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foundations of modern macroeconomics

Questions and Answers of Foundations Of Modern Macroeconomics

5. (Appendix 9.B) Recall from Chapter 7 that an increase in i , m the nominal interest rate on money, increases the demand for money. To capture that effect, let’s replace Eq. (9.B.17) with MP
4. (Appendix 9.B) In some macroeconomic models, desired investment depends on both the current level of output and the real interest rate. One possible rea son that desired investment may depend on
3. Suppose that the price level is fixed in the short run so that the economy doesn’t reach general equilib rium immediately after a change in the economy. For each of the following changes, what
2. Use the IS–LM model to analyze the general equilib rium effects of a permanent increase in the price of oil(a permanent adverse supply shock) on current out put, employment, the real wage,
1. For each of the following changes, what happens to the real interest rate and output in the very short run, before the price level has adjusted to restore general equilibrium?a. Wealth declines.b.
6. (Appendix 9.B) This question asks you to use the for mulas in Appendix 9.B to find the general equilib rium values of variables for the economy described in Numerical Problem 4. Assume that G 50.
5. Consider the following economy:Desired consumption ( ) = + − − C Y T r 1275 0.5 200 . d Desired investment = − I r 900 200 . d Real money demand = − L Y i 0.5 200.Full-employment output =
4. The production function in an economy is Y A N N 5 0.0025 , 2 ( ) = −where A is productivity. With this production func tion, the marginal product of labor is MPN A AN 5 0.005 .Suppose that A 2.
3. An economy has full-employment output of 1000.Desired consumption and desired investment are C Y T r I r 200 0.8 500 ;200 500 .d d( ) = + − −= −Government purchases are 196, and taxes are T
2. In a particular economy the real money demand function is MP Y i 3000 0.1 10,000. d = + −Assume that M P 6000, 2.0, = = and 0.02. e π =a. What is the real interest rate, r, that clears the
1. Desired consumption and investment are C r Y I r 4000 4000 0.20 ;2400 4000 .d d= − += −As usual, Y is output and r is the real interest rate.Government purchases, G, are 2000.a. Find an
9. Use the AD–AS framework to analyze whether money is neutral in the short run and whether it is neutral in the long run.
8. Describe the short-run aggregate supply (SRAS)curve and the long-run aggregate supply (LRAS)curve. Why is one of these curves horizontal and the other vertical?
7. What two variables are related by the aggregate demand (AD) curve? Why does the AD curve slope downward? Give two examples of changes in the economy that shift the AD curve up and to the right and
6. Define monetary neutrality. Show that, after prices adjust completely, money is neutral in the IS–LM model. What are the classical and Keynesian views about whether money is neutral in the short
5. Define general equilibrium and show the general equi librium point in the IS–LM diagram. If the economy isn’t in general equilibrium, what determines output and the real interest rate? What
In describing the adjustment of the real interest rate, use the relationship that exists between the price of a nonmonetary asset and the interest rate that it pays.
4. For constant output, if the real money supply exceeds the real quantity of money demanded, what will hap pen to the real interest rate that clears the asset market?
3. What relationship does the LM curve capture? Derive the LM curve graphically and show why it slopes as it does. Give two examples of changes in the econ omy that would cause the LM curve to shift
2. What relationship does the IS curve capture? Derive the IS curve graphically and show why it slopes as it does. Give two examples of changes in the economy that would cause the IS curve to shift
1. What determines the position of the FE line? Give two examples of changes in the economy that would shift the FE line to the right.
