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foundations macroeconomics

Questions and Answers of Foundations Macroeconomics

10. Suppose that after a negative shock on the labor demand curve in an economy, the government interfered and implemented an expansionary policy by decreasing taxes and increasing spending
9. An old saying goes: “Nothing succeeds like success.”Explain how this could relate to Keynes’s animal spirits view of economic fluctuations and the concept of a self-fulfilling prophec y.
8. Proponents of the real business cycle theory emphasize the importance of input prices, especially oil, a nonrenewable energy source that is subject to abrupt price changes. How might the
7. In 1973, the major oil-producing nations of the world declared an oil embargo. The price of oil, a key source of energy, increased. In many countries, this led to a fall in real GDP and
6. Assume that labor supply and labor demand are described by the following equations:Labor supply: L S = 5 * w Labor demand: L D = 110 - 0.5 * w where w = wage is expressed in dollars per hour, and
5. Answer the following and illustrate your answers on a graph.a. Assuming flexible wages, how will wages react to a fall in labor demand?b. What options do workers have in this case?
4. Suppose that the mythical country Moricana has a downward rigid wage. Moricana is in a recession; capacity utilization in the economy is at an all-time low, and surveys show that firms do not
3. The Conference Board publishes data on Business Cycle Indicators (BCI). The Composite Index of Leading Economic Indicators is one of the three components of the BCI. Changes in leading economic
2. Go to the Trading Economics website and view the unemployment rate section. Click on the max button, and a graph will show the unemployment rate in the European Union (EU) since 2000. To check GDP
1. Consider the data in Exhibit 12.3.a. List the recessions since 1929 by duration, with the longest recession first and the shortest last (excluding the 2020 recession).b. List the recessions since
4. In 2020, the unemployment rate fluctuated sharply from 3.5 percent at the beginning of the year, to 14.8 percent in April, to 6.7 percent by the end of the year.On average the unemployment rate in
3. Between 2000 and 2006, housing prices in the United States increased by about 90 percent. As detailed in the chapter, this increase abruptly reversed.a. What caused the housing bubble in the first
2. On average, consumption (C) changes by 3 cents when a family’s housing wealth or stock market wealth changes by a dollar.a. How much would we expect economy-wide consumption(C) to change if U.S.
1. What three factors explain the 2007–2009 recession?
9. What are two important mechanisms that reverse the effects of a recession in a modern economy?
8. How can contractionary monetary policy lead to an economy-wide recession? Why do policymakers generally prefer to target low levels of inflation (e.g., 2%)rather than zero inflation?
7. The concept of multipliers was one of the key elements of John Maynard Keynes’s theory of fluctuations. What is a multiplier? Explain with an example.
6. How did John Maynard Keynes use the concepts of animal spirits and sentiments to explain economic fluctuations?
5. How does real business cycle theory explain economic fluctuations?
4. How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor shifts to the left?
3. Does the Great Depression illustrate the three characteristics of economic fluctuations? Explain your answer.
2. What does it mean to say that an economic fluctuation involves the co-movement of many aggregate macroeconomic variables? Name four variables that exhibit co-movement during an economic expansion.
