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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+d. According to the sticky-wage theory of aggregate supply, how do nominal wages at point A compare to nominal wages at point B?
=+c. Now show the new long-run equilibrium(call it point C). What causes the economy to move from point B to point C?
=+5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B).
=+b. The central bank raises the money supply by
=+a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply.
=+ 3. Suppose an economy is in long-run equilibrium.
=+d. A severe hurricane damages factories along the East Coast.
=+c. Intel invents a new and more powerful computer chip.
=+b. Congress raises the minimum wage to $10 per hour.
=+a. The United States experiences a wave of immigration.
=+2. Explain whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply.
=+ Be sure to illustrate your analysis in a graph.
=+there is no change in policy). What role does the expected price level play in this adjustment?
=+c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in the long run (assuming
=+diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate?
=+b. Now suppose that a stock-market crash causes aggregate demand to fall. Use your
=+a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply.
=+1. Suppose the economy is in a long-run equilibrium.
=+ 7. What might shift the aggregate-supply curve to the left?
=+short-run and long-run effects of such a shift on output and the price level.
=+ Use the model of aggregate demand and aggregate supply to trace through the
=+6. What might shift the aggregate-demand curve to the left?
=+ 5. List and explain the three theories for why the short-run aggregate-supply curve is upward sloping.
=+ 4. Explain why the long-run aggregate-supply curve is vertical.
=+ 3. List and explain the three reasons the aggregatedemand curve is downward sloping.
=+ 2. Draw a diagram with aggregate demand, shortrun aggregate supply, and long-run aggregate supply. Be careful to label the axes correctly.
=+one macroeconomic variable that rises during a recession.
=+1. Name two macroeconomic variables that decline when the economy goes into a recession. Name
=+Use the model of aggregate demand and aggregate supply to analyze the effect on the economy.
=+Suppose that the election of a popular presidential candidate suddenly increases people’s confidence in the future.
=+4. Use the diagram of aggregate demand and aggregate supply to analyze how the economy moves from its new short-run equilibrium to its long-run equilibrium.
=+3. Use the diagram of aggregate demand and aggregate supply to determine the impact on output and the price level in the short run.
=+2. Decide in which direction the curve shifts.
=+1. Decide whether the event shifts the aggregate demand curve or the aggregate supply curve(or perhaps both).
=+ Which way would this event shift the curve?
=+How does the economy’s behavior in the short run differ from its behavior in the long run?
6. In Chapter 4, we defined the velocity of money as the ratio of nominal expenditure to the quantity of money. Let’s now use the Baumol–Tobin model to examine what determines velocity.a.
5. Let’s see what the Baumol–Tobin model says about how often you should go to the bank to withdraw cash.a. How much do you buy per year with currency (as opposed to checks or credit cards)? This
4. Suppose that an epidemic of street crime sweeps the country, making it more likely that your wallet will be stolen. Using the Baumol–Tobin model, explain (in words, not equations) how this crime
3. Give an example of a bank balance sheet with a leverage ratio of 10. If the value of the bank’s assets rises by 5 percent, what happens to the value of the owners’ equity in this bank? How
2. To increase tax revenue, the U.S. government in 1932 imposed a two-cent tax on checks written on deposits in bank accounts. (In today’s dollars, this tax was about 25 cents per check.)a. How do
1. The money supply fell from 1929 to 1933 because both the currency–deposit ratio and the reserve–deposit ratio increased. Use the model of the money supply and the data in Table 19-1 to answer
6. In what way does the existence of near money complicate the conduct of monetary policy?How has the Federal Reserve responded to this complication?the same?
5. According to the Baumol–Tobin model, what determines how often people go to the bank?What does this decision have to do with money demand?
4. Explain the difference between portfolio and transactions theories of money demand.
3. Why might a banking crisis lead to a fall in the money supply?
2. What are the three ways in which the Federal Reserve can influence the money supply?
1. Explain how banks create money.
7. U.S. tax laws encourage investment in housing(such as through the deductibility of mortgage interest for purposes of computing income) and discourage investment in business capital (such as
6. The United States experienced a large increase in the number of births in the 1950s. People in this baby-boom generation reached adulthood and started forming their own households in the 1970s.a.
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 she takes
4. When the stock market crashes, as it did in October 1929 and October 1987, what influence does it have on investment, consumption, and aggregate demand? Why? How should the Federal Reserve
3. The IS–LM model developed in Chapters 10 and 11 assumes that investment depends only on the interest rate. Yet our theories of investment suggest that investment might also depend on national
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 firms that the tax is for one time only.)
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.a. Anti-inflationary monetary policy
4. List four reasons firms might hold inventories.
3. Explain why an increase in the interest rate reduces the amount of residential investment.
2. What is Tobin’s q, and what does it have to do with investment?
1. In the neoclassical model of business fixed investment, under what conditions will firms find it profitable to add to their capital stock?
