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business
macroeconomics

Questions and Answers of Macroeconomics

Implementing a political business cycle You are the economic adviser to a newly elected president.In four years he or she will face another election. Voters want a low unemployment rate and a low
Suppose the government amends the constitution to prevent government officials from negotiating with terrorists.What are the advantages of such a policy? What are the disadvantages?
New Zealand rewrote the charter of its central bank in the early 1990s to make low inflation its only goal.Why would New Zealand want to do this?
Deficit reduction as a prisoner's dilemma game Suppose there is a budget deficit. It can be reduced by cutting military spending, by cutting welfare programs, or by cutting both.The Democrats have to
Games, pre-commitment, and time inconsistency in the news Current events offer abundant examples of disputes in which the parties are involved in a game, try to commit themselves to lines of action
The legislation governing the Federal Reserve Board The 1977 Federal Reserve Act, as amended in 1978, 1988, and 2000 governs the behavior of the Federal Reserve.a. In your opinion, does this excerpt
Using information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The deficit is the difference between real government spending and taxes net of
Consider the following statement:A deficit during a war can be a good thing. First, the deficit is temporary, so after the war is over, the government can go right back to its old level of spending
Consider an economy characterized by the following facts:i. The official budget deficit is \(4 \%\) of GDP.ii. The debt-to-GDP ratio is \(100 \%\).iii. The nominal interest rate is \(10 \%\).iv. The
Assume that money demand takes the form\[\frac{M}{P}=Y\left[1-\left(r+\pi^{e}ight)ight]\]where \(Y=1,000\) and \(r=0.1\).a. Assume that, in the short run, \(\pi^{e}\) is constant and equal to \(25
Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, \(\bar{E}\). Suppose that financial investors worry that the level of debt is too high and that the
Ricardian equivalence and fiscal policy First consider an economy in which Ricardian equivalence does not hold.a. Suppose the government starts with a balanced budget. Then, there is an increase in
Consider an economy characterized by the following facts:i. The debt-to-GDP ratio is \(40 \%\).ii. The primary deficit is \(4 \%\) of GDP.iii. The normal growth rate is \(3 \%\).iv. The real interest
The fiscal situation in the United States and in other countries From the FRED economic database at the Federal Reserve Bank of St. Louis, you can retrieve two series: General Government Gross Debt
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The most important argument in favor of a positive rate of inflation in
Breaking the link between money growth and inflation in the medium run The money demand relationship in Chapter 4 is used implicitly in Figure 23-1. That relation is\[\frac{M}{P}=Y L(i)\]The central
Inflation targets Consider a central bank that has an inflation target, \(\pi^{*}\). We studied two versions of the Phillips curve in Chapter 9. The general Phillips curve
Indexed bonds and inflation uncertainty In Chapter 14, in a Focus Box titled "The Vocabulary of Bond Markets," the concept of an inflation-indexed bond was introduced. Although such bonds are
Unwinding unconventional monetary policy It was noted in the text that the Federal Reserve purchased, in addition to Treasury bills, large amounts of mortgage-backed securities and long-term
The maximum loan-to-value ratio Most home-buyers purchase their home with a combination of a cash down payment and a mortgage. The loan-to-value ratio is a rule that establishes the maximum mortgage
Taxes, inflation, and home ownership In this chapter, we discussed the effect of inflation on the effective capital-gains tax rate on the sale of a home. In this question, we explore the effect of
Suppose you have been elected to Congress. One day, one of your colleagues makes the following statement:The Fed chair is the most powerful economic policy maker in the United States. We should not
The frequency of the zero lower bound around the world Use the FRED database at the Federal Reserve Bank of St Louis to find the monthly average nominal policy interest rates for four major players.
