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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

4. In the long run, the aggregate supply curve is vertical because output is determined by the amounts of capital and labor and by the available technology but not by the level of prices. Therefore,
3. The aggregate demand curve slopes downward. It tells us that the lower the price level, the greater the aggregate quantity of goods and services demanded. LOP8
2. The crucial difference between how the economy works in the long run and how it works in the short run is that prices are flexible in the long run but sticky in the short run. The model of
1. Economies experience short-run fluctuations in economic activity, measured most broadly by real GDP. These fluctuations are associated with movement in many macroeconomic variables. In particular,
8. 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? Is it a social problem? LOP8
c. How would this change in productivity affect the labor market if unions prevented real wages from falling? LOP8
b. How would this change in productivity affect the labor market—that is, employment, unemployment, and real wages—if the labor market was always in equilibrium? LOP8
a. What happens to the labor demand curve? LOP8
6. Suppose that a country experiences a reduction in productivity—that is, an adverse shock to the production function. LOP8
1. Answer the following questions about your own experience in the labor force:a. When you or one of your friends is looking for a part-time job, how many weeks does it typically take? After you find
How do they explain the fall in the natural rate in the 1990s and early 2000s? LOP8
5. How do economists explain the high natural rate of unemployment in the 1970s and 1980s? LOP8
4. Is most unemployment long-term or shortterm? Explain your answer. LOP8
3. Give three explanations why the real wage may remain above the level that equilibrates labor supply and labor demand. LOP8
4. Whether we conclude that most unemployment is short-term or long-term depends on how we look at the data. Most spells of unemployment are short. Yet most weeks of unemployment are attributable to
=+Why did the two nations have different policy options at their disposal?
=+In what ways were they different?
=+In what ways were the two situations similar?
=+experienced increases in government debt and a signifi cant economic downturn.
=+ 4. In recent years, as described in this chapter, both the United States and Greece have
=+Does this solve the moral hazard problem? Why or why not?
=+should be wiped out, but the fi rm’s creditors should be protected.
=+ 3. Some commentators argue that when a fi nancial fi rm is rescued by the government in the midst of a fi nancial crisis, the fi rm’s equity holders
=+d. Who benefi ts from having a better-developed fi nancial system?
=+c. Assume the production function is Cobb–Douglas. Compare the real wage and the real rental price of capital in the two countries.
=+capital per worker, and the capital–output ratio compare in the two countries?
=+b. Suppose that the two nations have the same saving rate, depreciation rate, and rate of technological progress. According to the Solow growth model, how does output per worker,
=+Explain. (Hint: See the appendix to Chapter 9 for the defi nition of total factor productivity.)
=+a. Which nation would you expect to have a higher level of total factor productivity?
=+has a less developed fi nancial system from which some would-be investors are excluded.
=+ 2. Nation A has a well-developed fi nancial system, where resources fl ow to the capital investments with the highest marginal product. Nation B
=+d. Maria, who has a large life insurance policy, spends her vacation pursuing her favorite hobbies: skydiving, bungee jumping, and bullfi ghting.
=+c. Brenda is buying a life insurance policy. She knows that members of her family tend to die young.
=+b. David is trying to get a large advance to write a textbook. He knows, but publishers don’t, that he did poorly on the writing portion of the SAT.
=+spending his time sailing rather than sitting in his offi ce working on the book.
=+a. Rick has gotten a large advance to write a textbook. With the money in hand, he prefers
=+1. In each of the following cases, identify whether the problem is adverse selection or moral hazard, and explain your answer. How might the problem be dealt with?
=+ 7. What are the pros and cons of using public funds to prop up a fi nancial system in crisis?
=+ 6. What does it mean for a central bank to act as lender of last resort?
=+5. Explain how a fi nancial crisis reduces the aggregate demand for goods and services.
=+ 4. How does the leverage ratio infl uence a fi nancial institution’s stability in response to bad economic news?
=+How do banks mitigate these problems?
=+ 3. What are adverse selection and moral hazard?
=+1. Explain the difference between debt fi nance and equity fi nance.
=+how will reality differ from this projection? (Hint: A good place to look is www.cbo.gov.)
=+If the United States experiences a productivity slowdown,
=+Do you think these assumptions are reasonable?
=+What assumptions are made about government spending, taxes, and economic growth?
=+5. Find some recent projections for the future path of the U.S. government debt as a percentage of GDP.
=+balanced-budget rule. Which is preferable? What problems do you see with the rule requiring a balanced cyclically adjusted budget?
=+4. Some economists have proposed the rule that the cyclically adjusted budget defi cit always be balanced. Compare this proposal to a strict
=+b. Does your answer depend on whether generations are altruistically linked?
