A Model That Attracted Quite a Bit of Interest in Macroeconomics

question 5

Essay

A model that attracted quite a bit of interest in macroeconomics in the 1970s was the St.
Louis model.The underlying idea was to calculate fiscal and monetary impact and long
run cumulative dynamic multipliers, by relating output (growth)to government
expenditure (growth)and money supply (growth).The assumption was that both
government expenditures and the money supply were exogenous.Estimation of a St.
Louis type model using quarterly data from 1960:I-1995:IV results in the following
output (HAC standard errors in parenthesis): where ygrowth is quarterly growth of real GDP, mgrowth is quarterly growth of real money supply (M2), and ggrowth is quarterly growth of real government expenditures. "d" in front of ggrowth and mgrowth indicates a change in the variable. (a)Assuming that money and government expenditures are exogenous, what do the
coefficients represent? Calculate the h-period cumulative dynamic multipliers from these.
How can you test for the statistical significance of the cumulative dynamic multipliers
and the long-run cumulative dynamic multiplier?

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Definitions:

Specific Tax

A fixed amount of tax imposed on a product, service, or transaction, regardless of its price.

Competitive Market

A market structure characterized by a large number of buyers and sellers where no single participant can significantly influence the price of goods or services.

Demand Curve

A graph showing the relationship between the price of a good and the amount of the good that consumers are willing to purchase at that price.

Deadweight Loss

The reduction in economic efficiency that happens when equilibrium is not reached or is unattainable for a specific good or service.