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foundations macroeconomics

Questions and Answers of Foundations Macroeconomics

15. What is Okun’s law? If the unemployment rate increases by 2 percentage points between this year and next year, by how much will output change during the same period? Assume that the natural
6. Use the concepts of income effect and substitution effect to explain why a temporary increase in the real wage increases the amount of labor supplied, but a permanent increase in the real wage may
4. Explain why the profit-maximizing level of employment for a firm occurs when the marginal revenue product of labor equals the nominal wage. How can this profit-maximizing condition be expressed
1. What is a production function? What are some factors that can cause a nation’s production function to shift over time? What do you have to know besides an economy’s production function to
3.3 Discuss the factors that affect the supply of labor.
3.2 Describe factors that affect the demand for labor.
4. If the real interest rate were approximately constant, then in periods in which inflation is high, the nominal interest rate should be relatively high (because the nominal interest rate equals the
3. Graph the annual (December to December) CPI inflation rate and the annual (fourth quarter to fourth quarter) GDP deflator inflation rate since 1960 on the same figure. What are the conceptual
2. On the same figure, graph national saving and investment as fractions of real GDP, using quarterly U.S. data since 1947. (Note that national saving is called gross saving in the FRED database.)
1. Graph the four main expenditure components of GDP, in real terms, since the first quarter of 1947. Also graph the expenditure components as a share of total real GDP. Do you see any significant
transactions and statistical discrepancy in Table 5.1 help?
4. We showed in Eq. (2.10) that S = I + CA, where S is national saving, I is investment, and CA is the current account balance. Calculations of national saving and investment depend on the treatment
3. Economists have tried to measure the GDPs of virtually all the world’s nations. This problem asks you to think about some practical issues that arise in that effort.a. Before the fall of
2. Consider a closed economy with a single telephone company, Calls-R-Us. The residents of the country make 2 million phone calls per year and pay $3 per phone call. One day a new phone company,
9. The GDP deflator in Econoland is 200 on January 1, 2011. The deflator rises to 242 by January 1, 2013, and to 266.2 by January 1, 2014.a. What is the annual rate of inflation over the two-year
8. Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214
7. For the consumer price index values shown, calculate the rate of inflation in each year from 1930 to 1933. What is unusual about this period, relative to recent experience? Year 1929 1930 1931
6. Consider an economy that produces only three types of fruit: apples, oranges, and bananas. In the base year (a few years ago), the production and price data were as follows: Fruit Quantity Price
5. You are given the following information about an economy: Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account
4. For each of the following transactions, determine the contribution to the current year’s GDP. Explain the effects on the product, income, and expenditure accounts.a. On January 1, you purchase
2. National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP?a. It is discovered
1. After a boat rescues everyone else from Gilligan’s Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows
9. Describe how the CPI and CPI inflation are calculated. What are some reasons that CPI inflation may overstate the true increase in the cost of living?
3. What is the difference between intermediate and final goods and services? In which of these categories do capital goods, such as factories and machines, fall? Why is the distinction between
3. Using data on the consumer price index (CPI) for all urban consumers, calculate and graph the annual U.S. inflation rate (the percentage change in the price index, December to December) for each
2. Graph the behavior of the civilian unemployment rate from 1961 until the present using monthly data. Can you see the periods of recession that occurred in 1969–1970, 1973–1975, 1980,
1.a. Calculate the total percentage growth in average labor productivity in the U.S. economy for the 1950s, 1960s, 1970s, 1980s, 1990s, and 2000s. Define average labor productivity for any year as
5. In 2002, President George W. Bush imposed tariffs on certain types of imported steel. He argued that foreign steel producers were dumping their steel on the U.S. market at low prices. The foreign
4. Which of the following statements are positive in nature and which are normative?a. A tax cut will raise interest rates.b. A reduction in the payroll tax would primarily benefit poor and
2. Prices were much higher in the United States in 2012 than in 1890. Does this fact mean that people were economically better off in 1890? Why or why not?
