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foundations macroeconomics

Questions and Answers of Foundations Macroeconomics

What happens when monetary policy is subject to the zero lower bound? Is there anything that the central bank can do in such circumstances to affect prices and real economic activity?
Explain how shifts in money demand create problems if the central bank wants to control the price level and inflation.
List four factors that can cause a shift in money demand.
What are the effects of an increase in credit market risk on aggregate economic activity? How does this matter for the current financial crisis?
Explain what a sectoral shock is. What are the macroeconomic effects of a sectoral shock and what are empirical examples of sectoral shocks?
How does asymmetric information affect the default premium and the firm's investment choice?A. Banks must charge all borrowers a higher interest rate on loans in order to ensure they are able to pay
How can a country overcome barriers to technology adoption?
What can cause barriers to the adoption of technology?
What are the three factors that account for growth in GDP?
What are three potential explanations for the Beveridge relation?
What is the Beveridge curve, and why is it important?
In the two-sided search model, what are the effects of an increase in the EI benefit?
How will an increase in the EI benefit affect the long-run unemployment rate in the one-sided search model, and why?
How does an increase in the EI benefit affect the reservation wage in the one-sided search model, and why?
How do demographic factors affect the participation rate.
Is the unemployment rate procyclical or countercyclical?
What are the four key determinants of the unemployment rate?
What is the role of the government in the one-period closed-economy model?
Why do macroeconomists work with seasonally adjusted data?
Explain what chain-weighting is.
What are government transfers? Explain why they are not included in GDP.
What is investment?
What three approaches are used to measure GDP?
How has the Canadian economy performed during the financial crisis and the recent global recession?
What has driven the increase in trade between Canada and the rest of the world?
How have unemployment rates behaved recently in Canada and the United States?
What are two possible causes of a productivity slowdown?
What are the theories of the business cycle that we will study?
List six fundamental macroeconomic questions.
What are two striking business cycle events in Canada during the past 100 years?
How much richer was the average Canadian in 2014 than in 1870?
Discuss four reasons why the Ricardian equivalence proposition is not likely to hold exactly.
What is the effect on interest rates and the money supply of an open-market purchase of Treasury bills?
Define monetary base. What is the relationship between the monetary base and the money supply in an all-currency economy?
According to the Keynesian model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run.
A closed economy has the following AD and AS curves: AD curve Y = 300 + 30(M/P) AS curve Y = Y + 10(P + Pe ) Here, Y̅ = 500 and M = 400. a. Suppose that Pe = 60. What are the
Figure 7.2 shows that before the 1990s, M1+ velocity generally rose over time. Suggest some explanations for this upward trend. Velocity of M1+ Velocity of M2 2011 1975 1979 1983 1987 1991 1995
According to the growth accounting approach, what are the three sources of economic growth? From what basic economic relationship is the growth accounting approach derived?
What is the key difference that determines whether an international transaction appears in the current account or the capital account?
Define a budget deficit. How does it differ from a budget surplus?
Suppose that the production function is With this production function, the marginal product of labour is The capital stock is K = 25. The labour supply curve is where ω is the real
The GDP deflator in Econoland is 200 on January 1, 2010. The deflator rises to 242 by January 1, 2012, and to 266.2 by January 1, 2013. a. What is the annual rate of inflation over the two-year
For the purpose of assessing an economy's growth performance, which is the more important statistic real GDP or nominal GDP? Why?
In 1993, the debate heated up in Canda about the North American Free Trade Agreement (NAFTA), which proposed reducing barriers to trade (such as taxes on, or limits to, imports) among Canada, the
Prices were much higher in Canada in 2013 than in 1914. Does this fact mean that people were economically better off in 1914? Why, or why not?
Go to the Statistics Canada website (www.statcan. gc.ca) and find “National Economic Accounts.” Opening that link takes you to another link on Gross Domestic Product. There you will find data on
Suppose there are two countries. In the rich country, the representative consumer has Hr units of human capital and total factor productivity is zr. In the poor country, the representative consumer
Suppose that you had the special powers to travel in time and to carry out any experiment you wanted on the economy. If you could turn back the clock to the time of the Great Depression, what
It has been argued that Greece, which effectively has a fixed exchange rate with the rest of the EMU, would have done better after the 2008–2009 recession if it were not part of the EMU and
Suppose in the NKRE model that from time 0 until time T -1, the natural rate of interest is r1*, where r1* < -π*, and from time T on the natural rate of interest is r2* > 0. Also, suppose that
In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital.a. Suppose that the central bank does nothing. What will be the effect on current
Suppose that the central bank observes a drop in real GDP but does not know what caused this drop.a. How would the central bank respond if it believed that GDP dropped because of a decline in total
Suppose that the central bank can influence expectations about inflation, by promising to increase the money supply in the future. In a liquidity trap, what effect does this have? Use a diagram to
Suppose that there are two groups of consumers in the population, constrained and unconstrained, with equal numbers of each. The constrained consumers look like the ones in Figure 10.5, while the
Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that is a constant, b. a. Determine how this consumer’s choice of current consumption,
Suppose that z, the marginal product of efficiency units of labour, increases in the endogenous growth model. What effects does this have on the rates of growth and the levels of human capital,
Suppose, there are two countries, A and B, and each is a Solow growth model economy. In each country, a fraction a of the population is rich and a fraction 1 -a is poor. Suppose that rich people save
Might differences across countries in population growth account for the persistence in income disparity across countries? Use the Solow growth model to address this question and discuss.
Consider the data in the table below:a. Calculate the Solow residual for each year from 2004 to 2014.b. Calculate percentage rates of growth in output, capital, employment, and total factor
