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macroeconomics

Questions and Answers of Macroeconomics

The diagram below shows the demand for money and the supply of money.a. Given the position of the \(M_{D}\) curve, explain why it is not possible for the Bank of Canada to set the money supply and
Milton Friedman was a professor of economics at the University of Chicago and was the most influential Monetarist of his generation. He was known for accusing the Federal Reserve (the U.S. central
Suppose it is mid-2007 and the stock market has been growing rapidly for the past five years. Some economists argue that the stock market has become "overvalued" and thus a "crash" is imminent.a. How
Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to \(Y^{*}\).a. Suppose the world price for raw
In the last few years, the path of CPI inflation has deviated from the path of core inflation several times (see Figure 28 -4).a. Why is core inflation less volatile than CPI inflation?b. Why might
During the financial crisis of 200 7-2008, the Bank of Canada took extraordinary actions to inject liquidity into the banking system. As a result, the amount of reserves in the banking system
Fill in the blanks to make the following statements correct.a. The term NAIRU stands for the ___________.b. Unemployment is said to be equal to the NAIRU when GDP is equal to __________.c. Changes in
Fill in the blanks to make the following statements correct.a. Suppose the economy is initially at potential GDP \(\left(Y^{*}ight)\) and then there is a sudden increase in the demand for Canadian
The table below shows several macroeconomic situations, each with a given amount of excess demand (or supply) for labour and a level of inflation expectations. Both are expressed in percentage per
What sources of inflation are suggested by each of the following quotations?a. A newspaper editorial in Manchester, England: "If American unions were as strong as those in Britain, America's
This exercise requires you to compute inflationary expectations based on a simple formula, and it will help you to understand why backward-looking expectations adjust slowly to changes in economic
In the \(A D / A S\) diagram here, the economy is in longrun equilibrium with real GDP equal to \(Y^{*}\); the price level is stable at \(P_{0}\).a. Suppose the central bank announces that it will
Consider the following \(A D / A S\) diagram. Suppose the economy experiences a positive aggregate demand shock-say, an increase in the demand for Canada's exports. This increases real GDP to
Consider the following \(A D / A S\) diagram. Suppose the economy experiences a negative aggregate supply shock-say, an increase in wages driven by a major union settlement. This reduces real GDP to
The table that follows shows some data on various disinflations. In each case, assume that potential GDP is equal to \(\$ 900 \) billion.a. In each case, compute the sacrifice ratio.b. Explain why
What is the relationship between the sacrifice ratio and the central bank's credibility?a. Explain why a more credible policy of disinflation reduces the costs of disinflation.b. Explain how you
In the summer of 201 5 , a time when U.S. inflation was rising and output was approaching potential, a story in The Globe and Mail reported that the release of strong employment-growth data for the
Fill in the blanks to make the following statements correct.a. The overall unemployment rate in Canada is not a good indicator of the level of activity in the labour market because ____________.b.
Fill in the blanks to make the following statements correct.a. The NAIRU is composed of ____________ unemployment and ________ unemployment. The NAIRU is always _________ than zero.b. If there are
The table below provides employment and labour force data for a small economy over a 3 -month period.a. What is the unemployment rate on September 1 , October 1 , and November 1 ?b. Explain why the
The following table shows the pattern of real GDP, potential GDP, and the unemployment rate for several years in Cycleland.a. On a scale diagram, draw the path of real GDP and potential GDP (with
Interpret the following statements from newspapers in terms of types of unemployment.a. "Recession hits local factory; 180 0 workers laid off."b. "Of course, I could take a job as a dishwasher, but
The diagram below shows a simple \(A D / A S\) diagram. The economy begins in long-run equilibrium at \(E_{0}\) with real GDP equal to \(Y^{*}\).a. At \(E_{0}\), the unemployment rate is 8 percent.
The diagram below shows a simple \(A D / A S\) diagram. The economy begins in long-run equilibrium at \(E_{0}\) with real GDP equal to \(Y^{*}\).a. At \(E_{0}\), the unemployment rate is 6 percent.
