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foundations macroeconomics

Questions and Answers of Foundations Macroeconomics

12. Recall the discussion in “Letting the Data Speak” regarding the Chinese yuan. Why did the Chinese authorities keep the yuan undervalued until the end of 2016? At the beginning of 2014, $1 was
11. Imagine that there are two economies in the world:Bostonia and New Yorkland. Bostonia’s currency is the sock and New Yorkland’s is the yank. Despite the longstanding rivalry between their
10. You may have seen the term “capital flight” in news articles about developing countries. Capital flight occurs when foreign investors, often spooked by political instability, lose confidence
9. Thailand and Taiwan are both rapidly growing Asian economies that trade actively with other countries.a. Suppose a computer circuit board is the only good produced in Thailand and Taiwan. The
8. Since 2008, the dollar has generally appreciated against the euro.a. Suppose that in the short run, the Fed wanted both to weaken the dollar (that is, stop its appreciation and/or cause it to
7. The following graph shows the Hungarian forint (HUF)per U.S. dollar (USD) exchange rate for 2008–2017.The table that follows shows the real interest rates in the United States and Hungary during
6. Challenge Problem: The beautiful, mythical country of Coloradial uses the teo as its currency, and the gritty, post-industrial country of Oheo uses the eren. Exactly 1 year ago, you could get 100
5. Econia trades with its neighbors, the countries of Governmentia and Sociologia. In Econia, the currency is called the econ; in Governmentia, the currency is called the gov; and in Sociologia, the
4. Using the net exports curve and the labor demand and labor supply curve, explain how a rise in the real exchange rate can lead to decrease in employment in a country.
3. In 2011, the government of Argentina developed a new policy (sometimes called the “dollar clamp”) to prevent Argentines from exchanging pesos, the local currency, for U.S. dollars. New
2. Recall from Chapter 6 that the Big Mac index is used as a rough measure of purchasing power parity across countries. In January 2021, The Economist magazine reported: “A Big Mac costs 66,000
1. Suppose that the European Union follows a flexible exchange rate regime. The exchange rate between the euro (EUR) and the U.S. dollar (USD) is currently 1 EUR = 1.17 USD.a. Use a graph to show the
4. The Evidence-Based Economics feature discusses how George Soros’s hedge fund made money by betting on the devaluation of the British pound. Interestingly, Soros also made money betting against
3. Based on what you know about the sustainability of undervalued vs. overvalued exchange rates, would you guess that most managed exchange rates are undervalued or overvalued?
2. Suppose a monetary authority is holding its country’s exchange rate above the equilibrium value by using$10 billion of foreign currency reserves (e.g., U.S.dollars) each month to buy domestic
1. Suppose a monetary authority is holding its country’s exchange rate below the equilibrium value by issuing domestic currency (e.g., the Indonesia rupiah), which the monetary authority uses to
12. The economy of Freedonia is currently faced with high unemployment. Explain how the Freedonian central bank could increase net exports and lower unemployment.
11. All else being equal, explain how an increase in the real interest rate is likely to affect a country’s net exports, labor demand, and level of employment.
10. How does a change in a country’s real exchange rate affect its net exports?
9. How is the real exchange rate for the United States calculated?
8. Why might a country peg its exchange rate at a level that overvalues its own currency?
7. What does it mean to say that, at an exchange rate of$1 = 70 INR, the U.S. dollar is overvalued and the Indian rupee (INR) is undervalued?
6. What does the supply curve for dollars show? Why does the supply curve for dollars slope upward?
5. What does the demand curve for dollars show? Why does the demand curve for dollars slope downward?
4. What are the advantages of undervaluation and overvaluation of a currency to an economy? What are the disadvantages of each?
