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macroeconomics principles

Questions and Answers of Macroeconomics Principles

1. 12. What is the purpose of the financial reregulation such as the Dodd-Frank bill and European initiatives? What were its main measures taken to reregulate the financial sector after the crisis?
1. 11. What have been the principal fiscal and monetary responses to the recession to date? What have been the results thus far?
1. 10. In what ways did globalization contribute to the financial crisis?
1. 9. Are short-term individual incentives for corporate officers consistent or in conflict with long-run interests of their companies and the economy as a whole?
1. 8. Explain “too big to fail” and why it is a potential economic problem in any economic setting. How is “too big to fail” related to moral hazard?
1. 7. What is financial deregulation? How important is it in explaining the financial crisis?
1. 6. Did social inequality play a part in inflating the bubble that led to the 2007 financial crisis? If so, how?
1. 5. What are mortgage-backed securities? Collateralized debt obligations?Credit default swaps? Are these “investments” in the traditional sense?
1. 4. How is the recent economic downturn similar to the Great Depression?How is it different?
1. 3. How can a collapse of the U.S. housing market and weakness in the banking system cause an economic recession and unemployment? How is it possible that the impact spreads around the world?
1. 2. What is “subprime” lending? How did it contribute to the bubble and the subsequent financial crisis?
1.1. What was the nature of the housing bubble experienced in the early to mid-2000s? What were its main causes?
1. 2. What would you think about a proposal to tax financial transactions?Would you prefer it to an income or a sales tax? Why or why not?
1.1. What is “quantitative easing”? Can you think of anything you learned earlier in the book to which it is related? What do you think are the main advantages and disadvantages of such a policy?
1. 2. Did the financial crisis mostly have to do with banks? Homebuyers?International economics? What do you think is the most important factor that explains it?
1.1. Have you seen anything in the news in recent weeks or months about the regulation of banking and finance? Do you think, in general, that it is a good idea to allow banks and financial
1. 2. Do you think that the Great Recession is nearly as bad as the Great Depression was? In what ways is it similar to it? In what ways was it different? Do you know any stories of family members
1.1. Do you think changes in the value of “paper assets” like stocks and bonds, or even of homes, should have real economic effects? Why? Why do you think that employment suffered from the
1. 2. Would you prefer interest rates in the economy to be high or low? On what does it depend? Who benefited from low interest rates during the inflation of the housing bubble in the U.S., Ireland,
1.1. People often refer to the housing “bubble” and even the housing “crisis.”Is an increase in the average price of homes not a good thing? What if prices are rising more rapidly than in the
1. 5. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Tariff 1. Makes international incomes comparable by accounting for differences in the cost of
1.4. Determine, for each of the following, whether it would appear in the current account or financial account section of the euro-area balance-of payments accounts and whether it would represent an
1. 3. Suppose that, due to rising interest rates in the euro area, the Japanese increase their purchases of European securities.a. Illustrate in a carefully labeled supply-and-demand diagram how this
1. 2. Classify each of the following as a trade flow, income flow, or asset transaction:a. A U.S. software company sells its products to European consumersb. A Saudi investor buys real estate in
1.1. Singapore is a natural-resource-poor country that has built its economy on the basis of massive imports of commodities and raw materials and similarly massive exports of refined and manufactured
1. 17. What reforms have been suggested for the international financial system?
1. 16. What is the “Washington Consensus”?
1. 15. How and why might a central bank “intervene” on a foreign exchange market?
1.14. Distinguish between floating and fixed exchange rate systems.
1.13. What is the effect of an open economy on fiscal policy?
1. 12. Does having an open economy make monetary policy stronger or weaker? Why?
1. 11. How and why is an imbalance (surplus or deficit) in the current account related to an imbalance in the capital account?
1. 10. What are the two main accounts in the balance-of-payment account, and what do they reflect?
1. 9. Draw a carefully labeled graph illustrating a depreciation of the euro against the dollar.
1. 8. Who creates the supply of a currency on the foreign exchange market?Who creates the demand?
1. 7. What is the theory of “purchasing power parity”?
1. 6. List six reasons why countries often limit trade.
1. 5. What are some international organizations and agreements dealing with trade relations?
1. 4. Briefly describe the recent history of the EU and world trade, and list the major European trading partners.
1. 3. List two policies related to international capital transactions.
1. 2. List four policies related to international trade.
1.1. In what seven ways are economies connected internationally?
1. 2. Have international trade or financial imbalances or actions of the IMF been in the news lately? What are the current controversies?
1.1. To check your understanding of international linkages, consider the following hypothetical scenario. Suppose that people overseas become less interested in buying euro-area government bonds
1. 2. Savings, imports, and taxes are all considered “leakages” from aggregate demand. Are they bad for the economy? Or is there an important function for each? How are their levels related to
1.1. What will be the likely effect of increased imports on euro-area GDP?Do imported goods undercut employment in the euro area? What other developments in the economy might counteract this effect?
1. 2. Production of apparel has been widely globalized in recent years. Before going to class, check the labels on a number of items of clothing that you own. Which countries are represented?
1.1. How do international linkages affect your own life? Can you give examples of the sorts of linkages listed in Section 1.1 effects on you or your family?that have had direct
1.7. Match each concept in Column A with a definition or example in Column B.Column Aa. Aggregate supply Column B 1. A rightward shift in the AD curveb. Real depreciationc. Increase in autonomous
1. 6. Empirical data on the macroeconomy for the euro area as well as other EU countries can be found on the European Commission’s Web site. Go to
