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business
macroeconomics principles
Questions and Answers of
Macroeconomics Principles
Explain what chain-weighting is.
What is investment?
Why is it useful to study different models of the business cycle?
What were the two main principles introduced in the rational expectations revolution?
Why might the effective lower bound not be zero?
List two unconventional monetary policy actions, and explain how each is supposed to work.
What is a liquidity trap, and how does monetary policy work in a liquidity trap?
How does conventional monetary policy work?
Explain how money can be nonneutral in the short run.
What are three ways the government could bring about a change in the money supply?
What are the effects of an increase in the money supply in the monetary intertemporal model?
What determines the demand for money in the monetary intertemporal model?
What are the alternatives to using currency in transaction in the monetary intertemporal model?
What is the real rate of interest on money?
How are the real interest rate, the nominal interest rate, and the inflation rate related to one another?
Why is money used in exchange when people could carry out transactions by trading goods or using credit?
List three monetary aggregates and the assets that these monetary aggregates include.
Explain how a sectoral shock is similar to, and different from, a total factor productivity shock.
How do credit market frictions affect aggregate economic activity? Explain how tax policy can mitigate credit market frictions.
Determine the equilibrium effects of an anticipated increase in future total factor productivity in the real intertemporal model. Explain why these effects are different from the effects of an
What are the effects of an increase in total factor productivity on the real interest rate, aggregate output, employment, the real wage, consumption, and investment? Explain how these results relate
What are the effects of a decrease in the current capital stock on the real interest rate, aggregate output, employment, the real wage, consumption, and investment?
What are the effects of a temporary increase in government purchases on the real interest rate, aggregate output, employment, the real wage, consumption, and investment?
How are aggregate output and the real interest rate determined in competitive equilibrium?
What are the factors that shift the output demand curve?
What are the factors that shift the output supply curve?
What is the government’s budget constraint in the real intertemporal model? Can the government run a deficit or run a surplus in the current period?
Explain how credit market uncertainty affects the investment decision of the firm.
How is optimal investment affected by an increase in future total factor productivity?
How is optimal investment for the firm affected by an increase in the current capital stock?
What rule does the representative firm follow in determining its optimal level of investment?
What is the goal of the representative firm in the real intertemporal model?
What determines the current demand for labor?
What are three factors that determine current labor supply?
Explain how intertemporal substitution is important for current labor supply and for the current demand for consumption goods.
How does the government’s ability to commit matter for social security programs?
What are the effects of a fully funded social security system?
Under what conditions will a pay-as-you-go social security system improve welfare for those currently alive and for all future generations?
For a borrower who is collateral-constrained, what happens when the value of collateralizable wealth falls? How does this matter for the financial crisis?
If the default premium increases, what is the effect on the consumption and savings of an individual consumer?
Explain how a default premium can arise, and what would cause it to increase.
What are two sources of credit market imperfections?
Does the existence of credit market imperfections imply that there is a useful role for government tax policy?
What are the effects of a tax cut on consumption and savings in the presence of a credit market imperfection? Does Ricardian equivalence hold?
What effects do credit market imperfections have on the interest rates faced by lenders and borrowers?
Give four reasons that the burden of the government debt is not shared equally in practice.
How does the government finance its purchases in the two-period model?
What are the effects of an increase in the real interest rate on consumption in each period, and on savings? How does this depend on income and substitution effects and whether the consumer is a
What does theory tell us about how the value of stocks held by consumers should be related to consumption behavior? Does the data support this?
What produces a larger increase in a consumer’s current consumption, a permanent increase in the consumer’s income or a temporary increase?
What are the effects of an increase in future income on consumption in each period, and on savings?
Give two reasons why consumption is more variable in the data than theory seems to predict.
What are the effects of an increase in current income on consumption in each period, and on savings?
How is the consumer’s motive to smooth consumption captured by the shape of an indifference curve?
What are the three properties of a consumer’s preferences?
If a consumer chooses the endowment point, how much does he or she consume in each period, and how much does he or she save?
What are the horizontal and vertical intercepts of a consumer’s lifetime budget constraint?
What is the slope of a consumer’s lifetime budget constraint?
Show how to derive the consumer’s lifetime budget constraint from the consumer’s cur-rent-period and future-period budget constraints.
What is the price of future consumption in terms of current consumption?
What factors are important to a consumer in making his or her consumption–savings decision?
How do consumers save in the two-period model?
Why do consumers save?
Is there convergence in the levels and rates of growth of per capita income in the endogenous growth model? Why or why not?
If the government could increase the rate of growth of consumption, should it? Why or why not?
What two factors affect the growth rate of income and consumption in the endogenous growth model?
Why is knowledge nonrivalrous?
What causes economic growth in the endogenous growth model?
How can a country overcome low productivity?
What are three sources of differences in productivity across countries?
How is the Solow model consistent with evidence on convergence across countries?
If countries are initially identical, except with respect to levels of capital per worker, what does the Solow model predict will happen to these countries in the long run? Is this consistent with
What does the Solow residual measure, and what are its empirical properties?
Why is a Cobb–Douglas production function useful for analyzing economic growth?
In what sense does the Solow growth model give optimistic conclusions about the prospects for improvement in the standard of living, relative to the Malthusian model?
Explain what determines the golden rule quantity of capital per worker and the golden rule savings rate.
In the Solow growth model, what are the steady state effects of an increase in the savings rate, of an increase in the population growth rate, and of an increase in total factor productivity?
What are the characteristics of a steady state in the Solow growth model?
Was Malthus right? Why or why not?
What can increase the standard of living in the Malthusian model?
What is the effect of an increase in total factor productivity on steady state population and consumption per worker in the Malthusian model?
What are the seven economic growth facts?
What is the difference between exogenous growth and endogenous growth?
What explains the observed Beveridge relation from 2000 to 2012?
In the two-sided search model, what are the effects of a decrease in matching efficiency?
In the two-sided search model, what are the effects of an increase in productivity?
In the two-sided search model, what are the effects of an increase in the UI benefit?
In the two-sided search model, when a worker and firm are matched, what determines the wage paid to the worker?
What are total surplus, worker surplus, and firm surplus in the two-sided search model?
In the two-sided search model, what determines a firm’s decision to post a vacancy?
In the two-sided search model, what determines a consumer’s decision to search for work?
How will an increase in the job offer rate affect the reservation wage and the long-run unemployment rate in the one-sided search model? What implications does this have for government policy?
How will an increase in the UI benefit affect the long-run unemployment rate in the one-sided search model, and why?
How does an increase in the tax on wage income affect the reservation wage in the one-sided search model, and why?
How does an increase in the UI benefit affect the reservation wage in the one-sided search model, and why?
What determines the reservation wage in the one-sided search model?
What causes shifts in the welfare of the unemployed in the one-sided search model?
What causes shifts in the welfare of the employed in the one-sided search model?
How does the vacancy rate behave relative to the unemployment rate, and how does this matter for the Beveridge curve?
How does the employment/population ratio behave relative to the participation rate?
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