3. Distinguish among flexible, fixed, and managed exchange rates.
2. When is a currency said to appreciate or depreciate?
1. How is the nominal exchange rate between two currencies defined?
12. The coffee market is one of the most globalized and volatile commodity markets in existence. In terms of the value of trade, it is second only to oil. Coffee is produced in over seventy
11. Foreign direct investment in several sectors in India is still heavily regulated. After much debate, the government of India recently relaxed restrictions on foreign direct investment in the
10. Throughout the 1950s and 1960s, many countries with low income per capita pursued a policy called “importsubstituting industrialization,” or ISI for short. India, and many nations in Africa
9. In 2019, the U.S. current account deficit was $480 billion, while the trade deficit was $577 billion.a. Why are the trade deficit and the current account deficit different?b. Based on the
8. Suppose the following table shows data on transactions between Hungary and the rest of the world for the second quarter of 2017. Assuming the list is exhaustive, use the information given to fill
7. Former President Donald Trump argued that China was exploiting the United States. In particular, he decried the large trade deficit with China—he often said that China was “killing” the
6. The United States has maintained a free trade policy since World War II. However, since the election of President Trump, there is growing discourse that tariffs should be imposed to save American
5. Use the information below to answer the questions that follow.a. Which country has the absolute advantage in producing cars? In producing wheat?b. For the United States, what is the opportunity
4. Assume that an American worker can produce 5 cars per year or 10 tons of grain per year, whereas a Japanese worker can produce 15 cars per year or 5 tons of grain per year. Assume for this
3. In India, an acre of land can produce 40 tons of sugarcane or 65 bushels of corn per season, while in the United States, an acre of land can produce 20 tons of sugarcane or 150 bushels of corn per
2. You and your roommate are enrolled in the same course: Postmodern Deconstruction of Postmodern Deconstructionism. The course requires a term paper.Since the professor encourages collaboration on
1. Nobel laureate Paul Samuelson (1969) once said of the concept of comparative advantage: “That it is logically true need not be argued before a mathematician; that it is not trivial is attested
4. Many of the children working in factories are girls.Because their wages are higher than in agriculture, they tend to delay marriage and their first birth. How might globalization improve the
3. Using Exhibit 14.11, estimate the impact of economic growth on child labor. Specifically, estimate how child labor will be affected by growing GDP from $1,000 per capita to$10,000 per capita.
2. If factories tend to be located in towns and cities, what is the impact of economic development on the degree of urbanization?
1. List the economic benefits and economic costs of moving from the agricultural sector to the manufacturing sector in a developing economy.
14. Are multinational companies harming factory workers in the developing world by hiring them at low wages?
13. What is foreign direct investment? Explain with an example.How does foreign direct investment benefit the recipient country?
12. What are net capital outflows? Use an example to explain how they are related to net exports.
11. What is included in a country’s financial account? How is the financial account related to the current account?
10. What does the current account include? Describe each of its components. Are all of these components included in GDP? Explain.
9. List the sources of income-based payments that domestic residents make to foreigners and the ways that domestic residents can receive income-based payments from foreigners.
8. The international accounting system maintains a clear distinction between residency and citizenship.a. Who would be considered a domestic resident of the United States, according to the
7. Why is it a problem if a country is running a current account deficit? How can this be balanced out?
6. Has trade been increasing or decreasing over the past few decades as a fraction of GDP? What could explain why the ratio of imports to GDP in the United States fell sharply in the 1930s? Hint:
5. How is trade between Mexico and the United States theoretically different from trade between California and Texas? Are there practical differences?
4. Explain the following terms:a. Open economyb. Closed economyc. Importsd. Exportse. Tariffs
3. Engaging in trade increases overall economic efficiency.Does this also imply that everyone in an economy gains from trade equally?
2. How does trade allow buyers and sellers to exploit gains from specialization?
1. How does comparative advantage differ from absolute advantage?
11. The European Central Bank (ECB) manages monetary policy for the eurozone. In 2019, the ECB’s policy rate(the ECB’s version of the federal funds rate) was already at 0 percent, before the
10. Milton Friedman, the renowned monetary economist, gave the following analogy about the Fed.“Imagine your house is being heated by a heater. The heater is controlled by a thermostat. The way
9. According to the article Politics and investment:Examining the territorial allocation of public investment in Greece, in the 34 years before the 2008 financial crisis, public expenditure in
8. Two economists estimate the government taxation multiplier and come up with different results. One estimates the multiplier at 0.75, while the other comes up with an estimate of 1.25.a. What do
7. According to the Taylor rule, how should an inflation rate above 2 percent affect the federal funds rate?
6. According to the Taylor rule, how should a negative output gap affect the federal funds interest rate?
5. Why is observing the Taylor rule important in ensuring macroeconomic stability? What are the potential effects of not taking it into consideration? Visit http://www.global-rates.com and check the
4. You and a friend are debating the merits of using monetary policy during a severe recession. Your friend says that the central bank needs to lower interest rates all the way down to zero.
