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macroeconomics

Questions and Answers of Macroeconomics

Investment and income This problem examines the implications of allowing investment to depend on output. Chapter 5 carries this analysis much further and introduces an essential relation — the
The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may find making a diagram helpful for parta. For this problem, you do not need to
Greece's usage of fiscal policy to avoid the meltdown and the debt crisis As a result of the combined effects of the global financial crisis and the sovereign debt crisis, the GDP of Greece declined
The "exit strategy" problem in fighting the recession associated with the crisis, taxes were cut, and government spending was increased. The result was a large government deficit. To reduce that
Label each of the following statements true, false, or uncertain. Explain briefly.a. Income is a flow variable while financial wealth is a stock variable.b. Economists distinguish between investors
Suppose that the household nominal income for an economy is \(£ 50,000\) billion and the demand for money in this economy is given by\[M^{d}=£ Y(0.2-0.8 i)\]a. What is the demand for money when the
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 following are the money demand and money supply functions in an economy.\[\begin{gathered}M^{s}=€ 8,000 \\M^{d}=€ 40,000(0.25-i)\end{gathered}\]a. Calculate the equilibrium interest rate.b.
Suppose that a person's wealth is \(\$ 50,000\) and that her yearly income is \(\$ 60,000\). Also suppose that her money demand function is given by\[M^{d}=\$ Y(0.35-i)\]a. Derive the demand for
The demand for money and bonds You have learnt in this chapter that the interest rate affects both the prices of bonds and the demand for money. Explain each of these relationships.Do these
ATMs and credit cards This problem examines the effect of the introduction of ATMs and credit cards on money demand. For simplicity, let's examine a person's demand for money over a period of four
Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following:i. The public holds no currency.ii. The ratio of reserves to deposits is 0.
Tools of monetary policy Suppose that the household nominal income in an economy is \(£ 5,000\) billion and the demand for money is given by\[M^{d}=£ Y(0.08-0.4 i)\]a. If the money demand is equal
Monetary policy in a liquidity trap Suppose that money demand in problem 9 holds as long as interest rates are positive. Answer the following questions when the interest rate is equal to zero:a. What
Current monetary policy The central bank of the Federal Republic of Germany is the Deutsche Bundesbank, also known as BUBA. BUBA is the most influential member of the European Central Bank and the
Label each of the following statements true, false, or uncertain. Explain briefly.a. The main determinants of investment are the level of sales and the interest rate.b. If all the exogenous variables
Consider first the goods market model with constant investment that we saw in Chapter 3.Consumption is given by\[\begin{gathered}C=c_{0}+c_{1}(Y-T) \\\text { and } \mathrm{I}, \mathrm{G}, \text { and
The response of the economy to fiscal policya. Use an IS-LM diagram, show the effects on output of a decrease in government spending. Can you tell what happens to investment? Why? Now consider the
Consider the money market to better understand the horizontal LM curve in this chapter.The money market relation (equation 5.3) is \(\frac{M}{P}=Y L(i)\)Equation 5.3a. What is on the left-hand side
Consider the following numerical example of the IS-LM model:\[\begin{aligned}C & =100+0.3 Y_{D} \\I & =150+0.2 Y-1000 i \\T & =100 \\G & =200 \\\bar{i} & =.01\end{aligned}\]a. Find the equation for
Investment and the interest rate The chapter argues that investment depends negatively on the interest rate because an increase in the cost of borrowing discourages investment. However, firms often
The Fiscal-Monetary policy mix in the aftermath of the global financial crisis The global financial crisis of 2008 left many nations with slow GDP growth rates and high levels of public debt. While
What policy mix of monetary and fiscal policy is needed to meet the objectives given here?a. Increase \(Y\) while keeping \(\bar{i}\) constant. Would investment (I) change?b. Decrease a fiscal
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
Consumption, investment, and GDP in China Along with other emerging market economies, China has been considered as the main driver of global growth especially during the global financial crisis.
Label each of the following statements true, false, or uncertain. Explain briefly.a. The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money.b.