Chinese economic growth is the outstanding feature of the world economic scene over the past two decades.a. In 2014, U.S. output was $17.4 trillion, and Chinese output was $10.4 trillion. Suppose
An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2009 and 2010 are as follows:a. What is nominal GDP in 2009 and in 2010? By what percentage
Consider the economy described in Problem 4.a. Use the prices for 2009 as the set of common prices to compute real GDP in 2009 and in 2010. Compute the GDP deflator for 2009 and for 2010, and compute
Consider the economy described in Problem 4.a. Construct real GDP for years 2009 and 2010 by using the average price of each good over the two years.b. By what percentage does real GDP change from
The Consumer Price Index represents the average price of goods that households consume. Many thousands of goods are included in such an index. Here consumers are represented as buying only food
Using macroeconomic relations:a. Okun’s law stated that when output growth is higher than usual, the unemployment rate tends to fall. Explain why usual output growth is positive.b. In which year, a
Comparing the recessions of 2001 and 2009. One very easy source for data is the Federal Reserve Bank of St. Louis FRED database. The series that measures real GDP is GDPC1, real GDP in each quarter
Use the economy described in Problem 2.a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.b. Assume that G is now equal to 110. Solve for equilibrium output.
Using fiscal policy in this first (and simplest model) to avoid the recession of 2009: GDP in 2009 was roughly $15,000 billion. You learned in Chapter 1 that GDP fell by approximately 3 percentage
Suppose that a person’s yearly income is $60,000. Also suppose that this person’s money demand function is given by:a. What is this person’s demand for money when the interest rate is 5%?
Consider a bond that promises to pay $100 in one year.a. What is the interest rate on the bond if its price today is$75? $85? $95?b. What is the relation between the price of the bond and the
In this chapter, you learned that an increase in the interest rate makes bonds more attractive, so it leads people to hold more of their wealth in bonds as opposed to money. However, you also learned
Choosing the quantity of money or the interest rate Suppose that money demand is given by:where $Y is $100.a. If the Federal Reserve Bank sets an interest rate target of 5%, what is the money supply
Monetary policy in a liquidity trap Suppose that money demand is given by:as long as interest rates are positive. The questions below then refer to situations where the interest rate is zero.a. What
Go to the Web site for the Federal Reserve Board of Governors (www.federalreserve.gov) and download the most recent monetary policy press release of the Federal Open Market Committee (FOMC). Make
Consider the following numerical example of the IS-LM model:a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.)b. The central bank sets
In 2001, the Fed pursued an expansionary monetary policy and reduced interest rates. At the same time, President George W. Bush pushed through legislation that lowered income taxes.a. Illustrate the
The (less paradoxical) paradox of saving A chapter problem at the end of Chapter 3 considered the effect of a drop in consumer confidence on private saving and investment, when investment depended on
Compute the real interest rate using the exact formula and the approximation formula for each set of assumptions listed in (a) through (c).a. \(i=4 \% ; \quad \pi^{e}=2 \%\)b. \(i=15 \% ; \quad
Fill in the table below and answer the questions that relate to the data in the tablea. Which situations correspond to a liquidity trap as defined in Chapter 4?b. Which situations correspond to the
Consider a simple bank that has assets of 100, capital of 20 , and checking deposits of 80. Recall from Chapter 4 that checking deposits are liabilities of a bank.a. Set up the bank's balance
Nominal and real interest rates around the worlda. There are a few episodes of negative nominal interest rates around the world. Some may or may not be in play as you read this book. The Swiss
Calculating the risk premium on bonds The text presents a formula where \[ (1+i)=(1-p)(1+i+x)+p(0) \]\(p\) is the probability the bond does not pay at all (the bond issuer is bankrupt) and has a
Un conventional monetary policy: financial policy and quantitative easing We have written the IS-LM model in terms:\[\begin{align*}\text { IS relation: } & Y=C(Y-T)+I(Y, r+x)+G \tag{6.5}\\L M
The spread between riskless and risky bonds The text used Figure 6-3 to describe fluctuations in the spreads between riskless rate on 10-year U.S. Treasury bonds and 10-year \(A A A\) and BBB