The diagram below shows a perfectly competitive labour market. The initial equilibrium is with wage \(w^{*}\) and employment \(L^{*}\).a. Suppose the demand for labour decreases to
Consider two hypothetical countries. In Country A, 20 percent of the labour force is unemployed for half the year and employed for the other half; the remaining 80 percent of the labour force is
The Canadian government recently announced its plan to modify the employment insurance (EI) program, generating a great deal of debate over the appropriate level of generosity for EI.a. Explain what
Consider an economy that begins with real GDP equal to potential. There is then a sudden increase in the prices of raw materials, which shifts the \(A S\) curve upward.a. Draw the initial long-run
The table below shows the percentage of the labour force accounted for by youths (15 to 24 years old) and older workers (25 years and older) over several years. Suppose that because of their lower
In its 2009 and 2010 budgets, the Canadian government significantly increased its planned spending on infrastructure projects in order to fight the existing recession and protect jobs.a. Explain
Fill in the blanks to make the following statements correct.a. The government's budget constraint shows that government expenditures must be equal to the sum of ________ and ___________.b. The
Fill in the blanks to make the following statements correct.a. When there is no change in the government's fiscal policy it is still possible for the budget deficit to fall because.b. For a given set
Fill in the blanks to make the following statements correct.a. In a closed economy, when the government borrows to finance the deficit, interest rates will ___________ and some private investment
The table below shows government spending data over eight years in Debtland. All figures are in billions of dollars. The symbols used are as defined in the text.a. Compute Debtland's budget deficit
The figure below shows the budget deficit function for a country.a. Explain why the budget deficit function is downward sloping.b. If the government increases its level of purchases \((G)\), what
In the late 199 0 s, the U.S. government was slightly ahead of the Canadian government in reducing its budget deficit. The following table shows the actual budget deficit and the structural budget
The Canadian federal budget moved from a surplus of \(\$ 9 .6\) billion in the 200 7-2008 fiscal year to a deficit of \(\$ 5 .8\) billion the next year, and a large deficit of \(\$ 55 .6\) billion in
The following table shows hypothetical data from 201 0 to 201 6 that can be used to compute the change in the debt-to-GDP ratio. The symbols used are as defined in the text.a. Remember from the text
The diagram below shows an AD/AS diagram. The economy begins at \(E_{0}\) with output equal to \(Y^{*}\). Suppose the government in this closed economy increases \(G\) and finances it by running a
The diagram below shows an \(A D / A S\) diagram. The economy begins at \(E_{0}\) with output equal to \(Y^{*}\). Suppose the government in this closed economy decreases its budget deficit by
A Member of Parliament recently exclaimed, "The prime minister's policies are working! Lower interest rates combined with staunch fiscal policy have reduced the deficit significantly." What do
The following table shows how many tonnes of dairy products and beef products can be produced in New Zealand and Australia with one unit of equivalent resources.a. Which country has an absolute
Fill in the blanks to make the following statements correct.a. The ________ argument provided the rationale for Canada's National Policy of 187 6. A high tariff wall allowed many Canadian industries
Fill in the blanks to make the following statements correct.a. A regional trade agreement, such as the NAFTA, or a common market, such as the European Union, allows for ___________ , whereby trade
Deficits and fiscal consolidation As seen in the following table, the 2008 financial crisis left the United States with an enormous federal budget deficit in 2009.There was a substantial fiscal
a. The equation of the Phillips curve from 1970 to 1995 is:\[\pi_{t}-\pi_{t-1}=7.4 \%-1.2 u_{t}\]Calculate and define the natural rate of unemployment using this curve.b. The equation of the Phillips
Suppose that the mark-up of goods prices over marginal cost is \(5 \%\), and that the wage-setting equation is:\[W=P(1-u)\]where \(u\) is the unemployment rate.a. What is the real wage, as determined
How can a lockdown result in stagflation?A lockdown can have three different effects:a. The first happens when demand during the lockdown decreases so that actual output, \(Y_{t}\), falls exactly to
Why is the effect of a lockdown different from that of an oil shock?There is an important difference between a lockdown and an oil shock. Although a lockdown is typically temporary, not all firms
Why might the 'Goggle mobility index' not be a good measure} of the fall in economic activity during a lockdown?Whether it provides, or not, a good measure of economic activity, depends on the
Fill in the values in the table below for inflation and expected inflation using the 1960s. The data will come from FRED as they did in the last question. You will have the most success using a
The estimated Phillips curve from Figure 8.5 is: \[\pi_{t}=2.8 \%-0.16 u_{t}\]Fill in the table below using the Phillips curve above after collecting the data from the FRED database. The monthly
Consider the market for butter, shown in the accompanying figure. The government imposes an excise tax of $0.30 per pound of butter. What is the price paid by consumers post-tax? What is the price
The demand for economics textbooks is very inelastic, but the supply is somewhat elastic. What does this imply about the incidence of an excise tax? Illustrate with a diagram.
