Intermediate Macroeconomics Assignment
1. Bonus Question Consider the Solow Growth model with technology Y = Kα(EL)1-α. Efficiency grows at the rate g, population grows at the rate n. Capital depreciates at the rate δ. Show that the Golden Rule savings rate is equal to the capital share α.
2. In your own words, explain what the "consumption puzzle" is. Then explain how Modigliani's Life-Cycle Hypothesis or Friedmand's Permanent Income Hypothesis (choose one of the two) can reconcile the puzzle.
3. In this question, you are asked to look at two types of consumption and income data. The first one is long-run time series of consumption and income in the United States from 1929 - 2012. The second one is household consumption and income data from Consumption Expenditure Survey (CES) in 2011.
Long run consumption and income data is available from the FRED database hosted by the Federal Reserve Bank of St. Louis through the following link
http://research.stlouisfed.org/fred2/categories/18
To access income data, choose Gross Domestic Income under "Categories". Find the series Gross Domestic Income, then click on Annual, Not Seasonally Adjusted. On the top left of the new page, click on Download Data, then at the bottom of the new page click on Download Data button. Go to the download folder, and you should be able to see a Microsoft Excel ?le named GDIA.xls.
To get consumption data, go back to the link above. This time click Personal Income and Outlays under "Categories". Find the series Personal Consumption Expenditures, and click on Annual, Not Seasonally Adjusted. On the top left of the new page, click on Download Data, then at the bottom of the new page click on Download Data. Go to the download folder, and you should be able to see a Microsoft Excel ?le named PCECA.xls.
Now you should have two series of annual data from 1929 to 2014 (you can ignore the 2015 data for consumption). For convenience, copy and paste both time series into a single spreadsheet.
(a) Compute the consumption share of income, i.e., consumption expenditure divided by income. Generate a time series plot of consumption share. Is the consumption share fairly constant over time as discovered by Simon Kuznets? What does the plot imply about the long-run relationship between average propensity to consume and income?
(b) Consumer Expenditure data is more difficult to handle, and has been processed for your use. Download CES2011.xls from Nexus. In this spreadsheet, you will find annual expenditure by household income level. Compute the ratio of consumption to income. Generate a scatter plot with consumption to income ratio on the vertical axis, and household income on the horizontal axis. What does the plot imply about the relationship between average propensity to consume and income?