Suppose the interest rate in France is 1. 7%, and the expected French inflation is \(0.8 \%\). The Swiss interest rate is also \(1.7 \%\) and the expected Swiss inflation is \(0.5 \%\).a. What are
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
Modern bank runs Suppose that a European bank has customer deposits of \(€ 500\)million and capital of \(€ 100\) million and total assets of \(€ 600\) million, divided as loans equal to \(€
The IS-LM view of the world with more complex financial markets Consider an economy described by Figure 6-6 in the text.a. What are the units on the vertical axis of Figure 6-6?Figure 6-6b. If the
The Troubled Asset Relief Program (TARP)Consider a bank that has assets of 100, capital of 20, and short term credit of 80. Among the bank's assets are securitized assets whose value depends on the
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 zero
Unconventional monetary policy: financial policy and quantitative easing The IS curve represents the equilibrium in the goods market and the LM curve represents the equilibrium in the money market.
The spread between riskless and risky bonds. Immediately after the British voted for Brexit, two major credit rating agencies, Standard \& Poor's and Fitch, downgraded the U.K.'s sovereign rating
Inflation-indexed bonds Some bonds issued by the U.S. Treasury make payments indexed to inflation. These inflation-indexed bonds compensate investors for inflation. Therefore, the current interest
Label each of the following statements true, false, or uncertain. Explain briefly.a. Since 1950, the participation rate in the United States has remained roughly constant at \(60 \%\).b. Each month,
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 natural rate of unemployment Suppose that the markup of the prices of products over wage cost, \(z\), is \(10 \%\), and that the wage-setting equation is\[W=P(1-2 m+z)\]where \(m\) is the
Reservation wages In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than \(\$ 10,000\) (presumably per day).a. What is your own reservation wage?b. Did your
Bargaining power and wage determination Even in the absence of collective bargaining, workers do have some bargaining power that allows them to receive wages higher than their reservation wage. Each
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
The informal labor market You learned in Chapter 2 that informal work at home (such as home-based unregistered cooks, baby sitters or garment workers working from home) is not counted as part of GDP.
Go to the Web site of the Office of National Statistics (https:// www.ons.gov.uk/), the United Kingdom's producer of official data and check the section "Employment and labor market."a. How does the
The typical dynamics of unemployment over a recession The table below shows the behavior of the annual growth rate of real GDP of the United Kingdom during four recession episodes: the eighties, the
Label each of the following statements true, false, or uncertain. Explain briefly.a. The original Phillips curve is the negative relation between unemployment and inflation that was first observed in
Discuss the following statements.a. The Phillips curve implies that when an economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in
The natural rate of unemploymenta. The Phillips curve is \(\pi_{t}=\pi_{t}^{e}+(m+z)-\alpha u_{t}\). Rewrite this relation as a relation between the deviation of the unemployment rate from the
The formation of expected inflation The text proposes the following model of expected inflation\[\pi_{t}^{e}=(1-\theta) \pi+\theta \pi_{t}-1\]a. Describe the process of the formation of expected
Mutations of the Phillips curve Suppose that the Phillips curve is given by\[\pi_{t}=\pi_{t}^{e}+0.1-2 u_{t}\]and suppose that \(\theta\) is initially equal to \(O\) and \(\bar{\pi}\) is given and
The macroeconomic effects of the indexation of wages Suppose that the Phillips curve is given by\[\pi_{t}-\pi_{t}^{e}=0.1-2 u_{t}\]where\[\pi_{t}^{e}=\pi_{t-1}\]Suppose that inflation in year \(t-1\)
Estimating the natural rate of unemployment To answer this question, you will need data on the annual French unemployment and inflation rates since 2000. Go to the English language Web site of the
Changes in the natural rate of unemploymenta. Repeat Problem 7, but now draw separate graphs for the period 2000 to 2008 and the period since 2008, which marks the global financial crisis.b. Do you
Using the natural rate of unemployment to predict changes in inflation Suppose that the equation of the Phillips curve is\[\pi_{t}-\pi_{t}-1=4.0-0.32 \theta t\]Fill in the table below using the data
The rate of inflation and expected inflation in different decades Fill in the values in the table below for inflation and expected inflation of your country during the 1980s. You need to use a
Label each of the following statements true, false, or uncertain. Explain briefly.a. The \(I S\) curve shifts up with an increase in G, up with an increase in \(T\), and up with an increase in
The medium-run equilibrium is characterized by four conditions:Output is equal to potential output \(Y=Y_{n}\).The unemployment rate is equal to the natural rate \(u=u_{n}\).The real policy interest
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
Fiscal consolidation at the Zero Lower Bound Suppose the economy is operating at the zero lower bound for the nominal policy rate; there is a large government deficit and the economy is operating at