True or false? When a substitute for a good is readily available to consumers, but it is difficult for producers to adjust the quantity of the good produced, then the burden of a tax on the good
The supply of bottled spring water is very inelastic, but the demand for it is somewhat elastic. What does this imply about the incidence of a tax? Illustrate with a diagram.
True or false? Other things equal, consumers would prefer to face a less elastic supply curve for a good or service when an excise tax is imposed. Explain your answer.
The accompanying table shows five consumers’ willingness to pay for one can of diet soda each, as well as five producers’ costs of selling one can of diet soda each.Each consumer buys at most one
In each of the following cases, focus on the price elasticity of demand and use a diagram to illustrate the likely size—small or large—of the deadweight loss resulting from a tax. Explain your
Assess each of the following taxes in terms of the benefits principle versus the ability-to-pay principle. What, if any, actions are distorted by the tax? Assume for simplicity in each case that the
An income tax taxes 1% of the first $10,000 of income and 2% on all income above$10,000.a. What is the marginal tax rate for someone with income of $5,000? How much total tax does this person pay?
When comparing households at different income levels, economists find that consumption spending grows more slowly than income. Assume that when income grows by 50%, from $10,000 to $15,000,
True or false? Explain your answers.a. Payroll taxes do not affect a person’s incentive to take a job because they are paid by employers.b. A lump-sum tax is a proportional tax because it is the
When comparing households at different income levels, economists find that consumption spending grows more slowly than income. Assume that when income grows by 50%, from $10,000 to $15,000,
True or false? Explain your answers.a. Payroll taxes do not affect a person’s incentive to take a job because they are paid by employers.b. A lump-sum tax is a proportional tax because it is the
True or false? Explain your answer.a. Policy choice A and policy choice B attempt to achieve the same social goal. Policy choice A, however, results in a much less efficient use of resources than
Consider the market for cheese-stuffed jalapeno peppers. There are two consumers, Casey and Josey, and their willingness to pay for each pepper is given in the accompanying table. (Neither is willing
Consider again the market for cheese-stuffed jalapeno peppers. There are two producers, Cara and Jamie, and their costs of producing each pepper are given in the accompanying table. (Neither is
Using the tables in Check Your Understanding 4-1 and 4-2, find the equilibrium price and quantity in the market for cheese-stuffed jalapeno peppers. What is total surplus in the equilibrium in this
Show how each of the following three actions reduces total surplus:a. Having Josey consume one fewer pepper, and Casey one more pepper, than in the market equilibriumb. Having Cara produce one fewer
Suppose UNOS decides to further alter its guidelines for the allocation of donated kidneys, no longer relying solely on the concept of net survival benefit but also giving preference to patients with
In some states that are rich in natural resources, such as oil, the law separates the right to above-ground use of the land from the right to drill below ground (called “mineral rights”). Someone
Suppose that in the market for used textbooks the equilibrium price is $30, but it is mistakenly announced that the equilibrium price is $300. How does this affect the efficiency of the market? Be
What is wrong with the following statement? “Markets are always the best way to organize economic activity. Any policies that interfere with markets reduce society’s welfare.”
