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macroeconomics

Questions and Answers of Macroeconomics

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.a. Tim just graduated from college and is looking for a job.b. A recession
The unemployment rate that is consistent with full employment is __________________.a. the natural rate of unemploymentb. the unnatural rate of unemploymentc. the status quo rate of unemploymentd.
A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent.About how large is this economy’s negative GDP gap?a. 1 percentb. 3
Cost-push inflation occurs in the presence of __________________.a. excess inventoryb. a trade deficitc. rising per-unit production costsd. excess demand for goods and services
Zion’s nominal income will go up by 10 percent next year. Inflation is expected to be −2 percent next year. By approximately how much will Zion’s real income change next year?a. −2
Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent, and she is expecting inflation to be exactly 3 percent.What
True or False. Lenders are helped by unanticipated inflation.
Economists agree that _____________ inflation reduces real output.a. cost-pushb. demand-pullc. push-pull
How long would it take for the price level to double if inflation persisted at (a) 2 percent per year, (b) 5 percent per year, and(c) 10 percent per year?
If the inflation premium is 2 percent and the nominal interest rate is 1 percent, what is the real interest rate? What is the real interest rate if the inflation premium is 3 percent while the
Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of the MPC and the MPS equal 1?
How is it possible for investment spending to increase even in a period in which the real interest rate rises?
Suppose that an economy has the Phillips curvea. What is the natural rate of unemployment?b. Graph the short-run and long-run relationships between inflation and unemployment.c. How much cyclical
An economy has the following equation for the Phillips curve:People form expectations of inflation by taking a weighted average of the previous two years of inflation:Okun’s law for this economy
Suppose the monetary-policy rule has the wrong natural rate of interest. That is, the central bank follows this rule:where ρ′ does not equal r, the natural rate of interest in the goods demand
Gabe and Gita both obey the two-period Fisher model of consumption. Gabe earns $100 in the first period and $100 in the second period. Gita earns nothing in the first period and $210 in the second
Albert and Franco both follow the life-cycle hypothesis: they smooth consumption as much as possible. They each live for five periods, the last two of which are retirement. Here are their incomes
This problem uses calculus to compare two scenarios of consumer optimization.a. Nina has the following utility function:She starts with wealth of $120,000, earns no additional income, and faces a
In the neoclassical model of business fixed investment, under what conditions will firms find it profitable to add to their capital stock?
What is Tobin’s q, and what does it have to do with investment?
Explain why an increase in the interest rate reduces the amount of residential investment.
List four reasons firms might hold inventories.
Suppose that the government levies a tax on oil companies equal to a proportion of the value of the company’s oil reserves. (The government assures the firms that the tax is for one time only.)
Assumes that investment depends only on the interest rate. Yet our theories of investment suggest that investment might also depend on national income: higher income might induce firms to invest
When the stock market crashes, what influence does it have on investment, consumption, and aggregate demand? Why? How should the Federal Reserve respond? Why?
It is an election year, and the economy is in a recession. The opposition candidate campaigns on a platform of passing an investment tax credit, which would be effective next year after she takes
The United States experienced a large increase in the number of births in the 1950s. People in this baby-boom generation reached adulthood and started forming their own households in the 1970s.a. Use
List three policy rules that the Fed might follow.Which of these would you advocate? Why?
A central bank has decided to adopt inflation targeting and is now debating whether to target 5 percent inflation or zero inflation. The economy is described by the following Phillips curve:where u
After every policy meeting, the Federal Reserve issues a statement (sometimes called the press release), which you can find on the Fed’s Web
What was unusual about U.S. fiscal policy from 1980 to 1995?
Do you find the traditional or the Ricardian view of government debt more credible? Why?
Give three reasons that a budget deficit might be a good policy choice.
The Social Security system levies a tax on workers and pays benefits to the elderly. Suppose that Congress increases both the tax and the benefits.For simplicity, assume that Congress announces that
Find some recent projections for the future path of the U.S. government debt as a percentage of GDP. What assumptions are made about government spending, taxes, and economic growth?Do you think these
What do you think are the defining characteristics of a science? Do you think macroeconomics should be called a science? Why or why not?
What does the consumer price index measure?List three ways in which it differs from the GDP deflator.
How are the CPI and the PCE deflator similar, and how are they different?
List the three categories used by the Bureau of Labor Statistics to classify everyone in the economy. How does the BLS compute the unemployment rate?
Describe the two ways the BLS measures total employment.
Go to the website of the Bureau of Economic Analysis and find the growth rate of real GDP for the most recent quarter. Go to the website of the Bureau of Labor Statistics and find the inflation rate
Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports.a. Boeing sells an airplane to the U.S. Air
Find data on GDP and its components, and compute the percentage of GDP for the following components for 1950, 1980, and the most recent year available.a. Personal consumption expendituresb. Gross
Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns. TLM’s equipment depreciates in value by $125,000. TLM
Consider an economy that produces and consumes hot dogs and hamburgers.In the following table are data for two different years.a. Using 2010 as the base year, compute the following statistics for
An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for jobs, 10 would
Suppose the production function in medieval Europe is Y = K 0.5L0.5, where K is the amount of land and L is the amount of labor. The economy begins with 100 units of land and 100 units of labor. Use
Consider an economy described as follows:a. In this economy, compute private saving, public saving, and national saving.b. Find the equilibrium interest rate.c. Now suppose that G is reduced by
Suppose that consumption depends on the interest rate. How, if at all, does this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment,
What are open-market operations, and how do they influence the money supply?
What are the various ways in which the Federal Reserve can influence the money supply?
Explain how each of the following events affects the monetary base, the money multiplier, and the money supply.a. The Federal Reserve buys bonds in an openmarket operation.b. The Fed increases the
