Title: fair Model

Title:    fair Model

NYIT School of Management
MBA Program – Abu Dhabi Campus

ECON610:Macro Environment of Business
Summer 2015

Fair Model Project

?    Use the MCM to do the following analysis on the country of your project depending on the availability of data for this country.
?    If not enough data is available for your country, use the US data.
?    Use graphs/tablesfor the period 1970:1-2013:4 to answer the following questions:
Recessionary Periods:
1.    From the table and graph for real GDP (GDPR), can you pick out the last recessionary period?

Inflationary Periods:
1.     From the table and graph for the percentage change in the GDP deflator,PCGDPD, can you pick out the last inflationary periods? How does theimport price index, PIM, behave during these periods? How about the nominalwage rate, WA, and the real wage rate, WR?
2.    Find a period of overlap between the recessionary and inflationary periods?(These overlap periods are called periods of stagflation) Can you speculateon what might have caused the stagflation?

Labor Market Variables:
1.    How did the unemployment rate, UR, behave during the recessionary andinflationary periods?
2.    Is there a tight relationship between UR and the rate of inflation, PCGDPD?
3.    How did productivity, PROD, behave during the recessionary periods?

Fiscal Policy Variables and Other Federal Government Variables:
1.     Examine howthe government deficit SGP and the government debtAGhavechanged over time. What are some of the factors that led to the large rise in thedeficit?

Monetary Policy Variables and Other Financial Variables:
1.    How did the bill rate, RS, behave during the recessionary periods? During theinflationary periods? What does this say about Fed behavior?

Foreign Sector Variables:
1.    Examine how PIM, IM, PEX, and EX have changed over time.
2.    SGP and -SR are sometimes call the“twin deficits.” Examine their relationshipover time.

Effect of Economic Policy:
1.    Choose economic policy tool(s),such as government spending or tax rate, and make relevant change during the last recession.
2.    Examine the effect of the above change on relevant economic variables, such as GDP and unemployment.

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NYIT – Abu Dhabi Campus
ECON 610: Macro Environment for Business
Summer 2015
Fair Model: An Introduction
The Model Home Page:
http://fairmodel.econ.yale.edu/main3.htm
To solve the US Model, click:
(Solve the current version (April 26, 2013) of the model)
To solve the Multi Country Model (MCH), click:
http://fairmodel.econ.yale.edu/mch/
1. Enter a username and password for your dataset and press Enter.
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You will be presented with the following main menu which gives you access to all of the features of the model.
2. Select option 1 to set the prediction period. Set it to 1970-2015.
3. Save Changes
4. Back at the main menu, select option 8 to solve the model and examine the results
After the model is solved, you will then be presented with the output page.
5. Click Proceed
You will be presented with a page which allows you to choose what information you want to present, and also how to display it. Let us look at the import and export rates of Japan as an example.
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6. Select one for all in the Graphs section to display all of the variables on one graph.
7. Set the period to be from 1980 to 2000.
8. Select Japan from the list of countries
9. Find Total exports in the list of variables and press Add to current list to add it to the list of output variables. Do the same for Total imports.
10. Click on Display Output to continue.
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You will be presented with a graph presenting Japan’s export (red) and import (green) levels from 1980 to 2000.
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11. To solve the assignemnt, solve the model as before and fill the output page as follows:
12. Type the codes for all of the variables you want to examine into the box, choose one graph per variable, and display output. You will be presented with graphs of all of your chosen variables. You can now begin answering the questions by analyzing the graphs.
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The recessionary periods are visible on the graph of GDPR as small dips. Some variables follow the business cycle. For example, the unemployment rate clearly rises during the recessionary periods as can be seen in the graph for UR. The savings rate also seems to rise during recessionary periods.
As can be seen above, the inflationary periods are accompanied by spikes in the GDP deflator. Import price index sees a similar spike during these periods. No apparent change in nominal wage rate, but slowing of real wage rate.
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Stagflation occurs from 1974:1-1975:1 and 1980:2-1981:1
The unemployment rate decreased during the inflationary periods (green) and increased during the recessionary periods (blue). The unemployment rate seems to be inversely related to inflation.
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Fair Model – Examining Alternate Policies
This tutorial will show you how to change an economic policy instrument/exogenous variable and see how a country’s economy would have been affected.

11. You will be presented with a graph as seen below displaying the effect of an increase in government purchase of goods on real GDP.
You can adjust the steps presented above to examine changes to different variables and countries as you desire.
* It is important to use historical errors otherwise your alternative scenario will be compared to actual values from that period. In order for the comparison to be valid we must compare model prediction to model prediction.

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