ECON10003
Assignment
Introductory Macroeconomics
Due Friday 16 May
Instructions. You can but do not have to do this assignment in a group. If you work in a group,
it can have at most three people. The assignment is due by 4pm on Friday 16 May.
Late assignments. There are no assignment extensions. Please apply for Special Consideration
if for some documented reason you cannot submit by the due deadline. In the absence of Special
Consideration, assignments submitted late are subject to a late submission penalty of 10% of the
available marks per full hour late (see Subject Guide, p. 8).
Marking criteria. The tutors will mark the assignment according to the following criteria:
• Ability to use material discussed in lectures, tutorials, and other sources to answer the assign-
ment questions in a logical and coherent fashion.
• The maximum assignment length is 1000 words.
• Please note that the University and the teaching staff take academic integrity seriously. Please
be aware that plagiarism and collusion are unacceptable. Further details can be found in the
subject guide.
Submission. On submission, you’ll be required to agree or disagree with the following declaration:
I have not represented AI-generated material as my own work. Any use of AI in the
preparation of this assessment has been acknowledged.
The aim of this declaration is to highlight your obligations in accordance with the University’s policy
on using Artificial Intelligence Tools.
Intro Macro: Assignment 2
QUESTIONS
1. AD-AS Model: The Effect of Trump’s Tariffs (6 marks)
In this question, you will use the aggregate demand-aggregate supply (AD-AS) model from the
lectures to discuss the potential impact of Trump’s Tariffs. Watch the following Channel 4
interview with Joseph Stiglitz:
https://www.youtube.com/watch?v=bkN-3pVVDzg
(a) According to Stiglitz, will the tariffs impact China’s aggregate demand, aggregate supply,
or both? Why? What can be done about this impact? Illustrate your analysis using an
AD-AS diagram.
(b) Repeat part (a) for the US. (Hint: Consider comparative advantage here.)
This question has a one-page limit excluding diagrams (min 12-pt font with standard margins).
2. Solow-Swan Model (14 marks).
For many developed countries, an aging population means many households will draw down on
their savings to fund their consumption. We explore the possible consequences of this.
Consider the basic Solow-Swan model. Suppose production follows the standard Cobb-Douglas
specification and assume total factor productivity A and labour L are fixed across time.1
(a) Derive mathematical expressions for the steady-state values of capital K⋆, output Y ⋆,
and consumption C⋆, in terms of model parameters A,L, α, s, δ, being sure to specify any
assumptions you make along the way.
(b) Assume the economy is at steady-steady until the savings rate suddenly experiences a
permanent decrease at t = 1.2 Use the following parameter values:
A = 1
L = 1
α = 0.5
δ = 0.1
s =
{
0.60 t < 1
0.40 t ≥ 1
where s is the saving rate and δ is the depreciation rate. For each of capital K⋆, output
Y ⋆, and consumption C⋆, calculate the original steady-state values (as at t = 0) and the
new steady-state values (as at t = 1). Draw a diagram to illustrate this change.
(c) We identified in part (b) a new steady-state after the change in s, but this does not mean
the economy reaches this steady-state immediately. Rather the economy would transition
to the new steady-state through its capital transition equation. To explore this, fill out
the table below (show your working for row 2 only).
1I.e., the production function is Yt = A×Kαt L1−α.
2Since labour is fixed, we are using the decrease in s to represent a lower proportion of savers in this economy.
Intro Macro: Assignment 3
Period (t) Capital Stock (Kt) Output (Yt) Consumption (Ct)
1 (This row will be your steady state values before the change in s)
2
3
4
5
6
7
8
9
10
Round to two decimal places. You may, though are not required to, use Excel or similar for this task.
(d) Assume households are happier with more consumption. Use your answers from parts (b)
and (c) to answer the following questions:
(i) Compare your results in parts (b) and (c). Do they make sense together? Explain.
(ii) Will households be happier after the change in the savings rate in the short run?
What about in the medium run? What about in the long run? What do the terms
short run, medium run and long run mean in this context?
(iii) Is it sufficient to analyse Macroeconomic problems only in terms of equilibrium out-
comes? Explain.

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