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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+merely adaptive, expected infl ation in period t, as seen in period t − 1, is Et −1t = t −1 +t −1, where
=+ 8. Suppose that people’s expectations of infl ation are subject to random shocks. That is, instead of being
=+c. Can you see any practical diffi culties that a central bank might face if t varied over time?
=+b. How would a shock to t affect output, infl ation, the nominal interest rate, and the real interest rate?
=+a. How would this change affect the equations for dynamic aggregate demand and dynamic aggregate supply?
=+ 7. The text assumes that the natural rate of interest is a constant parameter. Suppose instead that it varies over time, so now it has to be written as t.
=+a graph to analyze the impact of a supply shock.Does this analysis contradict or reinforce the Taylor principle as a guideline for the design of monetary policy?
=+ 6. Suppose a central bank does not satisfy the Taylor principle; that is, is less than zero. Use
=+(Hint: It might be helpful to solve for the longrun equilibrium without the assumption that t equals zero.) How might the central bank alter its policy rule to deal with this issue?
=+What would happen to the economy over time?In particular, would the infl ation rate return to its target in the long run? Why or why not?
=+ 5. The text analyzes the case of a temporary shock to the demand for goods and services. Suppose, however, that t were to increase permanently.
=+ 4. The sacrifi ce ratio is the accumulated loss in output that results when the central bank lowers its target for infl ation by 1 percentage point. For the parameters used in the text simulation
=+ 2. Suppose the monetary-policy rule has the wrong natural rate of interest. That is, the central bank follows this rule:it = t + + (t − *t) + Y(Yt − Yt)
=+ 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.
=+c. The IS–LM model for the large open economy in the appendix to Chapter 13.
=+b. The Keynesian cross in the fi rst half of Chapter 11.
=+a. The model of the classical large open economy in the appendix to Chapter 6.
=+1. Let’s consider some more special cases of the mother of all models. Starting with this comprehensive model, what extra assumptions would you need to yield each of the following specialized
=+ What might the difference tell you about shifts in the aggregate supply curve and in the short-run Phillips curve?
=+the CPI excluding food and energy (sometimes called core infl ation). Compare these two measures of infl ation. Why might they be different?
=+the consumer price index for all items (sometimes called headline infl ation) and as measured by
=+ 9. Go to the Web site of the Bureau of Labor Statistics (www.bls.gov). For each of the past fi ve years, fi nd the infl ation rate as measured by
=+ What do you think Blinder meant by this? What are the policy implications of the viewpoint Blinder is advocating? Do you agree? Why or why not?
=+to cure a head cold. Yet, as a collectivity, we routinely prescribe the economic equivalent of lobotomy (high unemployment) as a cure for the infl ationary cold.14
=+ 8. Economist Alan Blinder, a previous vice chairman of the Federal Reserve, once wrote the following:The costs that attend the low and moderate infl ation rates experienced in the United States
=+d. What is the long-run impact of a tax cut on output and the price level? How does your answer differ from the case without the laborsupply effect?
=+c. What is the short-run impact of a tax cut on output and the price level? How does your answer differ from the case without the labor-supply effect?
=+ The short-run aggregate supply curve?
=+The long-run aggregate supply curve?
=+b. How does a tax cut affect the aggregate demand curve?
=+a. If this view is correct, how does a tax cut affect the natural level of output?
=+ 7. Some economists believe that taxes have an important effect on the labor supply. They argue that higher taxes cause people to want to work less and that lower taxes cause them to want to work
=+d. What do these equations imply about the short-run and long-run tradeoffs between infl ation and unemployment?
=+c. What is the sacrifi ce ratio in this economy?Explain.
=+1 percentage point. What effect will that policy have on the unemployment rate over time?
=+b. Suppose that the Fed follows a policy to permanently reduce the infl ation rate by
=+a. Why might the natural rate of unemployment depend on recent unemployment (as is assumed in the preceding equation)?
=+ 6. Suppose that an economy has the Phillips curve = −1 − 0.5(u − un)and that the natural rate of unemployment is given by an average of the past two years’unemployment:un = 0.5(u−1 +
=+c. If the Fed sets the money supply well after people have set prices, so that the Fed has collected more information about the state of the economy, then monetary policy can be used systematically
=+as a policy of adjusting the money supply in response to the state of the economy. (This is called the policy irrelevance proposition.)
=+everyone has the same information about the state of the economy, then monetary policy cannot be used systematically to stabilize output. Hence, a policy of keeping the money supply constant will
=+b. If the Fed chooses the money supply at the same time as people are setting prices, so that
=+supply that were anticipated when prices were set do not have any real effects.
=+a. Only unanticipated changes in the money supply affect real GDP. Changes in the money
=+ 5. Assume that people have rational expectations and that the economy is described by the stickyprice model. Explain why each of the following propositions is true.
=+b. Assuming instead that any resulting infl ation is expected, explain any changes in GDP, unemployment, and infl ation that are caused by the monetary expansion. Once again, explain your
=+a. Assuming any resulting infl ation to be unexpected, explain any changes in GDP, unemployment, and infl ation that are caused by the monetary expansion. Explain your conclusions using three
=+ 4. Suppose that the economy is initially at a longrun equilibrium. Then the Fed increases the money supply.