Answer the following questions using the information provided in this chapter.a. As a percentage of employed workers, what is the size of the flows into and out of employment (i.e., hires and
The Existence of unemploymenta. Consider Figure 7-6. Suppose the unemployment rate is very low. How does the low unemployment rate change the relative bargaining power of workers and firms? What do
You learned in Chapter 2 that informal work at home (e.g., preparing meals, taking care of children) is not counted as part of GDP. Such work also does not constitute employment in labor-market
Go to the Web site maintained by the U.S. Bureau of Labor Statistics (www.bls.gov). Find the latest Employment Situation Summary. Look under the link "National Employment."a. What are the latest
The typical dynamics of unemployment over a recession The table below shows the behavior of annual real GDP growth during three recessions. These data are from Table B-4 of the Economic Report of the
Discuss the following statements.a. The Phillips curve implies that when unemployment is high, inflation is low, and vice versa. Therefore, we may experience either high inflation or high
Changes in the natural rate of unemploymenta. Repeat Problem 6 but now draw separate graphs for the period 1970 to 1990 and the period since 1990.b. Do you find that the relation between inflation
Changes in the natural rate of unemploymenta. Repeat Problem 6 but now draw separate graphs for the period 1970 to 1990 and the period since 1990.b. Do you find that the relation between inflation
Using the natural rate of unemployment to predict changes in inflation The estimated Phillips curve from Figure 8.4 is\[\pi_{t}-\pi_{t-1}=3.0-0.5 u_{t}\]Fill in the table below using the data
The rate of inflation and expected inflation in different decades Fill in the values in table below for inflation and expected inflation using the 1960s. Here you will have to find the data using
The two paths to the medium-run equilibrium explored in this chapter make two different assumptions about the formation of the level of expected inflation. One path assumes the level of expected
A shock to aggregate supply will also have different outcomes when there are different assumptions about the formation of the level of expected inflation. As in Question 3, one path assumes that the
Okun's Law is written as \(u-u(-1)=-0.4\left(g_{Y}-3 \%ight)\)a. What is the sign of \(u-u(-1)\) in a recession? What is the sign of \(u-u(-1)\) in a recovery?b. Explain where the \(3 \%\) number
Consider the data in the Focus Box, "Deflation in the Great Depression."a. Do you believe that output had returned to its potential level in 1933?b. Which years suggest a deflation spiral as
Consider the data in the Focus Box, "Deflation in the Great Depression."a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year's rate of
The Great Depression in the United Kingdom Answer the following questions based on information found in the table belowa. Is there evidence of the deflation spiral from 1929 to 1933 in the United
Assume that the average consumer in Mexico and the average consumer in the United States buy the quantities and pay the prices indicated in the following table:a. Compute U.S. consumption per capita
Consider the production function:a. Compute output when \(K=49\) and \(N=81\).b. If both capital and labor double, what happens to output?c. Is this production function characterized by constant
Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological
Convergence between Japan and the United States since 1960 The Bureau of Labor Statistics has a user-friendly Web site of GDP per capita at
Growth successes and failures Go to the Web site containing the Penn World Table and collect data on real GDP per capita (chained series) for 1970 for all available countries. Do the same for a
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The saving rate is always equal to the investment rate.b. A higher
Consider the following statement: "The Solow model shows that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. saving rate. Increasing
In Chapter 3 we saw that an increase in the saving rate can lead to a recession in the short run (i.e., the paradox of saving). We examined the issue in the medium run in Problem 5 at at the end of
Discuss how the level of output per person in the long run would likely be affected by each of the following changes:a. The right to exclude saving from income when paying income taxes.b. A higher
Suppose the United States moved from the current pay-asyou-go Social Security system to a fully funded one and financed the transition without additional government borrowing. How would the shift to
Suppose that the production function is given by:\[Y=0.5 \sqrt{K} \sqrt{N}\]a. Derive the steady-state levels of output per worker and capital per worker in terms of the saving rate, \(s\), and the
