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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+Why is it difficult for policymakers to choose the appropriate strength of their actions?
=+ 2. Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes.
=+c. Do you think the “natural restorative powers” of the economy mean that policymakers should be passive in response to the business cycle?
=+ Illustrate this adjustment on your diagram. Does it generally occur in a matter of months or a matter of years?
=+b. If the government does not use stabilization policy, what happens to the economy over time?
=+a. Illustrate the short-run effect of a fall in aggregate demand using an aggregatedemand/aggregate-supply diagram. What happens to total output, income, and employment?
=+1. The chapter suggests that the economy, like the human body, has “natural restorative powers.”
=+What does the political business cycle imply for the debate over policy rules?
=+ 2. What might motivate a central banker to cause a political business cycle?
=+What are the implications of these lags for the debate over active versus passive policy?
=+1. What causes the lags in the effect of monetary and fiscal policy on aggregate demand?
=+What fiscal policy might improve the lives of future generations more than reducing a government budget deficit?
=+Explain how reducing a government budget deficit makes future generations better off.
=+Why might your rule be better than discretionary policy? Why might it be worse?
=+Give an example of a monetary policy rule.
=+Why do these lags matter in the choice between active and passive policy?
=+What macroeconomic variables do you think they should look at when conducting monetary policy?
=+unemployment close to its natural rate. Unfortunately, because the natural rate of unemployment can change over time, they aren’t certain about the value of the natural rate.
=+11. Suppose Federal Reserve policymakers accept the theory of the short-run Phillips curve and the natural-rate hypothesis and want to keep
=+c. Why might the Fed choose not to pursue the course of action described in part (b)?
=+rates. What action would it take? On the same set of graphs from part (a), show the results. Label the new equilibrium as point C.
=+b. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural
=+or falls, or whether the impact is ambiguous:output, unemployment, the price level, the inflation rate.
=+short-run equilibrium as point B. For each of the following variables, state whether it rises
=+diagram and a Phillips-curve diagram. On both diagrams, label the initial long-run equilibrium as point A and the resulting
=+a. Starting from a long-run equilibrium, illustrate the effects of these two changes using both an aggregate-supply/aggregate-demand
=+10. As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by
=+ Many economists believe that countries can reduce the cost of disinflation by letting their central banks make decisions about monetary policy without interference from politicians. Why might
=+ 9. Given the unpopularity of inflation, why don’t elected leaders always support efforts to reduce inflation?
=+c. Expectations of inflation adjust quickly to actual inflation.
=+b. There is little confidence in the Fed’s determination to reduce inflation.
=+a. Wage contracts have short durations.
=+ 8. Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. Would the following conditions make the ensuing recession more or less
=+b. Do the effects of this event mean there is no short-run trade-off between inflation and unemployment? Why or why not?
=+a. Show the impact of such a change in both the aggregate-demand/aggregate-supply diagram and in the Phillips-curve diagram.What happens to inflation and unemployment in the short run?
=+ 7. Suppose the price of oil falls sharply (as it did in 1986 and again in 1998).
=+How might the Fed come to realize that its belief about the natural rate was mistaken?
=+percent. If the Fed based its policy decisions on its belief, what would happen to the economy?
=+ 6. Suppose the Federal Reserve’s policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is
=+expectations are very sluggish. Which economist is more likely to favor the proposed change in monetary policy? Why?
=+of inflation change quickly in response to new policies, whereas economist James believes that
=+ 5. The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent.Economist Milton believes that expectations
=+unemployment rate? If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs
=+(a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original
=+c. Now suppose the economy is back in longrun equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part
=+If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?
=+b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a).
=+a. Draw the economy’s short-run and long-run Phillips curves.
=+ 4. Suppose the economy is in a long-run equilibrium.
=+b. Now suppose that over time expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve?After the recession is
=+B. What happens to inflation and unemployment in the short run?
=+initial long-run equilibrium as point A and the resulting short-run equilibrium as point
=+a. Illustrate the immediate change in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillipscurve diagram. On both graphs, label the
=+ 3. Suppose that a fall in consumer spending causes a recession.
=+d. Actual inflation is 3 percent and expected inflation is 3 percent.
=+c. Actual inflation is 5 percent and expected inflation is 5 percent.
=+b. Actual inflation is 3 percent and expected inflation is 5 percent.
=+a. Actual inflation is 5 percent and expected inflation is 3 percent.
=+1. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here.Label the point that shows the position of the economy
=+Why might the natural rate of unemployment differ across countries?
=+ 3. What is “natural” about the natural rate of unemployment?
=+How might the credibility of the Fed’s commitment to reduce inflation affect the sacrifice ratio?
=+What is the sacrifice ratio?
=+How does it affect the Phillips curve?
=+Use the model of aggregate demand and aggregate supply to explain the effects of such a shock.
=+Give an example of a favorable shock to aggregate supply.
=+how policy can move the economy from a point on this curve with high inflation to a point with low inflation.
=+Draw the Phillips curve. Use the model of aggregate demand and aggregate supply to show
=+ In each case, is there another monetary policy that would lead to greater stability in output?
=+b. How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply?
=+a. How would the Fed respond to an event that contracted aggregate demand?
=+13. Some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed.
=+ Would that make the recession more or less severe?
=+c. If the government were to operate under a strict balanced-budget rule, what would it have to do in a recession?
=+b. Explain why government spending changes when the economy goes into a recession.
=+a. Explain why tax revenue changes when the economy goes into a recession.
=+12. For various reasons, fiscal policy changes automatically when output and employment fluctuate.
=+b. When the interest sensitivity of investment is large or when it is small?
=+a. When the investment accelerator is large or when it is small?
=+11. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.
=+if the Federal Reserve took no action in response or if the Fed were committed to maintaining a fixed interest rate? Explain.
=+10. Suppose government spending increases.Would the effect on aggregate demand be larger
=+d. If policymakers in this economy wanted to close the recessionary gap without increasing the government’s budget deficit, what are two ways they can accomplish this goal?
=+c. If the central bank were to hold the money supply, rather than the interest rate, constant in response to the change in fiscal policy, would your answers to the previous questions be larger,
=+a. In what direction and by how much would government spending need to change to close the recessionary gap? Explain your thinking.
=+no crowding out. The marginal propensity to consume is 4⁄5, and the price level is completely fixed in the short run.
=+ 9. An economy is operating with output $400 billion below its natural rate, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold
=+d. Based on your answer to part (c), can you think of a way in which the government can increase aggregate demand without changing the government’s budget deficit?
=+c. How does the total effect of this $20 billion tax cut compare to the total effect of a $20 billion increase in government purchases?Why?
=+What is the total effect of the tax cut on aggregate demand?
=+b. What additional effects follow this initial effect?
=+a. What is the initial effect of the tax reduction on aggregate demand?
=+ 8. Suppose the government reduces taxes by $20 billion, that there is no crowding out, and that the marginal propensity to consume is 3⁄4.
=+b. Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?
=+a. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be?
=+ 7. Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion.
=+change, what change in the money supply would have been necessary? What would have happened to aggregate demand and aggregate output?
=+constant market interest rate (the interest rate on nonmonetary assets) in the face of this
=+What would have happened to aggregate demand and aggregate output?c. If the Federal Reserve had maintained a
=+b. If the Federal Reserve had maintained a constant money supply in the face of this change, what would have happened to the interest rate?

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