=+infl ation—the sacrifi ce ratio—will be lower than if the public is skeptical about the policymakers’intentions. Why might this be true? How might credibility be achieved?
=+ 3. According to the rational-expectations approach, if everyone believes that policymakers are committed to reducing infl ation, the cost of reducing
=+d. Infl ation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.
=+c. How much cyclical unemployment is necessary to reduce infl ation by 5 percentage points? Using Okun’s law, compute the sacrifi ce ratio.
=+b. Graph the short-run and long-run relationships between infl ation and unemployment.
=+a. What is the natural rate of unemployment?
=+ 2. Suppose that an economy has the Phillips curve = −1 − 0.5(u − 0.06).
=+b. The desired price does not depend on aggregate output (a = 0).
=+1. In the sticky-price model, describe the aggregate supply curve in the following special cases. How do these cases compare to the short-run aggregate supply curve we discussed in Chapter 10?a.
=+ 6. Explain two ways in which a recession might raise the natural rate of unemployment.
=+ 4. Explain the differences between demand-pull infl ation and cost-push infl ation.
=+ 3. Why might infl ation be inertial?
=+ 2. How is the Phillips curve related to aggregate supply?
=+ What do the theories have in common?
=+1. Explain the two theories of aggregate supply.On what market imperfection does each theory rely?
=+bonds from the public. Compare your answer to the case of a small open economy with a fi xed exchange rate.
=+b. Describe what happens to income, the interest rate, and the trade balance if the central bank expands the money supply by buying
=+to the case of a small open economy with a fi xed exchange rate.
=+a. Describe what happens to income, the interest rate, and the trade balance in response to a fi scal expansion, such as an increase in government purchases. Compare your answer
=+commits itself to adjusting the money supply to ensure that the equilibrium exchange rate equals the target.
=+ 4. This appendix considers the case of a large open economy with a fl oating exchange rate, but suppose instead that a large open economy has a fi xed exchange rate. That is, the central bank
=+c. Is there any combination of monetary and fi scal policies at home and abroad that would achieve this goal?
=+b. Is there any combination of domestic monetary, fi scal, and trade policies that would achieve this goal?
=+a. Is there any combination of domestic monetary and fi scal policies that would achieve this goal?
=+ 3. Suppose that policymakers in a large open economy want to raise the level of investment without changing aggregate income or the exchange rate.
=+d. How does this change in the IS curve affect the Fed’s ability to control national income?
=+c. How does this change in the IS curve affect the Fed’s ability to control the interest rate?
=+b. If the CF function changes in this way, what happens to the slope of the IS curve?
=+what happens to the slope of the CF function?
=+a. If investors become more willing and able to substitute foreign and domestic assets,
=+of fi nancial opportunities abroad. Consider how this development affects the ability of monetary policy to infl uence the economy.
=+integrated. That is, investors in all nations have become more willing and able to take advantage
=+ 2. Over the past several decades, the economies of the world have become more fi nancially
=+b. The president restricts the import of foreign cars.
=+a. The president raises taxes to reduce the budget defi cit.
=+Your goal is to stabilize income, and you adjust the money supply accordingly. Under your policy, what happens to the money supply, the interest rate, the exchange rate, and the trade balance in
=+1. Imagine that you run the central bank in a large open economy with a fl oating exchange rate.
=+d. Can you think of any important features of the Californian economy that are different from, say, the Canadian economy and that might make the Mundell–Fleming model less useful when applied to
=+happen to income, the exchange rate, and the trade balance? Consider both the short-run and the long-run impacts.
=+c. If California prohibited the import of wines from the state of Washington, what would
=+or fi scal policy to stimulate employment?Explain. (Note: For this question, assume that the state government can print dollar bills.)
=+b. If California suffers from a recession, should the state government use monetary
=+a. What kind of exchange-rate system does California have with its major trading partners (Alabama, Alaska, Arizona, . . .)?
=+ 8. Use the Mundell–Fleming model to answer the following questions about the state of California(a small open economy).
=+in this model? Contrast with the standard Mundell–Fleming model.
=+c. Suppose that political instability increases the country risk premium and, thereby, the interest rate. What is the effect on the exchange rate, the price level, and aggregate income
=+b. What is the effect of expansionary fi scal policy under fl oating exchange rates in this model? Explain. Contrast with the standard Mundell–Fleming model.
=+a. Suppose that we graph the LM ∗ curve for given values of Pd and Pf(instead of the usual P). Is this LM ∗ curve still vertical? Explain.
=+the price of foreign goods measured in foreign currency Pf are sticky in the short run.
=+/e is the price of foreign goods measured in the domestic currency. The parameter is the share of domestic goods in the price index P.Assume that the price of domestic goods Pd and
=+ Here, Pd is the price of domestic goods, Pf is the price of foreign goods measured in the foreign currency, and e is the exchange rate. Thus, Pf

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