EC6012 Problem Set 1 Answers, Marks, and Marking Scheme

Here is the marking scheme and suggested answers, and below are the marks by student number. I'll hand back the problem sets in class. The average mark was 85%, which was excellent. Each question was scored out of 10, so the best possible score for the main section is 40. I write this so you don't have heart attacks when you click below and see '34'. The extra credit question's marks are in the second column. If you don't see your student number here, email me or chat to me after class.

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What is the point of the economy?

Visiting a friend's house last night, their seven year old asked what I did. I told her I was a guy who studied the economy.

She asked me:

What does the economy do?

In your opinion, what does the economy do? Answers either by email or in the comments.

EC6012 Problem Set 2

Here's the second problem set for International Monetary Economics. There are 4 questions. Questions 1-3 are compulsory, question 4 is extra credit. This is worth 15% of your grade, and due in Monday, 20th of April at the start of class.

Typo: For question 2, equation (2) has all + signs, the i on the deposit side of the eqn should be negative. Cheers for spotting the typo!

Readings & Helpful Papers

Bernanke & Blinder, 1988

Drazen & Helpman, 1988 (updated with the right link, thanks to Desi & Conor, here's a (.pdf)

Kinsella's Notes from Nell, 1992. Scan of Nell, 1992.

Measures of the Money Supply [1], [2], [3]

AIG Outrage

Prof. James Hamilton digests the pure rage AIG's decision to pay its executives 165 million dollars in bonuses, some of them to people who no longer worked for AIG. Hamilton writes:

"One of the reasons this is so outrageous is that the promise of such bonuses was in fact one of the very factors that caused our current problems, creating incentives for managers of AIG to get out of solid insurance underwriting and into hedge fund gambling. If anyone had supposed that AIG had "learned its lesson", this report seemed to dash that hope against the wall like a plate of china."
On a slightly lighter note, here's MIT's Ricardo Caballero on more constructive solutions to the crisis.

EC6012 Lecture 7

This week we'll be looking at models of interest rate determination in closed and open economies. Before we get there, though, it makes sense in the light of the forthcoming budget to think about aggregate demand, the money creation process, and especially tax financing of government deficits. And it just so happens I've got a model of that exact thing. Funny, eh? Then we'll move onto a model of an open economy with endogenous sterlisation or fixed exchange rates. This model, by Wynne Godley and Marc Lavoie, has a lot to say about our current predicament, and we'll mess about with it tonight.

Here are the lecture notes:EC6012_2009_MD.pdf  EC6012 Lecture 7 - Models of Money Demand , and here are the slides: EC6012 Lecture 7 - Models of Money Demand

International Monetary Economics Problem Set 1 Changes

Having had some feedback on the problem set, I've decided to change it slightly.

  • First, the deadline is now next Friday, 13th of March, at the same time as before.
  • Second, question 2, on the Goodwin model, will be an extra credit question, where marks gained in the question go towards any marks one might lose in the final exam. Thus if a student has worked hard on the problem, I will still reward that work.

Some students are finding this module hard. That is a good thing. The module will remain as hard, if not harder, in the coming weeks. International Monetary Economics is a technical subject. Mastery of this subject to a postgraduate requires a technical facility, which I expect each student to demonstrate over the course of the module if they wish to see a good grade at the end of it.

I'm very much looking forward to the rest of the course, and I'll see everybody on Monday, where I'll answer more questions if students have them.

Buying assets, recapitalising banks, and getting incentives right

This piece by Sal Rossi accurately summarises the current debate on how to fix banks in the short to medium term.

There are two schools of thought on how to get credit flowing again. One suggests buying the toxic assets, the other says to recapitalise banks. This column says that both approaches are necessary, though the right balance will vary across nations. The real difficulty is aligning incentives – in both pricing assets and recapitalising banks, bank managers’ interests may thwart governments’ objectives.

Buying assets, recapitalising banks, and getting incentives right

EC6012, International Monetary Economics, Problem Set 1

Apologies for the delay in posting this problem set, I've changed the due date to compensate.

This problem set is worth 10% of your final mark. All questions carry equal marks, and the date for submission is Friday, March 6th, to the departmental office, KB 3-22a, by 4pm. Work in groups, but submit alone.

Email me if you've questions on the problem set. It is a mix of theoretical, data work, and applied policy analysis, exactly the stuff we want you to learn in this course.

Update: Some sensible emails suggest I help you prepare for these questions a bit more, in order that I not break the class :), so here are some hints.

For question 1, read any introductory textbook, this and this.

For question 2, read the notes, and work through to the final equation with the I(r) term included, then just see what happens to things when r goes up.

For question 3, plug values of 1, 2, 3, 4, etc, into u and v, and graph it. You'll find interesting equilibrium values. Helpful notes on the maths are here, here, and here. I'm not looking for an algebraic solution though, just the graph will do.

For question 4, use your data skills from the trading floor and the notes from lecture 2.

For question 5, read the paper, tell me what you think.

I'll be on hand by email at any time to answer questions about the problem sets. Promise.