In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve–deposit ratio is 0.25.a. What are the money supply, the monetary base,
In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in
Give an example of a bank balance sheet with a leverage ratio of 20. If the value of the bank’s assets rises by 2 percent, what happens to the value of the owners’ equity in this bank? How large
Jimmy Paul Miller starts his own bank, called JPM. As owner, Jimmy puts in $2,000 of his own money. JPM then borrows $4,000 in a long-term loan from Jimmy’s uncle, accepts $14,000 in demand
In the country of Wiknam, the velocity of money is constant. Real GDP grows by 3 percent per year, the money stock grows by 8 percent per year, and the nominal interest rate is 9 percent. What isa.
An economy has the following money demand function: (M/P )d = .2Y/i ½.a. Derive an expression for the velocity of money. What does velocity depend on?Explain why this dependency may occur.b.
In each of the following scenarios, explain and categorize the cost of inflation.a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than
What are the net capital outflow and the trade balance? Explain how they are related.
Consider an economy described by the following equations:a. In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange
Here is a table similar to Table 6-2 (but in alphabetical order) for the currencies of four imaginary nations. Use the theory of purchasing-power parity to fill in the blanks with a number or
Do Europeans work more or fewer hours than Americans? List three hypotheses that have been suggested to explain the difference.
Consider an economy with the following Cobb–Douglas production function:a. Derive the equation describing labor demand in this economy as a function of the real wage and the capital stock.b. The
Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations:where L is labor (in number of workers), W is the
In any city at any time, some of the stock of usable office space is vacant. This vacant office space is unemployed capital. How would you explain this phenomenon? In particular, which approach to
Country A and country B both have the production functiona. Does this production function have constant returns to scale? Explain.b. What is the per-worker production function, y = f (k)?c. Assume
Consider an economy described by the production function: Y = F(K, L) = K0.4L0.6.a. What is the per-worker production function?b. Assuming no population growth or technological progress, find the
Draw a well-labeled graph that illustrates the steady state of the Solow model with population growth. Use the graph to find what happens to steady-state capital per worker and income per worker in
Give an example of an institutional difference between countries that might explain the differences in income per person.
Suppose an economy described by the Solow model has the following production function:a. For this economy, what is f (k)?b. Use your answer to part (a) to solve for the steady-state value of y as a
An economy has a Cobb–Douglas production function:capital share of a third, a saving rate of 24 percent, a depreciation rate of 3 percent, a rate of population growth of 2 percent, and a rate of
When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?
Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant.a. What happens to the aggregate demand curve?b. What happens to the level of output and the price
The official arbiter of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER’s Web site (http://www.nber.org) and find the
Use the Keynesian cross model to predict the impact on equilibrium GDP of the following.In each case, state the direction of the change and give a formula for the size of the impact.a. An increase in
In the Keynesian cross model, assume that the consumption function is given byPlanned investment is 200; government purchases and taxes are both 400.a. Graph planned expenditure as a function of
Suppose that the money demand function iswhere r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5.a. Graph the supply and demand for real money
The following equations describe an economy.a. Identify each of the variables and briefly explain their meaning.b. From the above list, use the relevant set of equations to derive the IS curve. Graph
Label each of the following statements true, false, or uncertain. Explain briefly.a. Output growth was negative in both advanced as well as emerging and developing countries in 2009.b. World output
Macroeconomic policy in Europe Beware of simplistic answers to complicated macroeconomic questions. Consider each of the following statements and comment on whether there is another side to the
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
Label each of the following statements true, false, or uncertain. Explain briefly.a. U.S. GDP was 32 times higher in 2014 than it was in 1960.b. When the unemployment rate is high, the participation
Suppose you are measuring annual U.S. GDP by adding up the final value of all goods and services produced in the economy. Determine the effect on GDP of each of the following transactions.a. A
Suppose that an economy shows only the following activities in a specific year:i. It costs an automobile manufacturing company \(€ 10\) million to assemble 5,000 cars. The cars are then sold to
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 The Consumer Price Index (CPI) is a measure of the average price of goods that a typical household consumes. To calculate the CPI, a basket of 700 goods and services that
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
Hedonic pricing As the first Focus box in this chapter explains, it is difficult to measure the true increase in prices of goods whose characteristics change over time. For such goods, part of any
Measured and true GDP Suppose that instead of cooking dinner for an hour, you decide to work an extra hour, earning an additional \$12. You then purchase some (takeout) Chinese food, which costs you
Comparing the 2008 global financial crisis and the European Sovereign debt crisis.EUROSTAT is the statistical agency of the European Commission that provides data to the institutions of the 28
Label each of the following statements true, false, or uncertain. Explain briefly.a. The largest component of GDP is consumption.b. Government spending, including transfers, was equal to \(18.1 \%\)
The following equations refer to the goods market of an economy in billions of euros:\[\begin{aligned}C & =480+0.5 Y_{D} \\I & =110 \\T & =70 \\G & =250\end{aligned}\]a. Solve for the goods market
Refer to the economy in Problem 2.a. Calculate the private savings, public savings, and investment spending.b. Calculate the multiplier and explain how it affects equilibrium output.c. Suppose that
The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in \(G\) and \(T\) that
Automatic stabilizers In this chapter we have assumed that the fiscal policy variables\(G\) and \(T\) are independent of the level of income. In the real world, however, this is not the case. Taxes
Balanced budget versus automatic stabilizers It is often argued that a balanced budget amendment would actually be destabilizing. To understand this argument, consider the economy in Problem 5.a.
Taxes and transfers Recall that we define taxes, T, as net of transfers. In other words,\[T=\text { Taxes }- \text { Transfer Payments }\]a. Suppose that the government increases transfer payments to

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