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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+Suppose you were put in charge of writing the constitution and laws for a country. Would you give the president of the country authority over the policies of the central bank?
=+as through the corporate income tax). What are the long-run effects of this policy? (Hint: Think about the labor market.)
=+interest for purposes of computing income) and discourage investment in business capital (such
=+ 7. U.S. tax laws encourage investment in housing(such as through the deductibility of mortgage
=+What do you fi nd? Is this fi nding consistent with the model? (Hint: A good source of data is the Economic Report of the President, which is published annually.)
=+b. For the years 1970 and 1980, compute the real price of housing, measured as the residential investment defl ator divided by the GDP defl ator.
=+a. Use the model of residential investment to predict the impact of this event on housing prices and residential investment.
=+this baby-boom generation reached adulthood and started forming their own households in the 1970s.
=+ 6. The United States experienced a large increase in the number of births in the 1950s. People in
=+she takes offi ce. What impact does this campaign promise have on economic conditions during the current year?
=+ 5. 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
=+ 4. When the stock market crashes, what infl uence does it have on investment, consumption, and aggregate demand? Why? How should the Federal Reserve respond? Why?
=+on national income Y, the interest rate r, consumption C, and investment I. How might this investment function alter the conclusions implied by the basic IS–LM model?
=+of the interest rate on investment. Use the IS–LM model to consider the short-run impact of an increase in government purchases
=+income on investment and b is a parameter greater than zero that measures the infl uence
=+where a is a parameter between zero and one that measures the infl uence of national
=+c. Suppose that investment depends on both income and the interest rate. That is, the investment function is I = I + aY − br,
=+income on investment. With investment set this way, what are the fi scal-policy multipliers in the Keynesian-cross model? Explain.
=+b. Suppose that investment is determined by I = I + aY, where a is a parameter between zero and one, which measures the infl uence of national
=+a. Explain why investment might depend on national income.
=+suggest that investment might also depend on national income: higher income might induce fi rms to invest more.
=+ 3. The IS –LM model developed in Chapters 11 and 12 assumes that investment depends only on the interest rate. Yet our theories of investment
=+only.) According to the neoclassical model, what effect will the tax have on business fi xed investment by these fi rms? What if these fi rms face fi nancing constraints?
=+ 2. 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 fi rms that the tax is for one time
=+d. Advances in computer technology make production more effi cient.
=+c. Immigration of foreign workers increases the size of the labor force.
=+b. An earthquake destroys part of the capital stock.
=+a. Anti-infl ationary monetary policy raises the real interest rate.
=+1. Use the neoclassical model of investment to explain the impact of each of the following on the rental price of capital, the cost of capital, and investment.
=+what would he do? Relate this example to one of the theories of consumption discussed in the chapter.
=+d. If, in period one, David were able to constrain the choices he can make in period two,
=+How does your answer here compare to David’s decision in part (b)?
=+ How much does he consume in periods two and three?
=+c. When David enters period two, his utility function is U = ln(C1) + 2 ln(C2) + ln(C3).
=+How much wealth does he have left after period one?
=+ In period one, how much does David decide to consume in each of the three periods?
=+b. David is just like Nina, except he always gets extra utility from present consumption.From the perspective of period one, his utility function is U = 2 ln(C1) + ln(C2) + ln(C3).
=+rate. How much does she consume in each of the three periods? (Hint: The marginal rate of substitution between consumption in any two periods is the ratio of marginal utilities.)
=+ She starts with wealth of $120,000, earns no additional income, and faces a zero interest
=+a. Nina has the following utility function:U = ln(C1) + ln(C2) + ln(C3).
=+ 9. This problem requires the use of calculus to solve some consumer optimization problems.
=+c. What do these choices say about the theories of the consumption function discussed in this chapter?
=+b. Can you imagine a person who might make the opposite choice? Explain.
=+a. Which account would you prefer? Why?
=+that you give 30-day advance notifi cation before withdrawals.
=+ 8. Consider two savings accounts that pay the same interest rate. One account lets you take your money out on demand. The second requires
=+the elderly who do have children. What might this fi nding imply about the validity of the two explanations? Why might it be inconclusive?
=+b. One study found that the elderly who do not have children dissave at about the same rate as
=+a. Describe the two possible explanations for this phenomenon.
=+ 7. A Case Study in the chapter indicates that the elderly do not dissave as much as the life-cycle model predicts.
=+d. Suppose now that consumers cannot borrow, so wealth cannot be negative. How does that change your answers above? Draw a new graph for part (c) if necessary.
=+c. Graph consumption, income, and wealth for each of them, with the period on the horizontal axis. Compare your graph to Figure 16-12.
=+a. For each individual, compute consumption and saving in each period of life.
=+is zero for both saving and borrowing and that the life span is perfectly predictable.