9.6 Explain the fundamentals and implications of the AD–AS model.
9.5 Discuss the role of price adjustment in achieving general equilibrium.
9.4 Describe the conditions necessary for general equilibrium using the IS–LM model.
9.3 Discuss factors that affect the LM curve, which represents equilibrium in the asset market.
9.2 Discuss factors that affect the IS curve, which represents equilibrium in the goods market.
9.1 Discuss factors that affect the full employment (FE) line.
4. Graph the levels of real GDP for the United States, Canada, and Germany (data can be found at www.oecd.org under Statistics and then under National Accounts). Are U.S. and Canadian business cycles
3. It has been argued that the stock market predicts recessions. Using quarterly data since 1961, plot the real value of the stock market index (the Wilshire 5000 index in the last month of the
2. How does each of the following variables behave over the business cycle? Develop graphs to show your results and give economic explanations.a. Real importsb. Federal government receiptsc. Housing
1. An economic variable is persistent if declines in the vari able tend to be followed by more declines, and increases by more increases. This question asks you to study the persistence of the
5. It is sometimes argued that economic growth that is= ÷“too rapid” will be associated with inflation. Use AD–AS analysis to show how this statement might be true.When this claim is made,
4. During the period 1973–1975, the United States expe rienced a deep recession with a simultaneous sharp rise in the price level. Would you conclude that the recession was the result of a supply
3. Output, total hours worked, and average labor pro ductivity all are procyclical.a. Which variable, output or total hours worked, increases by a larger percentage in expansions and falls by a
2. Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why
1. Figure 8.1 shows that business cycle peaks and troughs are identified with peaks and troughs in the level of aggregate economic activity, which is consistent with current NBER methodology.
8. How do Keynesians and classicals differ in their beliefs about how long it takes the economy to reach longrun equilibrium? What implications do these differences in beliefs have for Keynesian and
7. What are the two components of a theory of business cycles?
6. When a recession occurs, do economists expect it to be temporary? Or is there some degree of permanence?What is the empirical evidence for this?
5. If you knew that the economy was falling into a reces sion, what would you expect to happen to production during the next few quarters? To investment? To average labor productivity? To the real
4. What terms are used to describe the way a variable moves when aggregate economic activity is rising or falling? What terms are used to describe the timing of cyclical changes in economic variables?
3. If you were a member of the NBER businesscycle dating committee, would you declare that the U.S.economy is now in a recession? Why? Describe the major variables that you would look at to determine
2. What is comovement? How is comovement related to the business cycle facts presented in this chapter?
1. Draw a diagram showing the phases and turning points of a business cycle. Using the diagram, illus trate the concepts of recurrence and persistence.
8.4 Use aggregate demand and aggregate supply to describe the impact on business cycles of various shocks.
8.3 Describe the behavior of various variables over the course of business cycles.
8.2 Summarize the history of the American business cycle.
8.1 Define and describe the business cycle.
4. Find and plot data since 1960 on the net worth as a per centage of disposable personal income of households and nonprofit organizations. In which periods was net wealth as a percentage of income
3. Graph the three-month Treasury bill interest rate, the ten-year government bond interest rate, and the CPI inflation rate (based on the percentage change in the CPI from one year earlier) on the
2. Graph the CPI inflation rate, M1 money growth, and M2 money growth for the United States, using annual data since 1959. (Find annual growth rates for December to December.) Also graph the
1. Graph the current yield curve (see the section “Time to Maturity” in this chapter and the graph of the yield curve in Chapter 4, “In Touch with Data and Research:Interest Rates”), plotting
4. Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium. What are the effects of each of the fol lowing on output, the real interest
3. The prisoner-of-war camp described by Radford(“In Touch with Data and Research: Money in a Prisoner-of-War Camp”) periodically received large shipments of cigarettes from the Red Cross or
2. Figure 7.2 shows that, before the 1990s, M2 velocity generally rose over time. Suggest some explanations for this upward trend.
1. What happens to M1 and M2 due to each of the follow ing changes?a. You take $500 out of your checking account and put it into a passbook savings account.b. You take $1000 out of your checking
7. The income elasticity of money demand is 2/3 and the interest elasticity of money demand is 0.1.− Real income is expected to grow by 4.5% over the next year, and the real interest rate is
6. Suppose that the real money demand function is,πe 0.01 ,( )LY r Y r+ = +πe where Y is real output, r is the real interest rate, and eπis the expected rate of inflation. Real output is con stant
5. Consider an economy with a constant nominal money supply, a constant level of real output Y=constant real interest rate r=0.10.100, and a Suppose that the income elasticity of money demand is 0.5
4. Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value of 10,000, and the price level is 2.a. Determine the real demand for
3. Jason has wealth of $100,000 that he invests entirely in money (a checking account) and government bonds.Jason instructs his broker to invest $50,000 in bonds, plus $5000 more in bonds for every
2. Money demand in an economy in which no interest is paid on money is MP Y i 500 0.2 1000.a. Suppose that P Y CHAPTER 7 | The Asset Market, Money, and Prices 313 100, 1000 = = , and i 0.10.= Find
1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond
10. Give an example of a factor that would increase the public’s expected rate of inflation. All else being equal, how would this increase in the expected inflation rate affect interest rates?
9. What is the relationship between the price level and the nominal money supply? What is the relationship between inflation and the growth rate of the nominal money supply?