Which of the following create deadweight loss? Which do not and are simply a transfer of surplus from one person to another? Explain your answer.a. You have been evicted from your rent-controlled
The price of strawberries falls from $1.50 to $1.00 per carton and the quantity demanded goes from 100,000 to 200,000 cartons. Use the midpoint method to find the price elasticity of demand.
The price elasticity of demand for ice-cream sandwiches is 1. 2 at the current price of $0.50 per sandwich and the current consumption level of 100,000 sandwiches.Calculate the change in the quantity
For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand.a. Total revenue decreases when price increases.b. The additional revenue
What is the elasticity of demand for the following goods? Explain. What is the shape of the demand curve?a. Demand for a blood transfusion by an accident victimb. Demand by students for green erasers
After Chelsea’s income increased from $12,000 to $18,000 a year, her purchases of album downloads increased from 10 to 40 downloads a year. Calculate Chelsea’s income elasticity of demand for
Expensive restaurant meals are income-elastic goods for most people, including Sanjay. Suppose his income falls by 10% this year. What can you predict about the change in Sanjay’s consumption of
As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are
Using the midpoint method, calculate the price elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours transacted increases from 300,000
Are each the following statements true or false? Explain.a. If the demand for milk rose, then, in the long run, milk-drinkers would be better off if supply were elastic rather than inelastic.b.
Consider the market for butter, shown in the accompanying figure. The government imposes an excise tax of $0.30 per pound of butter. What is the price paid by consumers post-tax? What is the price
The demand for economics textbooks is very inelastic, but the supply is somewhat elastic. What does this imply about the incidence of an excise tax? Illustrate with a diagram.
True or false? When a substitute for a good is readily available to consumers, but it is difficult for producers to adjust the quantity of the good produced, then the burden of a tax on the good
The supply of bottled spring water is very inelastic, but the demand for it is somewhat elastic. What does this imply about the incidence of a tax? Illustrate with a diagram.
True or false? Other things equal, consumers would prefer to face a less elastic supply curve for a good or service when an excise tax is imposed. Explain your answer.
Using the midpoint method, calculate the price elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours transacted increases from 300,000
Are each the following statements true or false? Explain.a. If the demand for milk rose, then, in the long run, milk-drinkers would be better off if supply were elastic rather than inelastic.b.
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. If the nominal exchange rate is fixed, the real exchange rate is fixed.b.
Consider a country operating under fixed exchange rates. The IS curve is given by relation (20.1)\[\begin{array}{r}Y=Y\left(\frac{\overline{E P}}{P^{*}}, G, T, i^{*}-\pi^{e}, Y^{*}ight) \\(-,+,-,
Policy choices when the real exchange rate is "too high" and the nominal exchange rate is fixed An overvalued real exchange rate is a rate such that domestic goods are too expensive relative to
An exchange rate crisis occurs when the peg (the fixed exchange rate) loses its credibility. Bond holders no longer believe that next period's exchange rate will be this period's exchange rate. The
Modeling the movements in the exchange rate Equation (20.5) provides insight into the movements of nominal exchange rates between a domestic and a foreign country. Remember that the time periods in
Realignments of exchange rate Look at Figure 1 in the box 'The 1992 EMS Crisis." European nominal exchange rates had been fixed between the major currencies from roughly 1979 to 1992.a. Explain how
Real and nominal exchange rates for Canada and Mexico Two of the largest trading partners of the United States are Canada and Mexico. The FRED database at the Federal Reserve Bank of St. Louis
Exchange rates and expectations In this chapter, we emphasized that expectations have an important effect on the exchange rate. In this problem, we use data to get a sense of how large a role
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. There is so much uncertainty about the effects of monetary policy that we

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