1. What are economic fluctuations? What is the difference between an economic expansion and a recession?
12. The chapter discusses different models of how people form their expectations regarding inflation. Consider the following two investors, who are trying to forecast what inflation will be for next
11. As the U.S. economy recovers from the effects of the coronavirus recession, it is anticipated that the Fed will raise the federal funds rate. Suppose the current federal funds rate is 0 percent
10. Till the late nineteenth century, it was common for gold and silver coins to be used as a medium of exchange.When it required money, governments would often mint more coins and replace some
9. From 2001 to 2006, Japan’s central bank, the Bank of Japan (BOJ), engaged in a monetary policy program called quantitative easing. The BOJ increased the quantity of reserves that commercial
8. On March 15, 2020, the Federal Reserve Board held an emergency meeting in response to the large economic contraction caused by the coronavirus pandemic. After the meeting, the Fed released a press
7. The following table shows the cost of producing dollar notes of various denominations. As you can see in the table, it costs only 15.5 cents to produce a $100 bill.Suppose the government decides
6. According to the BBC, inflation in the country of Zimbabwe reached an annualized rate of 231,000,000 percent in October 2008. Prices got so high that in January 2009, the country’s central
5. Imagine that the central bank of the island economy you live in announced this morning that every denomination of the currency in circulation would be worth half of what it was yesterday. For
4. Bitcoins are defined as a “peer-to-peer decentralized digital currency.” The supply of bitcoins is not controlled by the government or any other central agency. The value of each bitcoin is
3. In some parts of the world, salt—the stuff sitting on your kitchen table—was once used as currency. In ancient Ethiopia, for example, blocks of salt were used to purchase goods and pay
2. Money makes a variety of economic transactions possible.In the following three situations, determine whether money is involved in the transaction.a. On the island of Yap, exchanges were made by
1. Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange.a. Due to the economic collapse of
3. If the price level doubles each year, how much will prices increase in 3 years? Please express this as a percentage using the formula (Ending value Starting value) (Starting value) Percentage
2. Suppose the long-run growth rate in the money supply is 102 percent per year and the long-run growth rate in real GDP is 2 percent per year. What will be the long-run rate of inflation
1. In this chapter we discussed the quantity theory of money, which predicts that over the long run the following quantity theory of money equation will hold.Growth rate of money supply= Growth rate
16. What are the two models that are used to describe inflationary expectations?
15. How does the Federal Reserve influence the long-term real interest rate?
14. Why is the Federal Reserve referred to as the “lender of last resort”?
13. How does a change in interest on reserves (IOR) effect equilibrium in the federal funds market, including the federal funds rate?
12. What is interest on reserves (IOR)? Does a change in interest on reserves affect the demand curve for reserves or the supply curve for reserves?
11. What is an open market operation? Why does the Federal Reserve conduct open market operations?
10. What is the federal funds rate? What are the factors that would shift the demand curve for reserves?
9. Does inflation have any benefits? Explain.
8. What are the costs associated with inflation?
7. What is the most common cause of hyperinflation?
6. What are the differences among inflation, deflation, and hyperinflation?
5. Recall the discussion in the chapter about the quantity theory of money.a. Explain the quantity theory of money.b. Explain how predictions of the quantity theory of money are borne out by
4. Explain why it is important to be able to measure inflation when calculating real GDP.
3. How is the M2 money supply defined? Does the definition of M2 include currency in bank vaults? Does the definition of M2 include reserves on deposit at the Fed?
2. How does fiat money differ from commodities like gold and silver that have been used as money?
1. List and explain the three functions of money in a modern economy.
11. The sharpest one-day percentage decline in the Dow Jones Industrial Average (DJIA) took place on October 19, 1987. The DJIA fell 23 percent on this one day.Foreign exchange markets and other
10. The Choice & Consequence box on “Asset Price Fluctuations and Bank Failures” discusses the relationship between the prices of things like oil and real estate, and the solvency of lending
9. In this problem, consider a simple mutual fund. Households and businesses invest in the fund by buying shares; the fund uses this money, in turn, to invest in a range of assets, including equities
8. If you have studied microeconomics, you may recall a concept called “moral hazard.” Moral hazard occurs when an economic agent is incentivized to take risks because some (or all) of the losses
7. Banks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. In other words, narrow banks take short-maturity
6. Households, like banks, have balance sheets. Although these assets and liabilities may not be written down in a neat table, they still influence household decision making.a. We saw in this chapter
5. Explain how the equilibrium real interest rate and the equilibrium quantity of credit would change in each of the following scenarios and illustrate your answer with a well-labeled graph of the
4. Many kinds of loans, like student loans and mortgages, can be taken out at either a fixed or variable rate. A fixed rate loan allows the borrower to pay the same nominal interest rate for the
3. The average annual inflation rate in Canada was 12.47 percent, in 1981 and became 1.78 percent in 2010. The Canadian short-term nominal interest rate was 17.78 percent in 1981 and it also fell to
2. The 1970s was a period of high inflation in many industrialized countries, including the United States.a. Due to the increase in the inflation rate, lenders, including credit card companies,
1. Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan.a. In a given year, the average rate paid by banks on savings accounts was 3.85
6. Now in light of the answers to the above parts, why do you think there were so many fewer bank failures during the 2007–2009 financial crisis than in the Great Depression?