1. Here are some macroeconomic data for the country of Oz for the years 2011 and 2012. 2011 2012 Output 12,000 tons of potatoes 14,300 tons of potatoes Employment 1000 workers 1100 workers Unemployed
Macroeconomics is the study of the structure and performance of national economies and of the policies
1. Using quarterly data since 1959, graph Federal government expenditures and receipts as a percentage of GOP. Separately, graph state and local government expenditures and receipts as a percentage
5. A constitutional amendment has been proposed that would force Congress to balance the budget each year (that is, outlays must equal revenues in each year). Discuss some advantages and
4.a. Use the fact that the nominal deficit equals the nominal primary deficit plus nominal interest payments on government debt to rewrite equation (15.4) showing the change in the debt-GOP ratio as
3. Both transfer programs and taxes affect incentives. Consider a program designed to help the poor that promises each aid recipient a minimum income of $10,000. That is, if the recipient earns less
2. Using the Economic Report of the President, compare the Federal government's budget in 1979, 1992, 2000, and 2004. Express the main components of Federal spending and receipts in each year as
1. Why is some state and local spending paid for by grants in aid from the Federal government instead of entirely through taxes levied by states and localities on residents? What are the advantages
9 Consider an economy in which the money supply consists of both currency and deposits. The growth rate of the monetary base, the growth rate of the money supply, inflation, and expected inflation
8. Real money demand in an economy is L = 0.2Y-500i, where Y is real income and i is the nominal interest rate. In equilibrium, real money demand, L., equals real money supply, M/P. Suppose that Y is
7 In this problem you are asked to analyze the question: By issuing new bonds and using the proceeds to pay the interest on its old bonds, can government avoid ever repaying its debts?a. Suppose that
6. Find the largest nominal deficit that the government can run without raising the debt-GDP ratio, under each of the following sets of assumptions:a. Nominal GOP growth is 10% and outstanding
5 Suppose that all workers value their leisure at 90 goods per day. The production function relating output per day, Y, to the number of people working per day, N, is Y � 250N - 0.5N'-.
4 Suppose that the income tax law exempts income of less than $8000 from the tax, taxes income between $8000 and $20,000 at a 25% rate, and taxes income greater than $20,000 at a 30% rate.a. Find the
3 Because of automatic stabilizers, various components of the government's budget depend on the level of output, Y. The following are the main components of tha t budget: Tax revenues Transfers
2 Congress votes a special one-time $1 billion transfer to bail out the buggy whip industry. Tax collections don't change, and no change is planned for at least several years. By how much will this
1 The following budget data are for a country having both a central government and provincial governments: Central purchases of goods and services Provincial purchases of goods and services Central
10. Define inflation tax (also called seignorage). How does the government collect this tax, and who pays it? Can the government always increase its real revenues from the inflation tax by increasing
9. Discuss four reasons why the Ricardian equivalence proposition isn't likely to hold exactly.
8. In what ways is the government debt a potential burden on future generations? What is the relationship between Ricardian equivalence and the idea that government debt is a burden?
7. Why do economists suggest that tax rates be kept roughly constant over time, rather than alternating between high and low levels?
6. Give a numerical example that shows the difference between the average tax ra te and the marginal tax rate on a person's income. For a constant before-tax real wage, which type of tax rate most
5. Define automatic stabilizer and give an example. For proponents of antirecessionary fiscal policies, what advantage do automatic stabilizers have over other types of taxing and spending policies?
4. What are the three main ways that fiscal policy affects the macroeconomy? Explain briefly how each channel of policy works.
3 How is government debt related to the government deficit? What factors contribute to a large change in the debt-GDP ratio?
2. Explain the difference between the overall government budget deficit and the primary deficit. Why are two deficit concepts needed?
1. What are the major components of government out- lays? What are the major sources of government rev- enues? How does the composition of the Federal government's outlays and revenues differ from
3. As discussed in the text, if money demand is unstable, the Fed may prefer to target interest rates rather than the money supply itself. When the Fed follows an interest-rate-targeting policy,
2. During much of the postwar period, the Fed attempted to stabilize nominal interest rates. However, during 1979-1982 the Fed under Paul Volcker greatly reduced its emphasis on interest rate
1. Obtain data on currency held by the nonbank public, which is called the currency component ofM1 (starting in 1959). Define "deposits" for each year since 1959 to be M1 minus currency, and define
4 Why do many governments have policies against negotiating with hostage-taking terrorists? Under what conditions, if any, are such policies likely to reduce hostage taking? Discuss the analogy to
3. In the game between the Fed and the firms shown diagrammatically in Fig. 14.10(b), what happens if the Fed doesn't value having the unemployment rate below the natural rate, II? Specifically,
2 Suppose that the Fed were committed to following the Taylor rule, given in Box 14.2, p. 554. For each of the following types of shocks, determine whether the use of the Taylor rule would tend to be
1 How would each of the following affect the U.s. money supply? Explain.a. Banks decide to hold more excess reserves. (Excess reserves are reserves over and above what banks are legally required to
4 This question asks you to analyze a game played by two players, player I and player II. Player I can choose one of two actions, A and B. Player II also has two actions from which to choose, a andb.