8. Consider two savings accounts that pay the same interest rate. One account lets you take your money out on demand. The second requires that you give 30-day advance notification before withdrawals.
7. One study found that the elderly who do not have children dissave at about the same rate as the elderly who do have children. What might this finding imply about the reason the elderly do not
6. Demographers predict that the fraction of the population that is elderly will increase over the next 20 years. What does the life-cycle model predict for the influence of this demographic change
5. In the discussion of the life-cycle hypothesis in the text, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes.How
4. Explain whether borrowing constraints increase or decrease the potency of fiscal policy to influence aggregate demand in each of the following two cases.a. A temporary tax cut.b. An announced
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 consumer can save at this rate but cannot borrow
2. Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100 in the first period and $100 in the second period. Jill earns nothing in the first period and $210 in the second
1. The chapter uses the Fisher model to discuss a change in the interest rate for a consumer who saves some of his first-period income. Suppose, instead, that the consumer is a borrower. How does
6. Give an example in which someone might exhibit time-inconsistent preferences.
5. Explain why changes in consumption are unpredictable if consumers obey the permanentincome hypothesis and have rational expectations.
4. Use Fisher’s model of consumption to analyze an increase in second-period income. Compare the case in which the consumer faces a binding borrowing constraint and the case in which he does not.
3. How do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?
2. Describe the evidence that was consistent with Keynes’s conjectures and the evidence that was inconsistent with them.
1. What were Keynes’s three conjectures about the consumption function?
5. Using the library or the Internet, find some recent projections for the future path of the U.S.government debt as a percentage of GDP. What assumptions are made about government spending, taxes,
4. Some economists have proposed the rule that the cyclically adjusted budget deficit always be balanced. Compare this proposal to a strict balanced-budget rule. Which is preferable?What problems do
3. The Social Security system levies a tax on workers and pays benefits to the elderly.Suppose that Congress increases both the tax and the benefits. For simplicity, assume that Congress announces
2. Draft a letter to the senator described in Section 16-3, explaining and evaluating the Ricardian view of government debt.
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, Taco Bell is pleased to announce that we have
8. Why might the level of government debt affect the government’s incentives regarding money creation?
7. Give three reasons why a budget deficit might be a good policy choice.
6. Do you find more credible the traditional or the Ricardian view of government debt? Why?
5. According to the Ricardian view of government debt, how does a debt-financed tax cut affect public saving, private saving, and national saving?
4. According to the traditional view of government debt, how does a debt-financed tax cut affect public saving, private saving, and national saving?
3. Describe four problems affecting measurement of the government budget deficit.
2. Why do many economists project increasing budget deficits and government debt over the next several decades?
1. What was unusual about U.S. fiscal policy from 1980 to 1995?
1. In the 1970s in the United States, the inflation rate and the natural rate of unemployment both rose. Let’s use this model of time inconsistency to examine this phenomenon. Assume that policy is
9. Use the dynamic AD–AS model to solve for inflation as a function of only lagged inflation and the supply and demand shocks. (Assume target inflation is a constant.)a. According to the equation
8. Suppose that people’s expectations of inflation are subject to random shocks. That is, instead of being merely adaptive, expected inflation in period t, as seen in period t − 1, is Et–1pt =
7. The text assumes that the natural rate of interest r is a constant parameter. Suppose instead that it varies over time, so now it has to be written as rt.a. How would this change affect the
6. Suppose a central bank does not satisfy the Taylor principle; that is, vp is less than zero. Use a graph to analyze the impact of a supply shock.Does this analysis contradict or reinforce the
5. The text analyzes the case of a temporary shock to the demand for goods and services.Suppose, however, that et were to increase permanently.What would happen to the economy over time? In
4. The sacrifice ratio is the accumulated loss in output that results when the central bank lowers its target for inflation by 1 percentage point.For the parameters used in the text simulation, what
3. “If a central bank wants to achieve lower nominal interest rates, it has to raise the nominal interest rate.” Explain in what way this statement makes sense.
2. Suppose the monetary-policy rule has the wrong natural rate of interest. That is, the central bank follows this rule:it = pt + r' + vp(pt − pt *) + vY(Yt − Y−t)where r' does not equal r, the
1. Derive the long-run equilibrium for the dynamic AD–AS model. Assume there are no shocks to demand or supply (et = ut = 0) and inflation has stabilized (pt = pt −1), and then use the five
4. A central bank has a new head, who decides to increase the response of interest rates to inflation. How does this change in policy alter the response of the economy to a supply shock?Give both a
3. A central bank has a new head, who decides to raise the target inflation rate from 2 to 3 percent. Using a graph of the dynamic AD–AS model, show the effect of this change. What happens to the
2. On a carefully labeled graph, draw the dynamic aggregate demand curve. Explain why it has the slope it has.
1. On a carefully labeled graph, draw the dynamic aggregate supply curve. Explain why it has the slope it has.

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