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business
micro economics

Questions and Answers of Micro Economics

Why did China fare much better than the United States and the United Kingdom during the 2007-2009 financial crisis?
Identify three factors that can shift the aggregate demand curve to the right and three different factors that can shift the aggregate demand curve to the left.
Using an aggregate demand and supply graph, show and describe the effects in both the short run and the long run of the following:a. A temporary negative supply shock.b. A permanent negative supply
Suppose the President gets Congress to pass legislation that encourages investment in research and the development of new technologies. Assuming this policy leads to a positive productivity change
Proposals advocating the implementation of a national sales tax have been presented before Congress. Predict the effects of such a tax on the aggregate supply and demand curves, showing the effects
Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.
Classify each of the following as a supply shock or a demand shock. Use a graph to show the effects on inflation and output in the short run and in the long run.a. Financial frictions increase.b.
During 2014, some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation
"The depreciation of the dollar from February 2009 to February 2014 had a positive effect on aggregate demand in the United States." Is this statement true, false, or uncertain? Explain your answer.
What determines the unemployment rate when output is at potential?
As the labor force becomes more productive over time, how is the long-run aggregate supply curve affected?
Why are central banks so concerned with inflation expectations?
"If prices and wages are perfectly flexible, then γ= 0 and changes in aggregate demand have a smaller effect on output." Is this statement true, false, or uncertain? Explain your answer.
What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?
Go to the St. Louis Federal Reserve FRED database, and find data on real government spending (GCEC1), real GDP (GDPC1), taxes (W006RC-1Q027SBEA), and the personal consumption expenditure price index
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), a measure of the price level; real compensation per hour (COM-PRNFB);
The fact that it takes a long time for firms to get new plants and equipment up and running is an illustration of what policy problem?
Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?
Why do activists believe that the economy's self-correcting mechanism works slowly?
If the economy's self-correcting mechanism works slowly, should the government necessarily pursue discretionary policy to eliminate unemployment? Why or why not?
Suppose one could measure the welfare gains derived from eliminating output (and unemployment) fluctuations in the economy. Assuming these gains are relatively small for the average individual, how
Given a relatively steep and a relatively flat short-run aggregate supply curve, which curve would support the case for nonactivist policy? Why?
How can monetary authorities target any inflation rate they wish?
"If autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation." Is this statement true, false, or uncertain? Explain your answer.
What will happen if policymakers erroneously believe that the natural rate of unemployment is 7% when it is actually 5% and therefore pursue stabilization policy?
How can demand-pull inflation lead to cost-push inflation?
How does the policy rate hitting a floor of zero lead to an upward-sloping aggregate demand curve?
Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
What nonconventional monetary policies shift the aggregate demand curve, and how do they work?
Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.a. Using a graph of aggregate demand and supply, show the
Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can result in undesirable fluctuations in output and inflation.
As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate
Many developing countries suffer from endemic corruption. How does this help explain why these countries' economies typically have high inflation and economic stagnation? Use a graph of aggregate
In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a "soft patch" in the economy, in particular the possibility of a deflation. As a
For each of the following shocks, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. a. Consumers reduce
Suppose that f is determined by two factors: financial panic and asset purchases.a. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below the
During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Fed's plan work?
Why does the divine coincidence simplify the job of policymakers?
Why do temporary negative supply shocks pose a dilemma for policymakers?
In what way is a permanent negative supply shock worse than a temporary negative supply shock?
Suppose three economies are hit with the same temporary negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country B,
"Policymakers would never respond by stabilizing output in response to a temporary positive supply shock." Is this statement true, false, or uncertain? Explain your answer.
On January 28, 2014, the Federal Reserve released a special statement that clarified its goals of "price stability" and "maximum employment." Specifically, it stated that "the Committee judges that
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of
What does the Lucas critique state about the limitations of our current understanding of the way in which the economy works?
Outline the benefits and costs of sticking to a set of rules in each of the following cases. How does each of these situations relate to the conduct of economic policy? a. Going on a diet b. Raising
How does Switzerland's monetary targeting strategy demonstrate the case against monetary policy rules?
