the point.
The following University submission and plagiarism policies apply.
• Deakin has a universal assessment submission time of 8 pm AEST. A late penalty
will apply to assessments submitted after 11.59 pm AEST. When submitting online, it is your responsibility to check that your work has been submitted properly.
• The following declaration relating to academic honesty must be made and submitted along with any assignment:
“I certify that the attached work is entirely my own, except where material
quoted or paraphrased is acknowledged in the text. I also declare that it
has not been submitted for assessment in any other unit or course.”
• No extensions will be considered for the assignment submission due date unless
a written request is submitted and negotiated with the designated Unit Chair.
• Assignments or other assessment tasks conducted during the semester submitted late without an extension being granted will not be marked. These will be
held until final grading and may be taken into consideration in a pass/fail situation.

Q1. Using the Solow framework, explain the economic forces behind the convergence
of output per person. Then, use the Penn World Table Version 10 (PWT 10.0) to examine if convergence holds in the data (see instructions below). Does convergence of
output per person hold for countries in the Organisation for Economic Co-operation
and Development (OECD)? What about Asian countries and African countries? What
might be the reasons why a particular group of countries fails to converge in output
per person? [8 marks]

  1. Download the PWT 10.0 data from the Groningen Growth and Development
  2. Use your favorite data analysis software, such as Excel or Stata, to load the data
    into memory.
  3. Compute output per person for each country and each year as the ratio of GDP
    (rgdpo) to population (pop). Name this variable as ‘rgdppc’.
  4. Compute annual growth rate of output per person for each country since 1960 as
    100 ×h (rgdppc in 2019/rgdppc in 1960) 1/59 − 1 i. Name this variable as ‘grate’.
  5. Keep the observations for which the year is 2019. Make sure you have information on a country’s output per person in 1960 and the annual growth rate of
    output per person since 1960.
  6. Create new variables to identify whether a country belongs to OECD, East Asia,
    Africa, or others.
  7. Create scatter plots of the annual growth rate (grate) against output per person
    (rgdppc) in 1960 for (i) OECD, (ii) East Asia, and (iii) African countries.
    Q2. The bubble in the U.S. was a stock market bubble caused by excessive
    speculation of Internet-related companies in the late 1990s. In a move to protect the
    economy from the overvalued stock market, the Federal Reserve raised interest rates
    six times between June 1999 and May 2000 (see Figure 1). The burst of the stock market bubble triggered a mild recession in the U.S. from March 2001. To help the economy recover, the Federal Reserve aggressively reduced the interest rate. The recession
    soon ended in early 2002. Using the IS-LM framework, explain what happened to the
    interest rate and output (i) before, and (ii) after the burst of bubbles in March 2001.
    Furthermore, read the article by President Neel Kashkari of the Federal Reserve Bank
    of Minneapolis. Do you think the Federal Reserve should react to asset price bubbles?
    Why or why not? [6 marks]
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