8. Why is equilibrium in the asset market described by the condition that real money supply equal real money demand? What aggregation assumption is needed to allow ignoring the markets for other
7. What are the major components of M1? What are the major components of M2? Describe each component.
6. List and discuss the macroeconomic variables that affect the aggregate demand for money.
5. Describe what is meant by the expectations theory of the term structure of interest rates. Why isn’t the expec tations theory sufficient to describe the data on interest rates that we observe?
4. What are the four characteristics of assets that are most important to holders of wealth? How does money com pare with other assets for each characteristic?
3. Who determines the nation’s money supply? Explain how the money supply could be expanded or reduced in an economy in which all money is in the form of currency.
2. What are the three functions of money? How does each function contribute to a more smoothly operat ing economy?
1. Define money. How does the economist’s use of this term differ from its everyday meaning?
7. 5 Discuss the relationship between money growth and inflation.
7. 4 Discuss the fundamentals of asset market equilibrium.
7. 3 Examine macroeconomic variables that affect the demand for money.
7. 2 Discuss the factors that affect how people choose which assets they own.
7. 1 Define money, discuss its functions, and describe how it is measured in the United States.
4. In FRED, get data on the levels of real GDP per capita for both the United States and China for the most recent year that such data are available for both coun tries. By what percentage does real
3. According to the Solow model, if countries differed primarily in terms of their capital–labor ratios, with rich countries having high capital–labor ratios and poor countries having low
2. Graph the U.S. capital–labor ratio since 1960 (use pri vate fixed assets from the Fixed Assets section of the BEA website, www.bea.gov, Table 6.2 as the measure of capital, and civilian
1. This problem asks you to do your own growth account ing exercise. Using data since 1960, make a table of annual growth rates of real GDP, the capital stock(private fixed assets from the Fixed
The economy’s saving rate is s, and all saving is used to create physical capital, which depreciates at rated. Workers acquire skills on the job by working with capital; the more capital with which
7. An economy has a per-capita production function=where A and a are fixed parameters, y is per-worker output, k is the capital–labor ratio, and h is human capital per worker, a measure of the
6. Suppose that total capital and labor both increase by the same percentage amount, so that the amount of capital per worker, k, doesn’t change. Writing the production function in per-worker
5. Two countries are identical in every way except that one has a much higher capital–labor ratio than the other. According to the Solow model, which country’s total output will grow more
4. In a Solow-type economy, total national saving, S , t is S s hK= −t t t Y .The extra term, −hK , t reflects the idea that when wealth (as measured by the capital stock) is higher, saving is
3. This problem adds the government to the Solow model. Suppose that a government purchases goods in the amount of g per worker every year; with Nt workers in year t, total government purchases are
2. An economy is in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently.a. According to the Solow model, what are the
1. According to the Solow model, how would each of the following affect consumption per worker in the long run (that is, in the steady state)? Explain.a. The destruction of a portion of the
7. Both population and the work force grow at the rate of= n 0.01 per year in a closed economy. Consumption is ( ) = − C t Y 0.51 , where t is the tax rate on income and Y is total output. The
6. Consider a closed economy in which the population grows at the rate of 1% per year. The per-worker pro duction function is = y k 6 , where y is output per worker and k is capital per worker. The
5. An economy has the per-worker production function= y k 3 t t0.5 where yt is output per worker and kt is the capital labor ratio. The depreciation rate is 0.1, and the popu lation growth rate is
4. Use the data from Table 6.1 to calculate annual growth rates of GDP per capita for each country listed over the period 1950–2018. [Note: The annual growth rate z will satisfy the equation ( ) +
3. For a particular economy, the following capital input K and labor input N were reported in four different years:Year K N 1 200 1000 2 250 1000 3 250 1250 4 300 1200 The production function in this
2. Over the past 20 years an economy’s total output has grown from 1000 to 1300, its capital stock has risen from 2500 to 3250, and its labor force has increased from 500 to 575. All measurements
1. Two economies, Hare and Tortoise, each start with a real GDP per person of $5000 in 1950. Real GDP per person grows 3% per year in Hare and 1% per year in Tortoise. In the year 2020, what will be
9. What types of policies are available to a government that wants to promote economic growth? For each type of policy you identify, explain briefly how the policy is supposed to work and list its
8. What two explanations of productivity growth does endogenous growth theory offer? How does the pro duction function in an endogenous growth model differ from the production function in the Solow
7. What effect should each of the following have on long run living standards, according to the Solow model?a. An increase in the saving rate.b. An increase in the population growth rate.c. A

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