5. Let us go back to the case with $5 billion of mortgage losses, but now suppose that because there is an economy-wide recession, the bank also loses another$10 billion on its non-mortgage assets
4. Consider again the case with $11 billion of mortgage value being lost. What happens if the government gives the bank $1 billion as a bailout (for example, a special loan that the bank will not
3. Suppose now that the housing crash is even more severe and the bank loses $11 billion out of its $40 billion of mortgages. Will the bank fail?
2. Consider a housing crash, so that house prices fall sharply and the $40 billion of mortgages the bank holds are now suddenly worth only $35 billion. Will this cause a bank run and a bank failure?
1. What happens if all of the depositors of the bank suddenly decide that they want their money back? Distinguish what would happen with and without deposit insurance.Can we have a situation in which
13. Banks fail when they invest in long-term assets that subsequently fall in price. What are the two views on why asset prices fluctuate so much that they lead to financial crises and bank failures?
12. As the Choice & Consequence box on “Too Big to Fail”notes, bank regulators worry about the prospect of the failure of large financial institutions, dubbed “systemically important financial
11. What is deposit insurance? Is deposit insurance successful in preventing bank runs?
10. What is a bank run?
9. What is stockholders’ equity? Who bears the risk that a bank faces when stockholders’ equity is greater than zero?
8. What is maturity transformation?
7. What functions do banks perform as financial intermediaries in the economy?
6. What is the shadow banking system?
5. What are the key categories on a bank’s balance sheet?Illustrate using a table with assets on the left and liabilities and stockholders’ equity on the right.
4. Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest
3. What factors explain why people save for the future?
2. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate.If everything else remaining unchanged, what is likely to happen to the credit
1. What is the difference between nominal and real interest rates?
14. The following figure shows the demand and supply curves in the market for workers (called “baristas”) in Starbucks coffee shops. The hourly wage in this market has been fixed at $7.25 and
13. According to salary.com, the average salary for an Art and Creative Director in the United States is $99,700 as of 2020. A new company decided to take the advertising industry by storm and so it
12. Metro Cheese Steaks prepares meals from outlets in major cities across the country. Assume that some outlets can hire only White workers and others only Black workers. Productivity of all workers
11. Assume that half of all workers are White and the other half Black. All workers are equally productive. Draw a graph of the labor market for White and then Black workers. Include the equilibrium
10. In response to the financial crisis of 2007, the government of Hungary, in 2012, reduced the number of days for which unemployment benefit can be provided to 90 days from 270 days. What could
9. The following graph shows the demand for and supply of labor in a market with a minimum wage set at€125 per month. Use the graph to answer the following questions.a. How many workers will be
8. Countries around the world have faced a youth unemployment crisis in recent decades. According to a report by the International Labour Organization, the global youth unemployment rate in 2016 was
7. Every month, statistics on employment and unemployment are compiled by the Bureau of Labor Statistics.a. The unemployed worker whose frustration was discussed at the beginning of Section 9.1 had
6. Following are the durations of unemployment in Italy during 2018:15• Less than 1 month: 5.7 percent• More than 1 month and less than 3 months: 10.7 percent• More than 3 months and less than
5. Suppose Construire Construction Firm makes a special window frame that it sells for €20. The following table shows the number of window frames that can be produced from a given number of labor
4. A new study suggests that technology might provide improved leisure options, like video games, to potential workers, and that young men with low levels of education are increasingly staying home
3. In April 2012, the Bazanian Daily, a leading newspaper in the country of Bazania, carried a report titled “20,000 Jobs Added in the Last Quarter; Unemployment Rate Shoots Up from 5 Percent to
2. Assume that 1 million immigrants enter the United States this year and that some of these immigrants work in the home construction industry.a. Graph the impact of immigration on the supply of
1. The following table shows the employment level, unemployment level, and the labor force participation rate in Greece for the month of March of every year from 2008 to 2020. Use the given data to
2. In the 1980s, Raleigh-Durham in North Carolina specialized in textiles, apparel, electrical products, and computers.These industries contracted in the next two decades, partly as a result of
1. The period from 2007 to 2009 was a time of economic contraction that some have called the “Great Recession.”An even sharper (though shorter) economic contraction occurred during the COVID

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