The Cobb-Douglas production function and the steady state This problem is based on the material in the chapter appendix. Suppose that the economy's production function is given by:\[Y=K^{\alpha}
Continuing with the logic from Problem 7, suppose that the economy's production function is given by \(Y=K^{1 / 3} N^{2 / 3}\) and that both the saving rate, \(s\), and the depreciation rate,
Deficits and the capital stock For the production function, \(Y=\sqrt{K} \sqrt{N}\) equation (11.9)gives the solution for the steady-state capital stock per worker.a. Retrace the steps in the text
RED and growtha. Why is the amount of R\&D spending important for growth? How do the appropriability and fertility of research affect the amount of R\&D spending?How do each of the policy proposals
Sources of technological progress: Leaders versus followersa. Where does technological progress come from for the economic leaders of the world?b. Do developing countries have other alternatives to
For each of the economic changes listed in (a) and (b), assess the likely impact on the growth rate and the level of output over the next five years and over the next five decades.a. A permanent
Suppose that the economy's production function is\[Y=\sqrt{K} \sqrt{A N}\]that the saving rate, s, is equal to \(16 \%\), and that the rate of depreciation, \(\delta\), is equal to \(10 \%\). Suppose
Suppose an economy is characterized by the following equations:\[\begin{gathered}\text { Price setting: } P=(1+m)(W / A) \\\text { Wage setting: } W=A^{e} P^{e}(1-u)\end{gathered}\]a. Solve for the
Discuss the following statement: "Higher labor productivity allows firms to produce more goods with the same number of workers and thus to sell the goods at the same or even lower prices. That's why
How might the policy changes in (a) through (d) the wage gap between low-skill and high-skill workers in the United States?a. Increased spending on computers in public schools.b. Restrictions on the
Technological progress, agriculture, and employment Discuss the following statement: "Those who argue that technological progress does not reduce employment should look at agriculture. At the start
Productivity and the aggregate supply curve Consider an economy in which production is given by:\[Y=A N\]Assume that price setting and wage setting are described in the following
The churn The Bureau of Labor Statistics presents a forecast of occupations with the largest job decline and the largest job growth. Examine the tables at www.bls.gov/emp/emptab4.htm (for the largest
Income Inequalitya. What evidence is presented in the text that income inequality has increased over time in the United States?b. Use supply and demand of educated workers to explain the increase in
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The present discounted value of a stream of returns can be calculated in
For which of the problems listed in (a) through (c) would you want to use real payments and real interest rates, and for which would you want to use nominal payments and nominal interest rates to
Compute the two-year nominal interest rate using the exact formula and the approximation formula for each set of assumptions listed in (a) through (c).a. \(i_{t}=2 \% ; i_{t+1}^{e}=3 \%\)b.
The equity premium and the value of stocksa. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and expects to pay its next
Approximating the price of long-term bonds The present value of an infinite stream of dollar payments of\(\$ z\) (that starts next year) is \(\$ \mathrm{z} / \mathrm{i}\) when the nominal interest
Monetary policy and the stock market Assume all policy rates, current and expected into the future had been \(2 \%\). Suppose the Fed decides to tighten monetary policy and increase the short-term
Regular IRAs versus Roth IRAs You want to save \(\$ 2,000\) today for retirement in 40 years. You have to choose between the two plans listed in (i) and (ii).i. Pay no taxes today, put the money in
House prices and bubbles Houses can be thought of as assets with a fundamental value equal to the expected present discounted value of their future real rents.a. Would you prefer to use real payments
The Economist annually publishes The Economist House Price Index. It attempts to assess which housing markets, by country, are the most overvalued or undervalued relative to fundamentals. Find the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. For a typical college student, human wealth and nonhuman wealth are
A consumer has nonhuman wealth equal to \(\$ 100,000\). She earns \(\$ 40,000\) this year and expects her salary to increase by \(5 \%\) in real terms each year for the following two years. She will

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