=+a. How do you suppose this change would affect the economy? (Hint: Think about the marginal propensities to consume of the young and the old.)
=+Congress increases both the tax and the benefi ts.For simplicity, assume that Congress announces that the increases will last for only one year.
=+a true reduction in the government’s indebtedness? Do you think Taco Bell was serious about this plan? (Hint: Note the date.) Be sure to explain your answers.
=+called the Taco Liberty Bell and will still be accessible to the American public for viewing. We hope our move will prompt other corporations to take similar action to do their part to reduce
=+Taco Bell is pleased to announce that we have agreed to purchase the Liberty Bell, one of our country’s most historic treasures. It will now be
=+1. On April 1, 1996, Taco Bell, the fast-food chain, ran a full-page ad in the New York Times with this news: “In an effort to help the national debt,
=+6. Do you fi nd the traditional or the Ricardian view of government debt more credible? Why?
=+Do consumers fail to understand that higher government borrowing today means higher taxes tomorrow?
=+ If you agree with the traditional view of government debt, what is the reason?
=+why do you hold the view that you do?
=+ Will it stimulate consumption, as the traditional view holds?
=+how will the policy affect the economy?
=+d. In 1979, President Jimmy Carter appointed the conservative central banker Paul Volcker to head the Federal Reserve. According to
=+c. Now what happens to the infl ation rate when the natural rate of unemployment rises?
=+ Follow steps similar to those in the text to solve for the infl ation rate under discretionary policy.
=+b. Let’s now change the model slightly by supposing that the Fed’s loss function is quadratic in both infl ation and unemployment. That is, L(u, ) = u2 + 2.
=+a. In the model as developed so far, what happens to the infl ation rate when the natural rate of unemployment rises?
=+rose. Let’s use this model of time inconsistency to examine this phenomenon. Assume that policy is discretionary.
=+1. In the 1970s in the United States, the infl ation rate and the natural rate of unemployment both
=+ What do you think about the Fed’s recent policy decisions?
=+What is the Fed doing? Why?
=+release, segment of congressional testimony, or report about recent monetary policy. What does it say?
=+ 4. Go to the Web site of the Federal Reserve(www.federalreserve.gov). Find and read a press
=+e. What problem does your answer to part (d)illustrate?
=+people with 5 percent infl ation. What is unemployment in this period of unexpected infl ation?
=+d. Suppose the central bank chooses to target zero infl ation, and expected infl ation is zero.Suddenly, however, the central bank surprises
=+c. Based on your answers to parts (a) and (b), which infl ation target would you recommend? Why?
=+b. If the central bank commits to target zero infl ation, what is expected infl ation?
=+What is the loss from infl ation and unemployment?
=+a. If the central bank commits to target 5 percent infl ation, what is expected infl ation? If the central bank follows through, what is the unemployment rate?
=+ The central bank would like this loss to be as small as possible.
=+ where u and are the unemployment rate and infl ation rate measured in percentage points. The social cost of unemployment and infl ation is described by the following loss function:L = u + 0.05
=+ 3. A central bank has decided to adopt infl ation targeting and is now debating whether to target 5 percent infl ation or zero infl ation. The economy is described by the following Phillips
=+does not discourage the construction of new housing. Evaluate this argument in light of the time-inconsistency problem.
=+not yet built. Advocates of rent control argue that this exemption ensures that rent control
=+ 2. When cities pass laws limiting the rent landlords can charge on apartments, the laws usually apply to existing buildings and exempt any buildings
=+c. Do your answers above support the conclusion that monetary policy should be set by an independent central bank?
=+a. Every four years, one of the parties takes control based on a random fl ip of a coin.(Hint: What will expected infl ation be prior to the election?)b. The two parties take turns.
=+high money growth and the Right Party always follows a policy of low money growth. What“political business cycle’’ pattern of infl ation and unemployment would you predict under the following
=+ where u denotes the unemployment rate, un the natural rate, the rate of infl ation, and E the expected rate of infl ation. In addition, suppose that the Left Party always follows a policy of
=+1. Suppose that the tradeoff between unemployment and infl ation is determined by the Phillips curve:u = un − ( − E),
=+ what is the advantage of a policy rule?
=+Why might policymakers be tempted to renege on an announcement they made earlier?
=+ 5. What is meant by the “time inconsistency’’of economic policy?
=+ 2. Why would more accurate economic forecasting make it easier for policymakers to stabilize the economy?
=+Which has the longer outside lag? Why?
=+1. What are the inside lag and the outside lag? Which has the longer inside lag—monetary or fi scal policy?
=+Or would you allow the central bank to make decisions free from such political infl uence?

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