=+ They both die at the beginning of period six. To keep things simple, assume that the interest rate
=+5. Dave and Christy both follow the life-cycle hypothesis: they smooth consumption as much as possible. They each live for fi ve periods, the last two of which are retirement. Here are their
=+ 4. Explain whether borrowing constraints increase or decrease the potency of fi scal policy to infl uence aggregate demand in each of the following cases.a. A temporary tax cutb. An announced
=+e. What determines fi rst-period consumption in each of the three cases?
=+d. Now add to your graph the consumer’s indifference curves. Show three possible outcomes:one in which the consumer saves, one in which he borrows, and one in which he neither saves nor borrows.
=+area that represents the combination of fi rstperiod and second-period consumption the consumer can choose.
=+c. On a single graph, show the two budget constraints from parts (a) and (b). Shade the
=+b. What is the consumer’s budget constraint in the case in which he consumes more than his income in period one? Answer in the form of an equation.
=+a. What is the consumer’s budget constraint in the case in which he consumes less than his income in period one? Answer in the form of an equation.
=+consumer can save at this rate but cannot borrow at all. Consider now the intermediate case in which the consumer can save at rate rs and borrow at rate rb, where rs < rb.
=+ 3. The chapter analyzes Fisher’s model for the case in which the consumer can save or borrow at an interest rate of r and for the case in which the
=+Is Jill better off or worse off than before the interest rate increase?
=+c. What will happen to Jill’s consumption in the fi rst period when the interest rate increases?
=+b. Suppose the interest rate increases. What will happen to Jack’s consumption in the fi rst period? Is Jack better off or worse off than before the interest rate rise?
=+a. You observe both Jack and Jill consuming $100 in the fi rst period and $100 in the second period. What is the interest rate r?
=+earns nothing in the fi rst period and $210 in the second period. Both of them can borrow or lend at the interest rate r.
=+ 2. Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100 in the fi rst period and $100 in the second period. Jill
=+instead, that the consumer is a borrower. How does that alter the analysis? Discuss the income and substitution effects on consumption in both periods.
=+1. The chapter uses the Fisher model to discuss a change in the interest rate for a consumer who saves some of his fi rst-period income. Suppose,
=+the case in which the consumer faces a binding borrowing constraint and the case in which he does not.
=+ 4. Use Fisher’s model of consumption to analyze an increase in second-period income. Compare
=+hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?
=+ 3. How do the life-cycle and permanent-income
=+ Question 2: Would you prefer (A) a candy in 100 days or (B) two candies in 101 days?
=+Would you prefer (A) a candy today or (B) two candies tomorrow?
=+How does a shock to demand or supply infl uence the path of infl ation?
=+interest rate only 0.8 percentage point for each percentage-point increase in infl ation. In this case, what is ?
=+d. Suppose the central bank does not follow the Taylor principle but instead raises the nominal
=+c. Suppose the central bank does not respond to changes in infl ation but only to changes in output, so that = 0. How, if at all, would this fact change your answer to part (a)?
=+b. Suppose the central bank does not respond to changes in output but only to changes in infl ation, so that Y = 0. How, if at all, would this fact change your answer to part (a)?
=+a. According to the equation you have derived, does infl ation return to its target after a shock? Explain. (Hint: Look at the coeffi cient on lagged infl ation.)
=+infl ation as a function of only lagged infl ation and supply and demand shocks. (Assume target infl ation is constant.)
=+ 9. Use the dynamic AD –AS model to solve for
=+e. In what sense are infl ation scares self-fulfi lling?
=+d. What happens to the economy in subsequent periods?
=+infl ation, and nominal and real interest rates in that period? Explain.
=+c. What happens to the DAD and DAS curves in period t + 1? What happens to output,
=+What happens to output, infl ation, and nominal and real interest rates in that period? Explain.
=+greater than zero (for this period only). What happens to the DAD and DAS curves in period t?
=+b. Suppose that the economy experiences an infl ation scare. That is, in period t, for some reason people come to believe that infl ation in period t + 1 is going to be higher, so tis
=+a. Derive both the dynamic aggregate demand(DAD) equation and the dynamic aggregate supply (DAS) equation in this slightly more general model.
=+beyond past infl ation causes expected infl ation to change. Similarly, Ett +1 = t +t.
=+Give both a graphical answer and a more intuitive economic explanation.Mankiw_Macro_ch15.indd 462 t−1 is a random shock. This shock is normally zero, but it deviates from zero when some event
=+ 4. A central bank has a new head, who decides to increase the response of interest rates to infl ation. How does this change in policy alter the response of the economy to a supply shock?
=+show the effect of this change. What happens to the nominal interest rate immediately upon the change in policy and in the long run? Explain.
=+ 3. A central bank has a new head, who decides to raise the target infl ation rate from 2 to 3 percent.Using a graph of the dynamic AD –AS model,

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