Economy The Macroeconomy Research Assignment

Order Description

Weight: 30%
Word length: 1500 words
Aim:
This is a research assignment. You should draw on the relevant theories and
contextualise them with respect to the questions. Also, you are required to cite
additional empirical evidence to support your conclusions (reference the evidence
appropriately). Provide diagrams to explain the theory where appropriate. Diagrams
must to be clearly and correctly labelled, and you should actually refer to them in your
explanation.
You are required to answer both questions (750 words each).
Question 1:
Critically evaluate the following statement: “Economic theory makes no sense. For
example, capital has a diminishing marginal product and poor countries have very little
capital. So, in poor countries, the marginal product of capital must be high. Why then,
if capital is so productive in those countries, is not everyone there rich?”
Guidelines to complete the question
? This question requires you to draw from materials covered in topics 1 to 3.
? In evaluating this statement, make appropriate use of the Solow growth model
to discuss the theory.
? Identify other relevant factors why poor countries are still poor despite their
marginal product of capital being high. Provide empirical evidence.
? Use data, graphs and/or tables to support your theory and/or arguments as
necessary.
2
Question 2:
Why is the world’s largest economy, the United States, borrowing heavily in the
international capital markets, rather than lending as would seem more natural. What
implications does the United States’ reliance on a trade deficit and on foreign credit
have for the performance of the U.S. economy?
Guidelines to complete the question
? This question requires you to draw from materials covered in topic 6.
? You are required to explain the saving-investment nexus in the long-run and
provide some empirical evidence
? You should to discuss why the U.S. still borrows heavily from the rest of the
world, despite its status as the world largest economy. An important aspect of
this is the link between a trade deficit and net capital inflows.
? Furthermore, you need to consider the effects of the net capital flow on the U.S.
real interest rate. The best way to illustrate this effect is to think in terms of the
international loanable funds market.
? Discuss the long-run impact on high real interest rate to the US economy. Draw
on criticisms and/or supportive arguments about US reliance on foreign
borrowings. Use references to support your arguments.
Important additional resources:
Mankiw 9 ED, chapter 6, pp. 152-154 (Case study – The U.S. Trade Deficit)
Mankiw 9 ED, chapter 6, Appendix (The large open economy)
More references will be provided with Topic 6