1. 5. Check recent inflation rates at www.ecb.europa.eu/. What do you think explains the recent pattern of inflation? How does this relate to AS/AD analysis, and to the debate among different schools
1. 4. Suppose that an economy is in a deep recession.a. Draw and carefully label an AS/AD diagram that illustrates this case. Label the point representing the state of this economy E0.b. If no policy
1.3. Suppose that an economy is currently experiencing full employment, and inflation is only slightly higher than had been expected.a. Draw and carefully label an AS/AD diagram that illustrates this
1. 2. Suppose the inflation rate in an economy is observed to be falling.Sketching an AS/AD model for each case, determine which of the following phenomena could be the cause. (There may be more than
1.1. For each of the following, indicate which curve in the AS/AD model shifts (initially), and in which direction(s):a. A beneficial supply shockb. An increase in government spendingc. A monetary
1. 10. What underlying dynamic did Keynes believe is behind the business cycle? Illustrate with an AS/AD graph.
1. 9. What does the AS curve look like in the classical model, and why?
1. 8. Describe, using the AS/AD model, the effects of austerity and structural reforms.
1. 7. Describe, using the AS/AD model, how ECB policy might bring down inflation over time.
1. 6. Describe, using the AS/AD model, the impact of an adverse supply shock.
1. 5. Describe, using the AS/AD model, a combination of events that might cause an economy to suffer from “stagflation.”
1. 4. What shifts the AS curve?
1. 3. What does the AS curve represent, and why does it have the shape that it has?
1. 2. What shifts the AD curve?
1.1. What does the AD curve represent, and why does it slope downward(differentiate between countries with a central bank of their own and euro-area countries without a national central bank deciding
1. 2. Which do you think gives a better description of economic realities:classical or Keynesian macroeconomic theory? Explain.
1.1. What is the effect of expansionary fiscal and monetary policies in the classical model?
1. 2. Stagflation—a combination of unemployment and inflation—seems to be the worst of both worlds. What policies were used to respond to the stagflation of the late 1970s and early 1980s? What
1.1. Under what circumstances can aggregate demand be increased without leading to problems with inflation? Under what circumstances is an increase in aggregate demand likely to cause inflation?
1. 2. In some euro-area countries, certain wage contracts are automatically linked to inflation, meaning that workers get automatic pay raises if consumer prices increase. Why does this practice have
1.1. Describe in words how the AS curve differs from the AD curve. What does each represent? What explains their slopes?
1. 2. Does the ECB always want the inflation rate to be as low as possible?Why or why not?
1.1. “The negative slope of the AD curve means that higher levels of output will lead to lower levels of inflation.” Is this statement correct or not?Discuss.
1. 8. (Appendix A2) Suppose that the nominal prime interest rate for a one year loan is currently 6 percent.a. If inflation is 1 percent per year, what is the current real interest rate?b. Suppose
1. 7. (Appendix A1) Suppose that you have a bond with a face value of €200 and coupon amount of €10 that matures one year from now.a. If the going interest rate is 3 percent, how much can you
1. 6. The president of the ECB regularly gives testimony before the European Parliament’s Economic and Monetary Affairs Committee about the state of monetary policy. Find the most recent such
1. 5. Match each concept in Column A with the best definition or example in Column B.Column A Column Ba. Expansionary monetary policyb. Flat moneyc. Accelerator principled. Monetary neutralitye.
1. 4. Suppose that the level of nominal GDP in Estilvania is €30 billion and the level of the money supply is €10 billion.a. What is the velocity of money in Estilvania?b. Suppose that the money
1. 3. Suppose that investor confidence falls, and the ECB is aware of this fact.Using the model presented in this chapter, show (a) through (c) below graphically:a. How a fall in investor confidence
1. 2. Suppose that the ECB increases its main refinancing rate by 0.25 percentage points.a. Assuming that the level of business confidence remains unchanged, show on a graph how this interest rate
1.1. Suppose that the QRS bank has extended loans by €2,000,000 to its customers and credited the money to the customers’ overnight accounts.a. Show how this affects the balance sheet of QRS
1. 12. Explain how problems in the banking sector, such as insufficient capital, can affect the transmission mechanism between interest rate cuts and aggregate demand.
1. 11. Discuss how monetary expansion can lead to high inflation, using the quantity equation.
1. 10. What is monetarism?
1. 9. What is the quantity equation? What is the quantity theory of money?
1. 8. Describe how ECB policy operated during the 2000–2015 period.
1. 7. Show the effects of an expansionary monetary policy in a Keynesian cross diagram.
1. 6. How is investment related to the interest rate? What other factors affect investment? Use a graphical analysis to show these relationships.
1.5. Describe how a change in the ECB’s main refinancing rate might lead to changes in the money supply M1.
1. 4. Describe two tools the ECB uses to keep money market interest rates close to its main refinancing rate.
1. 3. Describe how decisions by a bank to extend loans finally lead to an increase in reserves in the banking sector and why the increase in reserves is usually lower than the increase in initial
1. 2. Show what happens to the ECB’s balance sheet and the balance sheet of a commercial bank when the commercial bank borrows from the ECB.
1.1. Draw up and explain the components of the balance sheet of the ECB.
1. 2. How does the issue of time lags affect fiscal and monetary policy?
1.1. What are some arguments in favor of having the ECB having a broader mandate? What are some arguments against it?
1. 2. Has inflation been reported to be a problem in any recent news reports?Check recent inflation data at http://ec.europa.eu/eurostat/de. How do you think this is related to recent ECB monetary
1.1. What is the difference between the quantity theory of money and the quantity equation?
1. 2. Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great Recession and in the euro crisis?
1.1. What is quantitative easing? How is it different from the ECB’s main refinancing operations? What other “unconventional” tools has the ECB employed since the outbreak of the euro crisis?
1. 2. Is it always true that a cut in interest rates leads to an increase in investment and aggregate demand? Why or why not?

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