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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+ 7. Suppose that the price level relevant for money demand includes the price of imported goods and that the price of imported goods depends on the exchange rate. That is, the money market is
=+ Analyze the short-run impact of a tax cut in a small open economy on the exchange rate and income under both fl oating and fi xed exchange rates.
=+ 6. Suppose that money demand depends on disposable income, so that the equation for the money market becomes M/P = L(r, Y − T).
=+ How does your answer compare to the results in Table 13-1?
=+of a fi scal expansion on income and the trade balance under the following exchange-rate regimes.a. A fl oating exchange rateb. A fi xed exchange rate
=+ 5. Suppose that higher income implies higher imports and thus lower net exports. That is, the net-exports function is NX = NX(e, Y).Examine the effects in a small open economy
=+of monetary and fi scal policies should you pursue? Use a graph, and be sure to identify the effects of each policy.
=+b. Suppose you wanted to make domestic industries more competitive but did not want to PROBLEMS AND APPLICATIONS alter aggregate income. According to the Mundell–Fleming model, what combination
=+a. How would a change in the nominal exchange rate affect competitiveness in the short run when prices are sticky?
=+ 4. Business executives and policymakers are often concerned about the competitiveness of American industry (the ability of U.S. industries to sell their goods profi tably in world markets).
=+c. In the Mundell–Fleming model with a fi xed exchange rate, what happens to aggregate income, the exchange rate, and the trade balance when the world interest rate rises?
=+b. In the Mundell–Fleming model with a fl oating exchange rate, what happens to aggregate income, the exchange rate, and the trade balance when the world interest rate rises?
=+a. What might cause the world interest rate to rise? (Hint: The world is a closed economy.)
=+ 3. The Mundell–Fleming model takes the world interest rate r ∗ as an exogenous variable. Let’s consider what happens when this variable changes.
=+monetary and fi scal policy should they choose?Use a graph, and be sure to identify the effects of each policy.
=+ 2. A small open economy with a fl oating exchange rate is in recession with balanced trade. If policymakers want to reach full employment while maintaining balanced trade, what combination of
=+c. The introduction of automatic teller machines reduces the demand for money.
=+b. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.
=+a. A fall in consumer confi dence about the future induces consumers to spend less and save more.
=+fl oating and fi xed exchange rates in response to each of the following shocks. Be sure to include an appropriate graph in your answer.
=+1. Use the Mundell–Fleming model to predict what would happen to aggregate income, the exchange rate, and the trade balance under both
=+ 5. Describe the impossible trinity.
=+ 4. What are the advantages of fl oating exchange rates and fi xed exchange rates?
=+trade balance when a quota on imported cars is removed. What would happen if exchange rates were fi xed rather than fl oating?
=+ 3. In the Mundell–Fleming model with fl oating exchange rates, explain what happens to aggregate income, the exchange rate, and the
=+What would happen if exchange rates were fi xed rather than fl oating?
=+ 2. In the Mundell–Fleming model with fl oating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced.
=+income, the exchange rate, and the trade balance when taxes are raised. What would happen if exchange rates were fi xed rather than fl oating?
=+1. In the Mundell–Fleming model with fl oating exchange rates, explain what happens to aggregate
=+does this result change if the parameterf, the interest sensitivity of money demand, equals zero? Explain the intuition for your result.
=+ i. Use your answer to part (g) to prove that increases in G and M, and decreases in T, shift the aggregate demand curve to the right. How
=+ h. Use your answer to part (g) to prove that the aggregate demand curve has a negative slope.
=+Your expression should show Y as a function of P; of exogenous policy variables M, G, and T; and of the model’s parameters. This expression should not contain r.
=+ ii. the value of the parameterf, the interest sensitivity of money demand?g. Use your answers to parts (a) and (d) to derive an expression for the aggregate demand curve.
=+f. How does the size of the shift in the LM curve resulting from a $100 increase in M depend on i. the value of the parametere, the income sensitivity of money demand?
=+e. Using your answer to part (d), determine whether the LM curve is steeper for large or small values off, and explain the intuition.
=+d. Solve for r as a function of Y, M, and P and the parameters e and f.
=+ where e > 0 and f > 0. The parameter e measures the sensitivity of money demand to income, while the parameter f measures the sensitivity of money demand to the interest rate.
=+answer to part (a), and explain the intuition.Now suppose demand for real money balances is a linear function of income and the interest rate:L(r, Y) = eY – fr,
=+c. Which will cause a bigger horizontal shift in the IS curve, a $100 tax cut or a $100 increase in government spending? Refer to your
=+b. How does the slope of the IS curve depend on the parameterd, the interest sensitivity of investment? Refer to your answer to part (a), and explain the intuition.
=+a. Solve for Y as a function of r, the exogenous variables G and T, and the model’s parametersa,b, c, and d.
