Assignment

1. Recently a coup occurs in Turkey, a developing country where the steady state equals to the golden rule initially. Due to the political instability, the birth rate in Turkey falls slightly and the emigrant rate jumps slightly, resulting in a lower dilution rate. Even firms which still operate in the country (including McDonald's, Pizza Hut and KFC, etc.) become conservative and thus decrease the investment rate dramatically. Also, during the coup huge amounts of existing factories are destroyed and machines are stolen by anarchists. The coup causes some death as well. Assume all other factors including technology and depreciation rate keep unchanged.

(1) What happened to the per worker productivity in Turkey?

(2) What happened to the steady state per work capital level in Turkey?

(3) What happened to the golden rule per work capital level in Turkey and what happened to the maximal possible sustainable consumption level?

(4) Does your answer to (2) and (3) contradictory with each other? Why?

2. Dr. Strangelove gave a speech in PSU recently during which he claimed: "Firms and other investors should treat recession a good thing because whenever there is a recession, there will be an expansion and thus they can simply buy low and sell high...Even the government should do nothing during a recession because of the following three reasons: (1) the cyclical unemployment is temporal and will eventually go back to zero; (2) the price level will go down during a recession which means a value increase of local currency; and (3) in the long run the expansion and the recession simply break even and thus there is no impact on the long run growth."

Use the empirical facts and the impacts of business cycle we discussed in class to argue with Dr. Strangelove.

3. During the great depression from 1929 to 1933, two different strategies were applied by the US government when facing the shrinking aggregate demand. At the very beginning President Hoover followed the policy of new liberalism and decided to do nothing, waiting for the recession to recover by itself. Realizing that "in the long run we are all dead", President Roosevelt changed the strategy according to Keynesian view and largely increased the government purchase, which eventually helped the US to recover from the disaster.

According to the material, compare the difference between the two strategies using the ADAS model.