Modify the Solow growth model by including government spending, as follows. The government purchases G units of consumption goods in the current period, where G = g N and g is a positive
Adapt the two-sided search model to include government activity as follows. Suppose that the government can operate firms, subject to the same constraints as private firms. In particular, the
Suppose that there is technological change that reduces the costs of recruiting for firms. Using the two-sided search model, determine the effects on the unemployment rate, the vacancy rate, the
Suppose the government’s goal is to reduce the unemployment rate. Some legislators propose that the government should give a subsidy s to any firm that hires a worker. Others argue that it would be
Suppose that the government makes it more difficult to qualify for employment insurance, for example, by increasing the duration of employment required before collecting EI benefits during an
Suppose there is an increase in total factor productivity, which implies that all firms offer higher wages. In the one-sided search model of unemployment, determine the effects of this on the
Suppose a two-person household. Person 1 has h1 units of time available and takes l1 units of leisure time, while person 2 has h2 units of time available and takes l2 units of leisure time.
Suppose that a consumer cannot vary hours of work as he or she chooses. In particular, he or she must choose between working q hours and not working at all, where q > 0. Suppose that dividend
Typically, older workers reduce their hours of work for a period until they retire. How could we capture such an effect in the consumer model in this chapter? Draw a diagram and illustrate how this
Suppose, as in the federal income tax code for Canada, that the representative consumer faces a wage income tax with a standard deduction. That is, the representative consumer pays no tax on wage
In Figure 3.15 we observe that seasonally unadjusted employment is actually quite variable. It is an accepted idea that one of the roles of economic policy is to smooth out fluctuations in seasonally
Consumption of durables is more variable relative to trend than consumption of semi-durables, and consumption of semi-durables is more variable relative to trend than con-sumption of nondurables and
We have measured average labour productivity in this chapter as Y/N, where Y is real GDP and N is employment. The business cycle facts concerning employment relate to how the denominator N comoves
In Canada, transactions among banks and other financial institutions takes place through the Large Value Transfer System (LVTS) operated by the Bank of Canada. During 2015, 8.1 million payments were
Part of gross domestic product consists of production in the so-called FIRE sector (finance, insurance, real estate, and rental and leasing). Value-added is notoriously difficult to measure in this
Consider an economy with a corn producer, some consumers, and a government. In a given year, the corn producer grows 3 million tonnes of corn, and the market price for corn is $50 per tonne. Of the 3
In this chapter, we learned that the quantity of Canadian currency outstanding per Canadian resident was $2026 in 2015. Suppose we were to try to use this number to estimate the amount of output
In some countries, price controls exist on some goods, which set maximum prices at which these goods can be sold. Indeed, Canada experienced a period of wage and price controls in the 1970s, under
Assume an economy with two firms. Firm A produces wheat and firm B produces bread. In a given year, firm A produces 5000 tonnes of wheat, sells 2000 tonnes of wheat to firm B at $30 per tonne,
Assume an economy in which there are two producers: a wheat producer and a bread producer. In a given year, the wheat producer grows 3 million tonnes of wheat, of which 2.5 million tonnes are sold to
Between 2000 and mid-2008, Canada ran a current account surplus. Relate this increase to what happened to exports and imports at the time.
Why do you think the real interest rate was low during the recession in the mid-1970s and during the 2008–2009 recession?
Is there anything you observe in Figure 1.9 that would make you think that increases (decreases) in inflation cause increases (decreases) in the nominal interest rate, as opposed to increases
In Figure 1.7, the unemployment rate in Canada did not change much from 2014 to 2016, but the U.S. unemployment rate continued to fall. Why do you think this happened?Figure 1.7: 10 9. United States
Why do you think the government surplus fell during the recession of 2008-2009? (See Figure 1.6.)Figure 1.6: 4 -2 -6 -8 -10 -12 1960 1980 1990 2000 2010 2020 1970 Year Government Surplus, % of GDP 2.
Consider the following data on real GDP per capita in Canada:a. Calculate the percentage growth rates in real GDP per capita in each of the years 2011 through 2014, from the previous year.b. Now,
Joan, your study partner, has just made the following statement: “A loan is a loan and therefore cannot be an asset.” Is she correct? Why or why not?
You find that real GDP per capita in Burundi is $800 while real GDP per capita in the United States is $50,000. What is misleading about these figures when comparing standards of living?
Is the currency in your pocketbook or wallet a real or a financial asset? Why?
Why was character George Bailey in the film It’s a Wonderful Life right when he stated on the day of a bank run that depositors could not withdraw all their money from the bank?
What are two roles of the financial sector?
As radical economists see it, when it comes to making monetary policy, the Fed consistently puts the interests of bondholders ahead of people seeking work. It regularly moves to protect the value of
Why are large financial institutions considered to be too big to fail? What problem does it create?
Why do some economists believe the Fed needs to unwind monetary policies instituted during the recession? What is the risk in doing so?
Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $200 billion.a. What is
In Figure 35-2, a foreign government chooses to maintain an equilibrium market exchange rate of U.S. $1.00 per unit of its own currency. Discuss the implications of the government trying to maintain
If a country’s actual exchange rate is 20 units per dollar and its purchasing power parity exchange rate is 25, is its currency under- or overvalued? Explain your answer.
Domestic policy as it relates to a country’s currency is related to the state of the economy.a. Why didn’t the United States have to implement contractionary policy following World War II even
Why are economic statistics incomplete measures of quality of life?
What impact does measuring income per capita using the purchasing power parity approach have on the comparison of incomes between developed and developing countries as opposed to measuring them based
Christians are called to be Christ-like, a "light to lighten the nations" (Luke 2:32).a. In light of the basic biblical norms of justice, righteousness, and stewardship, how should a nation decide

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