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
Label each of the following statements true, false, or uncertain. Explain briefly.a. On a logarithmic scale, a variable that increases at \(5 \%\) per year will move along an upward-sloping line with
Suppose that every month the average student in Tokyo, Japan, and the average student in Beijing, China, consume the following quantities of food and transportation services at the following
Consider the following production function:\[Y=K+2 N\]a. Suppose that \(K=10\) and \(N=20\). What is the value of \(Y\) ?b. Suppose that \(K\) and \(N\) triple. What happens to \(Y\) ?c. How would
The growth rates of capital and output Consider the production function given in problem 3.Assume that\(N\) is constant and equal to 1 . Note that if \(z=x^{a}\), then \(g_{z} \approx a g_{x}\),
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
On the World Bank's Web site (http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD), find the data on GDP per capita (in constant 2005 US\$) for China and for the Euro area (which includes Austria,
Convergence in two sets of countries Go to the Web site containing the Penn World Table and collect data on real GDP per person (chained series) from 1950 to 2011 (or the most recent year available)
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
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 investment rate can sustain higher growth of
Suppose that the head of the Finance Ministry in your country were to go on the record advocating an effort to restrain current consumption, arguing that "lower consumption now means higher savings;
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 that in a given economy, both the savings rate and the depreciation rate increase. What would the effect of this dual movement be on the economy's capital per worker and output per worker in
Suppose that an economy is characterized by the following production function:\[Y=3 \sqrt{K} \sqrt{N}\]a. Derive the steady-state level of output per worker, and the steady-state level of capital per
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, \(\delta\)
The savings rate and changes in the capital stock Suppose that in country \(X\), the savings rate slowly declines from \(12 \%\) in year to \(11 \%\) in year \(t+1\) and \(10 \%\) in year
Savings and government deficits.a. The World Bank has a database on gross domestic savings (as \% of GDP) available on its Web site. Using the data (for 2014), find the savings rates for France,
Label each of the following statements true, false, or uncertain. Explain briefly.a. Writing the production function in terms of capital and effective labor implies that as the level of technology
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 the following changes in economic policy, explain how the growth rate and the level of output in the future would be affected. Distinguish between short-run effects and long-term effects.a. The
Measurement error, inflation, and productivity growth Suppose that there are only two goods produced in an economy: haircuts and banking services. Prices, quantities, and the number of workers
Suppose that a country's production function is\[Y=2 \sqrt{K} \sqrt{A N}\]and that the savings rate, s, is equal to \(20 \%\) and the depreciation rate, \(\delta\), is \(10 \%\). Suppose further that
Discuss the potential role of each of the factors listed in (a) through (g) on the steady-state level of output per worker. In each case, indicate whether the effect is through \(A\), through \(K\),
Growth accounting The appendix to this chapter shows how data on output, capital, and labor can be used to construct estimates of the rate of growth of technological progress. We modify that approach
Label each of the following statements true, false, or uncertain. Explain briefly.a. The change in employment and output per person in the United States since 1900 lends support to the argument that
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
Discuss the potential impact of the following policies on wage inequalities.a. New fiscal incentives for corporate spending on on-the-job training for low-skilled employees.b. Trade barriers erected
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
Technology and the labor market In the appendix to Chapter 7, we learned how the wage-setting and price-setting equations could be expressed in terms of labor demand and labor supply. In this
The churn In 2014, the European Commission (EC) published a"European Vacancy and Recruitment Report" on its Web site, which contains data on the occupations with the sharpest declines and increases
Real wages According to the International Labour Office's (ILO) latest Global Wage Report's appendix on Asia and the Pacific, available on its Web site, real wage growth has been very strong in the
Income Inequality Use the World Income Database (at http://www.wid. world/\#Database) to find data about income inequality in France and the United Kingdom.a. Find data about the top \(1 \%\) income
Explain how each of the following situations illustrates one of the five principles of interaction.a. Using eBay any student who wants to sell a used textbook for at least $30 is able to sell it to

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