EC 304

Fall 2002

Assignment #5

Due: Tuesday, October 8

Use the on-line Fair Model (http://fairmodel.econ.yale.edu/) to perform the following comparisons for the period 1984.1 to 1986.1.

1. Set up a data base for your purposes (i.e., name and password) and then simulate the model without changing any of the exogenous variables. Compare the model simulation to actual history for Real GDP, the GDP deflator, the Unemployment Rate, the Short-term interest rate, the governments budget deficit, and any other variables you find of interest. Discuss the model's performance, i.e., does it predict well or not? Explain why the model may be mis-predicting the actual data. Recall that the "Base" data set of the Fair Model is the "actual" data for historical comparisons.

2. Set up a second data base for your purposes (i.e., name and password) and then simulate the model after changing the assumption about monetary policy so that the path of the short-term interest rate is exogenous. To do this, you will first have to change from the models default of using a policy reaction function to determine the short-term interest rate (RS) to a policy of exogenously fixing the path of the short-term interest rate. You do this after clicking on the instruction button concerning monetary policy, entitled: "Change assumptions about monetary policy". Then run your simulation. Compare your results with this change in monetary policy to the simulation of the model you did in part 1 (where the reaction function determined monetary policy). Explain what the reaction function does (youll have to look up the equation) and explain how changing monetary policy in this way alters the predictions of the model. Note that you are changing the short-term interest rate from being endogenous to being exogenous. Again, in your analysis focus on real GDP, the GDP price deflator, the Unemployment Rate, the budget deficit, and the short-term interest rate (which, of course, you've made exogenous in this simulation).

3. Set up a third data base for your purposes (i.e., name and password) and then simulate the model after changing the assumption about monetary policy so that the path of the short-term interest rate (RS) is exogenous (as in part 2), but is now increased by 1.0 percentage point during the period 1984.1 to 1986.1. Then run your simulation. Compare your results to the simulation of the model you did in part 2. Explain how the higher exogenous path of the short-term interest rate affects the economy.

4. Set up a fourth data base for your purposes (i.e., name and password) and then simulate the model after changing the assumption about fiscal policy so that the path of Federal government spending (COG) is 100 billion dollars lower during the period 1984.1 to 1986.1. Then run your simulation. Compare your results to the simulation of the base model you did in part 1. Explain how the lower path of government spending affects the economy.