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foundations of modern macroeconomics

Questions and Answers of Foundations Of Modern Macroeconomics

+ 2. Use the classical IS–LM model to analyze the effects of a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent
+1. The discovery of a new technology increases the expected future marginal product of capital.a. Use the classical IS–LM model to determine the effect of the increase in the expected future MPK
+ 8. (Appendix 10.B ) Consider the following economy:IS curve Real money demand r = 2.47−0.0004Y.L = 0.5Y −500(r+πe).Short-run aggregate supply Y = ¯¯¯Y +100(P −Pe).Here, is the real
+ 7. In a particular economy the labor force (the sum of employed and unemployed workers) is fixed at 100 million. In this economy, each month 1% of the workers who were employed at the beginning of
+ 6. Try the following experiment: Flip a coin fifty times, keeping track of the results. Think of each “heads” as a small positive shock that increases output by one unit; similarly, think of
+ 5. Output in an economy is given by the production function Y =AK0.3N0.7, where Yis output, A Pmeasures productivity, the capital stock, K, is fixed at 30, and employment Nis fixed at 100.Output
+ 4. An economy has the following AD and AS curves.AD curve Y = 300+30(M/P).AS curve Y = ¯¯¯ Y+10(P −Pe).Here,¯¯¯and Y =500 M=400a. Suppose that.Pe =60 P.. What are the equilibrium values of
+ 3. Consider the following economy.Desired consumption Desired investment Real money demand Cd = 250 + 0.5(Y − T) − 500r.Id = 250 − 500r.L = 0.5Y − 500i.Full-employment output ¯¯¯Expected
+ 2. An economy is described as follows.Desired consumption Desired investment Real money demand Cd = 600 + 0.5(Y − T) − 50r.Id = 450 − 50r.L = 0.5Y − 100i.Full-employment output
+1. In a certain economy the production function is Y =A(100N −0.5N2), where is output, is productivity, and YA Nis total hours worked.The marginal product of labor associated with this production
+ 10. Define rational expectations. According to the classical model, what implications do rational expectations have for the ability of the central bank to use monetary policy to smooth business
+ 9. What conclusion does the basic classical model (with no misperceptions of the price level) allow about the neutrality or nonneutrality of money? In what ways is this conclusion modified by the
+ 8. According to the misperceptions theory, what effect does an increase in the price level have on the amount of output supplied by producers? Explain. Does it matter whether the increase in the
+ 7. In the context of the relationship between the money supply and real economic activity, what is meant by reverse causation? Explain how reverse causation could occur. What business cycle fact is
+6. What effects does a temporary increase in government purchases have on the labor market, according to the classical theory? What effects does it have on output, the real interest rate, and the
+What factors cause the Solow residual to change?
+ 5. What is the Solow residual and how does it behave over the business cycle?
+ 3. Define real shock and nominal shock. Give an example of each.What type of real shock do real business cycle economists consider the most important source of cyclical fluctuations?
+ 2. What are the two main components of any theory of the business cycle? Describe these two components for the real business cycle theory.
+1. What main feature of the classical IS–LM model distinguishes it from the Keynesian IS–LM model? Why is the distinction of practical importance?
+Summarize the fundamentals and implications of the misperceptions theory.
+ Explain the roles of money and monetary policy in the classical model.
+ Discuss the effects of fiscal policy shocks in the classical model.
+ Summarize the real business cycle theory and describe how well it accounts for the business cycle facts.
+ including employment, the real wage, output, the real interest rate, and the price level?
+ How does this modification change the solutions for the general equilibrium values of the variables discussed in Appendix 9.B ,
+5. (Appendix 9.B ) Recall from Chapter 7 that an increase in ,im the nominal interest rate on money, increases the demand for money. To capture that effect, let’s replace Eq. (9.B.17)
+ 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 reason that desired investment may depend
+ 3. Suppose that the price level is fixed in the short run so that the economy doesn’t reach general equilibrium immediately after a change in the economy. For each of the following changes, what
+ 2. Use the IS–LM model to analyze the general equilibrium effects of a permanent increase in the price of oil (a permanent adverse supply shock) on current output, employment, the real wage,
+1. Use the IS–LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and
+ 6. (Appendix 9.B ) This question asks you to use the formulas inAppendix 9.B to find the general equilibrium values of variablesfor the economy described in Numerical Problem 4. Assume that
+ 5. Consider the following economy:Desired consumption Desired investment Cd =1275+0.5(Y −T)−200r..Id = 900−200r.Real money demand Full-employment output L =0.5Y −200i.¯¯¯Y =4600.Expected
+ 4. The production function in an economy is Y =A(5N −0.0025N2), where is productivity. With this production function, the Amarginal product of labor is MPN =5A−0.005AN.Suppose that A=2. The
+ 3. An economy has full-employment output of 1000. Desired consumption and desired investment are Cd = 200+0.8(Y −T)−500r;Id = 200−500r.Government purchases are 196, and taxes are T
+ 2. In a particular economy the real money demand function is Md PAssume that=3000+0.1Y −10,000i., M=6000 P =2.0, andπe = 0.02 r.a. What is the real interest rate, , that clears the asset market