3 When the real interest rate increases, banks have an incentive to lend a greater portion of their deposits, which reduces the reserve-deposit ratio. In particular, suppose that res = 0.4 - 2r,
2a. The money supply is $6,000,000, currency held by the public is $2,000,000, and the reserve-deposit ratio is 0.25. Find deposits, bank reserves, the monetary base, and the money multiplier. h. In
1 The Agricolan monetary base is 1,000,000 florins. The public always holds half its money supply as currency and half as deposits. Banks hold 20% of deposits in the form of reserves. Starting with
10. Has the use of money-growth targets significantly improved central bank credibility? Besides adopting money-growth targets, what other actions can a coun- try take to increase the credibility of
9. "It is plain to see that discretion is a better way to run monetary policy than following a rule because a policy of discretion gives the central bank the ability to react to news about the
8. What are the three channels of monetary policy? Explain each channel briefly.
7 What are intermediate targets? How do they differ from monetary policy goals? List the two principal types of intermediate targets that the Fed has used.
6 Besides open-market operations, what other means does the Federal Reserve have for controlling the money supply? Explain how these alternative methods work.
5 Who determines monetary policy in the United States? What role does the President play?
4 What is the effect on the monetary base of an open- market purchase of U.S. Treasury securities? What is the effect on the money supply?
3 Discuss how actions of the public and banks can cause the money multiplier to rise or fall. Does the fact that the public and banks can affect the money multiplier imply that the central bank
2 Define money multiplier. What is the value of the money multiplier in a system of 100% reserve banking? What is the value of the money multiplier in a system of frac- tional reserve banking, if all
1 Define monetary base. What is the relationship between the monetary base and the money supply in an all- currency economy?
3. Plot the exchange rate of the Hong Kong dollar relative to the U.s. dollar from January 1981 to the present. Was the Hong Kong dollar generally appreciating or depreciating relative to the U.s.
2. Using quarterly data since 1973, graph the U.s. real exchange rate (as calculated in Exercise 1) and net exports as a fraction of GOP in the same figure. Also create a scatter plot of the same two
1. The United States left the Bretton Woods fixedexchange-rate system in stages during the early 1970s.a. Graph the U.S. nominal exchange rate from 1973 to the present. Calculate and graph the U.S.
4 Use a diagram like that in Fig. 13.7a to analyze the effect on a country's net exports of a beneficial supply shock that temporarily raises full-employment output by 100 per person. Assume that the
3 Use the classical IS-LM model for two countries to analyze the idea that the United States became a relatively more attractive place to invest in the early 1980s. Assume that, because of more
2 Use the classical IS-LM model for two countries to analyze the idea that the United States became a relatively more attractive place to invest in the early 1980s. Assume that, because of more
1 Recessions often lead to calls for protectionist measures to preserve domestic jobs. Suppose that a country that is in a recession imposes restrictions that sharply reduce the amount of goods
6a. For the economy described in Numerical Problem 4, find the values of all the parameters of Eqs. (13.B.l), (13.B.2), and (13.B.3). Use Eqs. (13.B.8) and (13.B.9) to derive the open-economy IS
5 Consider the following classical economy: AD Y = 400 + 50 M/P AS Y = Y = 1000. This economy produces only wine, its output is measured in terms of wine, and its currency is francs. It trades with a
4 Consider the following Keynesian economy: Desired consumption Cd = 200 + 0.6(Y - T) - 200r. Desired investment rd = 300 - 300r. Taxes T = 20 + 0.2Y. Government purchases G = 152. Net exports NX =
3 Consider the following classical economy: Desired consumption Desired investment Government purchases Net exports Real exchange ra te Full-employment output Cd = 300 + O.5Y - 200r. rd = 200 - 300r.
2 Japan produces and exports only cameras, and Saudi Arabia produces and exports only barrels of oil. Initially, Japan exports 40 cameras to Saudi Arabia and imports 64 barrels of oil. The real
1 West Bubble makes ordinary soap bars that are sold for 5 guilders each. East Bubble makes deluxe soap bars that are sold for 100 florins each. The real exchange rate between West and East Bubble is
12. Discuss the relative advantages and disadvantages of flexible exchange rates, fixed exchange rates, and a currency union.
11. Why is a country limited in changing its money supply under a fixed-exchange-rate system? Explain how policy coordination among countries in a fixed- exchange-rate system can increase the degree
10. What is the fundamental value of a currency? What does saying that a currency is overvalued mean? Why is an overvalued currency a problem? What can a country do about an overvalued currency?
9 What effects does expansionary monetary policy have on the nominal exchange rate in both the short and long run? Explain.
8 How are net exports affected by expansionary fiscal policy? By expansionary monetary policy? What is the potential ambiguity in determining these effects?
7 How does the IS-LM model for an open economy differ from the IS-LM model for a closed economy? Illustrate the use of the open-economy IS-LM model in describing how a recession in one country may be
6 Why do foreigners demand dollars in the foreign exchange market? Why do U.S. residents supply dol- lars to the foreign exchange market? Give two exam- ples of changes that would lead to an
5 For a given real exchange rate, how are a country's net exports affected by an increase in domestic income?An increase in foreign income? How does an increase in the domestic real interest rate
4 What is the J curve? What explains the behavior of net exports represented by the J curve?

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