How is constrained discretion different from discretion in monetary policy? How are the outcomes of these policies likely to differ?
In general, how does credibility (or lack thereof) affect the aggregate supply curve?
As part of its response to the global financial crisis, the Fed lowered the federal funds rate target to nearly zero by December 2008 and quadrupled the monetary base between 2008 and 2014, a
Why did the oil price shocks of the 1970s affect the economy differently than the oil price shocks of 2007?
Central banks that engage in inflation targeting usually announce the inflation target and time period for which that target will be relevant. In addition, central bank officials are held accountable
Suppose the statistical office of a country does a poor job in measuring inflation and reports an annualized inflation rate of 4% for a few months, while the true inflation rate has been around 2.5%.
What are the purposes of inflation targeting, and how does this monetary policy strategy achieve them?
How can the establishment of an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?
What traits characterize a "conservative" central banker?
Suppose the central bank is following a constant-money-growth-rate rule and the economy is hit with a severe economic downturn. Use an aggregate supply and demand graph to show the possible effects
Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country's central bank affect the speed of
Suppose two countries have identical aggregate demand curves and potential levels of output, and γ is the same in both countries. Assume that in 2016, both countries are hit with the same negative
How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does a credible nominal anchor help if a negative aggregate supply shock
In what sense can greater central bank independence make the time-inconsistency problem worse?
What are the arguments for and against policy rules?
If, in a surprise victory, a new administration that the public believes will pursue inflationary policy is elected to office, predict what might happen to the level of output and inflation even
In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year Ago," and
Go to the St. Louis Federal Reserve FRED database, and find data on the GDP deflator (GDPDEF) and the price of a barrel of oil (MCOILWTICO). For the GDP deflator, convert the units setting to
In 2009, in the wake of the global financial crisis and when interest rates were at their lowest, the U.S. government instituted a "cash for clunkers" program and later a "cash for appliances"
From mid-2008 to early 2009, the Dow Jones Industrial Average declined by more than 50%, while real interest rates were low or falling. What does this scenario suggest should have happened to
In the late 1990s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy
During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At the same time, the stock market fell dramatically and housing market values declined sharply.
During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks' excess reserves increased sharply, while credit extended to households and firms decreased
Why does the credit view imply that monetary policy has a greater effect on small businesses than on large firms?
Why might the bank lending channel be less effective today than it once was?
One of the classic features of the global financial crisis was the failure of high-profile investment banks and financial firms such as Lehman Brothers, Bear Stearns, and AIG. These firms experienced
If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?
How does the Great Depression demonstrate the unanticipated price level channel?
"Considering that consumption accounts for nearly two-thirds of total GDP, this means that the interest rate, wealth, and household liquidity channels are the most important monetary policy channels
How are the wealth effect and the household liquidity effect similar? How are they different?
Following the global financial crisis, mortgage rates reached record-low levels in 2011. a. What effect should this have had on the economy, according to the household liquidity effect channel? b.
What evidence exists to support the credit view of monetary policy?
"A decrease in short-term nominal interest rates necessarily implies a stance of monetary easing." Is this statement true, false, or uncertain? Explain your answer.
How does the experience of Japan during the "two lost decades" lend support to the four lessons for monetary policy outlined in this chapter?
Suppose the economy is in recession and the monetary policymakers lower interest rates in an effort to stabilize the economy. Use an aggregate supply and demand diagram to demonstrate the effects of
How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?
Lars Svensson, a former Princeton professor and deputy governor of the Swedish central bank, proclaimed that when an economy is at risk of falling into deflation, central bankers should be
Describe an advantage and a disadvantage of the fact that monetary policy has so many different channels through which it can operate.
"If countries fix their exchange rate, the exchange rate channel of monetary policy does not exist." Is this statement true, false, or uncertain? Explain your answer.
During the 2007-2009 recession, the value of common stocks in real terms fell by more than 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the
"The costs of financing investment are related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates." Is this
Predict what will happen to stock prices after a monetary easing. Explain your prediction.
A "rate cycle" is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business cycle conditions. Go to the
As defined in Exercise 1, a "rate cycle" is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business

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