=+autonomous consumption. Suppose also that investment is a linear function of the interest rate:I(r) = c – dr, where c > 0 and d > 0. The parameter d measures the sensitivity of investment to the
=+ 9. This problem asks you to analyze the IS–LM model algebraically. Suppose consumption is a linear function of disposable income:C(Y – T ) = a + b(Y – T ), where a > 0 and 0 < b < 1. The
=+a. The analysis of changes in government purchasesb. The analysis of changes in taxes
=+the money demand function is M/P = L(r, Y – T ).Using the IS–LM model, discuss whether this change in the money demand function alters the following.
=+ 8. Suppose that the demand for real money balances depends on disposable income. That is,
=+b. All shocks to the economy arise from exogenous changes in the demand for money.
=+a. All shocks to the economy arise from exogenous changes in the demand for goods and services.
=+• adjusting the money supply to hold the interest rate constant.In the IS–LM model, which policy will better stabilize output under the following conditions?Explain your answer.
=+• holding the money supply constant and letting the interest rate adjust, or
=+ 7. The Fed is considering two alternative monetary policies:
=+ 6. Use the IS–LM diagram to describe both the short-run effects and the long-run effects of the following changes on national income, the interest rate, the price level, consumption,
=+b. In the early 1980s, the U.S. government cut taxes and ran a budget defi cit while the Fed pursued a tight monetary policy. What effect should this policy mix have?
=+a. Suppose that the government wants to raise investment but keep output constant. In the IS–LM model, what mix of monetary and fi scal policy will achieve this goal?
=+ 5. Monetary policy and fi scal policy often change at the same time.
=+f. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal.
=+e. If money demand does not depend on income, the LM curve is horizontal.
=+d. If money demand does not depend on the interest rate, the LM curve is vertical.
=+c. If money demand does not depend on the interest rate, the IS curve is horizontal.
=+b. If investment does not depend on the interest rate, the IS curve is vertical.
=+a. If investment does not depend on the interest rate, the LM curve is horizontal.
=+ 4. Determine whether each of the following statements is true or false, and explain why. For each true statement, discuss the impact of monetary and fi scal policy in that special case.
=+from 2 to 4. What happens? What are the new equilibrium interest rate and level of income?g. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand
=+f. With the initial values for monetary and fi scal policy, suppose that the price level rises
=+ What are the new equilibrium interest rate and level of income?
=+e. Suppose instead that the money supply is raised from 1,000 to 1,200. How does the LM curve shift?
=+What are the new equilibrium interest rate and level of income?
=+d. Suppose that government purchases are raised from 100 to 150. How does the IS curve shift?
=+c. Find the equilibrium interest rate r and the equilibrium level of income Y.
=+ The money supply M is 1,000 and the price level P is 2. For this economy, graph the LM curve for r ranging from 0 to 8.
=+b. The money demand function in Hicksonia is(M/P)d= Y – 100r.
=+ Government purchases and taxes are both 100. For this economy, graph the IS curve for r ranging from 0 to 8.
=+ 3. Consider the economy of Hicksonia.a. The consumption function is given by C = 200 + 0.75(Y – T ).The investment function is I = 200 – 25r.
=+d. The appointment of a new “dovish” Federal Reserve chairman increases expected infl ation.
=+c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.
=+b. A wave of credit card fraud increases the frequency with which people make transactions in cash.
=+ 2. Use the IS–LM model to predict the shortrun effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Fed should do to
=+1. According to the IS–LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an
=+3. What is the impact of a decrease in the money supply on the interest rate, income, consumption, and investment?
=+ 2. What is the impact of an increase in taxes on the interest rate, income, consumption, and investment?
=+d. What are the equilibrium level of income and equilibrium interest rate?
=+c. From the above list, use the relevant set of equations to derive the LM curve. Graph the LM curve on the same graph you used in part (b).
=+b. From the above list, use the relevant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph.
=+a. Identify each of the variables and briefl y explain their meaning.
=+ 6. The following equations describe an economy.Y = C + I + G.C = 120 + 0.5(Y − T ).I = 100 − 10r.G = 50.T = 40.(M/P)d = Y − 20r.M = 600.P = 2.
=+d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?
=+c. Assume that the price level is fi xed. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200?
=+b. What is the equilibrium interest rate?
=+a. Graph the supply and demand for real money balances.
=+ where r is the interest rate in percent. The money supply M is 1,000 and the price level P is 2.
=+ 5. Suppose that the money demand function is(M/P)d = 1,000 − 100r,
=+d. Does this paradox arise in the classical model of Chapter 3? Why or why not?
=+c. Why do you suppose this result is called the paradox of thrift?
=+b. What happens to equilibrium saving?
=+a. What happens to equilibrium income when the society becomes more thrifty, as represented by a decline in C−?
=+− is a parameter called autonomous consumption and c is the marginal propensity to consume.
=+ 4. Consider the impact of an increase in thriftiness in the Keynesian cross. Suppose the consumption function is C = C− + c (Y − T ), where C
=+c. In the IS–LM model, how does this tax system alter the slope of the IS curve?
=+b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier?

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