ECOS3021 Business Cycles and Asset Markets University of Sydney
2021 Semester 1
Tutorial #1
1. Describe one major difference between Growth Cycles and Classical Cycles. Draw an example of
the evolution of GDP which illustrates this difference (i.e. across two different recessions).
2. Go to the following webpage: http://www.rba.gov.au/statistics/tables/index.html and down- load Gross Domestic Product and Income – H1. The first series in column B is real GDP for Australia and the second series in column C is year-ended real GDP growth. Insert a blank column next to column B. Calculate quarterly and four-quarter ended growth rates using the formulas shown in lecture slides.
3. How do we express these growth rates in annualized percentage growth rates? Apply this compu- tation to your growth rates from Question (2). Plot these two growth rates against each other. Which is more volatile? Why?
4. Identify all the peaks and troughs in quarterly Australian GDP data using the BBQ procedure. (Note: You may like to use the BBQ Excel Macro posted on Canvas. You may alternatively do the BBQ algorithm ‘by hand’: first calculate the quarterly growth rates yt − yt−1 and yt − yt−2, then apply the formulas from Lecture 1.)
5. What is the difference between a deterministic and stochastic trend?
6. Business cycles may be identified by the Hodrick Prescott (HP) Filter. What two components of a macroeconomic variable does the HP filter distinguish between? The flexibility of the HP filter is determined by the choice of parameter λ. What effect does the choice of this parameter have?
7. Why might the HP filter have produced mis-leading estimates of the GDP cycle throughout 2020?
8. What is a data generating process (DGP)? What is a random walk? Is the random walk with drift model of real GDP consistent with the decomposition of output into growth and cyclical components? (Use equations and words in your answer).
9. Suppose that the log of quarterly real GDP follows a random walk with drift μ = 0.0488, and shocks that are normally distributed with mean zero and standard deviation σ = 0.05. Suppose real GDP is currently equal to $1. What do you expect the value of real GDP to be next quarter? What do you expect the value of real GDP to be one year from now?
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