+1. Desired consumption and investment are Cd = 4000−4000r+0.20Y;Id = 2400−4000r.As usual, Y is output and is the real interest rate. Government rpurchases, , are 2000.Ga. Find an equation
+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
+ 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
+ 5. Define general equilibrium and show the general equilibrium point in the IS–LM diagram. If the economy isn’t in general equilibrium, what determines output and the real interest rate?What
+ 4. For constant output, if the real money supply exceeds the real quantity of money demanded, what will happen to the real interest rate that clears the asset market? In describing the adjustment
+ 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 economy 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.
+Explain the fundamentals and implications of the AD–AS model.
+ Discuss the role of price adjustment in achieving general equilibrium.
+ Discuss factors that affect the IS curve, which represents equilibrium in the goods market.
+ 5. In the FRED database, find a variable that is available in both a seasonally adjusted form and a not seasonally adjusted form. Plot both over time and describe how large the seasonal variation
+ 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
+ 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.
+1. An economic variable is persistent if declines in the variable 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, what
+ 4. During the period 1973–1975, the United States experienced 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 productivity 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.
+ identified with peaks and troughs in the level of aggregate economic activity, which is consistent with current NBER methodology. However, for business cycles before 1927, the NBER identified
+1. Figure 8.1 shows that business cycle peaks and troughs are
+ What implications do these differences in beliefs have for Keynesian and classical views about the usefulness of antirecessionary policies? About the types of shocks that cause most recessions?
+ 8. How do Keynesians and classicals differ in their beliefs about how long it takes the economy to reach long-run equilibrium?
+ 7. What are the two components of a theory of business cycles?
+ 6. How is the fact that some economic variables are known to lead the cycle used in macroeconomic forecasting?
+ 5. If you knew that the economy was falling into a recession, 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
+ 3. What is the evidence for the view that the U.S. business cycle has become less severe over time? Why is the question of whether the cycle has moderated over time an important one?
+ 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, illustrate the concepts of recurrence and persistence.
+ Use aggregate demand and aggregate supply to describe the impact on business cycles of various shocks.
+ By what percentage did it decline during the Great Recession from the fourth quarter of 2007 to the second quarter of 2009? (Note that net wealth data for nonprofit organizations is included with
+4. Find and plot data since 1960 on the net worth as a percentage 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,” here and the graph of the yield curve here ), plotting the interest rate on bonds with different maturities against their
+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 following 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,” here )periodically received large shipments of cigarettes from the Red
+1. All else being equal, how would each of the following affect the demand for M1? The demand for M2? Explain.a. The maximum number of checks per month that can be written on money market mutual
+ 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 L(Y, r+πe) = , 0.01Y r +πe where is real output, is the real interest rate, and Yrπe is the expected rate of inflation. Real output is constant
+ 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
+ 3. Mr. Midas has wealth of $100,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs his broker to invest $50,000 in bonds, plus $5000 more in bonds
+ 2. Money demand in an economy in which no interest is paid on money is Md Pa. Suppose that=500+0.2Y −1000i.P =100, Y =1000, and i= 0.10.Find real money demand, nominal money demand, and
+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. Define velocity. Discuss the role of velocity in the quantity theory of money.
+ 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, , is St St = sYt −hKt.The extra term,−hKt, 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 per worker every year; with Nt gworkers in year , total government purchases tt
+ 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 per year in a closed economy. Consumption is n =0.01 C =0.5(1−t)Y, where is the tax rate on income and is total output. The per tworker
+ 3. For a particular economy, the following capital input input Nwere reported in four different years:Year Kand labor K1 2200 N1000 250 3250 4300 The production function in this economy is 1000
+ 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
4. In FRED, find and plot data on the ratio of outstanding total international debt to GDP for (a) the Euro area, (b) the United States, and (c) Japan. These amounts represent the international
How has the interdependence of the U.S. economy with the rest of the world’s economies changed over time? (Note:When computing the percentage of GDP, you should note that quarterly data on exports
3. Using quarterly data since 1960, graph the following four series, expressing each as a percent of GDP: exports of goods(sometimes called merchandise), exports of services, imports of goods

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