3. Indicate whether the following phenomena will lead to a shift in the reserves supply and demand curve for the Bank of England (BoE), where the horizontal axis indicates the quantity of reserves
2. The following figures show the European Central Bank’s (ECB) balance sheet as well as the balance sheet of a commercial bank in France, Crédit Paribas Bank. Suppose the ECB wants to raise bank
1. Former chairman of the Federal Reserve Alan Greenspan used the term “irrational exuberance” in 1996 to describe the high levels of optimism among stock market investors at the time. Stock
6. Explain why the multiplier for payments to people who were unemployed is greater than the multiplier for payments that were made universally to all adults.
5. Adding up these four pieces and assuming that GDP would have been $19.1 trillion in 2020 without the CARES Act, by what percentage did the CARES Act raise 2020 GDP?
4. Assume that the multiplier on the rest of the CARES Act(mostly transfers to businesses and the establishment of collateral for loans from the Federal Reserve System)was 0.25. If $1,350 billion was
3. Assume that the multiplier on $1,200 payments that were made universally to all adults (regardless of their employment status) was 0.5. If $300 billion was budgeted for these payments in the CARES
2. Assume that the multiplier on payments to hospitals as well as state and local governments was 0.75. If $300 billion was budgeted for these programs in the CARES Act, what was the associated
1. Assume that the multiplier on payments to people who are unemployed was 0.75. If $250 billion was budgeted for these programs in the CARES Act, what was the associated increase in GDP?
20. What aspect of the CARES Act represented a mix of fiscal and monetary policy?
19. Why is the Troubled Asset Relief Program (TARP) considered an example of a countercyclical policy that represents a mix of fiscal and monetary policy?
18. What could explain why a decrease in taxes could lead to a less than one-for-one increase in output?
17. The CARES Act (2020) financed government spending and transfers to firms and households that occurred primarily in 2020, whereas the American Recovery and Reinvestment Act (2009) financed fiscal
16. Why might the fiscal multipliers be lower during a pandemic?
15. Why do governments, in most cases, not follow countercyclical fiscal policy? How can the need for discretionary fiscal policies be decreased?
14. What are the automatic and discretionary components of fiscal policy?
13. According to the Taylor rule, when should the Federal Reserve lower or raise the federal funds rate?
12. What does the Taylor rule state?
11. When nominal interest rates have hit the zero lower bound, can central banks use interest rates to stimulate the economy? Explain.
10. How does the zero lower bound on interest rates affect the working of monetary policy?
9. Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.
8. Does the effectiveness of monetary policy depend on inflation expectations? Explain.
7. Other than interest on reserves (IOR), open market operations, and quantitative easing, what tools does the Federal Reserve use to manipulate interest rates in the economy?
6. A successful campaign of quantitative easing increases bond prices and decreases interest rates. Lower interest rates increase the value of real estate and stocks as well as bonds. Given that the
5. What is quantitative easing? Why do central banks undertake quantitative easing programs?
4. Briefly explain how expansionary monetary policy shifts the labor demand curve to the right.
3. How does an increase in interest on reserves (IOR) effect the federal funds rate?
2. How do expansionary policies differ from contractionary policies?
1. What are the similarities and the differences between monetary and fiscal policies?
15. The pandemic of 2020 affected firms’ willingness to hire workers, initially shifting the labor demand curve sharply to the left.a. Work out the consequences of this labor demand shift on an
14. Some economists stress the role of monetary policy in the period leading up to the 2007–2009 recession.Between 2001 and 2003, the Federal Reserve lowered the target federal funds rate from 6.5
13. The first Evidence-Based Economics feature in the chapter identifies three key factors that caused the recession of 2007–2009.a. How would Keynes’s concept of animal spirits explain the
12. In the early 1980s, the unemployment rate in the United States rose above 10 percent. The United States was in a severe recession. Both fiscal and monetary policies were used to stimulate the
11. The global outbreak of COVID-19 in 2020 wreaked havoc on most economies. The containment efforts of the pandemic were proving to be detrimental to economic activity, leading many countries to

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