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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

1. Let’s consider some more special cases of this large model. Starting with the large model, what extra assumptions would you need to yield each of the following models?a. The model of the
4. Suppose that a large open economy has a fixed exchange rate.a. Describe what happens in response to a fiscal contraction, such as a tax increase. Compare your answer to the case of a small open
3. Suppose that policymakers in a large open economy want to raise the level of investment without changing aggregate income or the exchange rate.a. Is there any combination of domestic monetary and
2. Over the past several decades, investors around the world have become more willing to take advantage of opportunities in other countries.Because of this increasing sophistication, economies are
1. Imagine that you run the central bank in a large open economy. Your goal is to stabilize income, and you adjust the money supply accordingly.Under your policy, what happens to the money supply,
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. Suppose also
8. Suppose that the demand for real money balances depends on disposable income. That is, the money demand function is M/P = L(r, Y −T).Using the IS–LM model, discuss whether this change in the
7. The Fed is considering two alternative monetary policies:• holding the money supply constant and letting the interest rate adjust, or• adjusting the money supply to hold the interest rate
6. Use the IS–LM diagram to describe the short-run and long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money
5. Suppose that the government wants to raise investment but keep output constant. In the IS–LM model, what mix of monetary and fiscal policy will achieve this goal? In the early 1980s, the U.S.
4. Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases.a. If investment does not depend on the interest rate, the IS
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.Government purchases and taxes are both 100. For this
2. Use the IS–LM model to predict the 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 keep income
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?a. The central bank increases the money
4. Describe the possible effects of falling prices on equilibrium income.
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?
1. Explain why the aggregate demand curve slopes downward.
5. Suppose that the money demand function is(M/P)d = 1,000 – 100r, where r is the interest rate in percent. The money supply M is 1,000 and the price level P is 2.a. Graph the supply and demand for
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− is a parameter called autonomous consumption and c
3. Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, in many countries (including the United States) taxes depend on income. Let’s represent the
2. In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y − T ).Planned investment is 100; government purchases and taxes are both 100.a. Graph planned
1. Use the Keynesian cross to predict the impact on equilibrium GDP ofa. An increase in government purchases.b. An increase in taxes.c. Equal-sized increases in both government purchases and taxes.
4. Why does the LM curve slope upward?
3. Why does the IS curve slope downward?
2. Use the theory of liquidity preference to explain why an increase in the money supply lowers the interest rate. What does this explanation assume about the price level?
1. Use the Keynesian cross to explain why fiscal policy has a multiplied effect on national income.
4. The official arbiter of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER’s Web site(www.nber.org) and find the
3. Let’s examine how the goals of the Fed influence its response to shocks. Suppose Fed A cares only about keeping the price level stable and Fed B cares only about keeping output and employment at
2. Suppose the Fed reduces the money supply by 5 percent.a. What happens to the aggregate demand curve?b. What happens to the level of output and the price level in the short run and in the long
1. An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of
5. Why is it easier for the Fed to deal with demand shocks than with supply shocks?
4. Explain the impact of an increase in the money supply in the short run and in the long run.
3. Why does the aggregate demand curve slope downward?
2. Give an example of a price that is sticky in the short run but flexible in the long run.
1. When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?
3. Suppose an economy described by the Solow model is in a steady state with population growth n of 1.8 percent per year and technological progress g of 1.8 percent per year. Total output and total
2. Labor productivity is defined as Y/L, the amount of output divided by the amount of labor input. Start with the growth-accounting equation and show that the growth in labor productivity depends on
1. In the economy of Solovia, the owners of capital get two-thirds of national income, and the workers receive one-third.a. The men of Solovia stay at home performing household chores, while the
9. Choose two countries that interest you—one rich and one poor. What is the income per person in each country? Find some data on country characteristics that might help explain the difference in
8. Consider how unemployment would affect the Solow growth model. Suppose that output is produced according to the production function Y = Ka[(1 − u)L]1-a, where K is capital, L is the labor force,
7. In the Solow model, population growth leads to steady-state growth in total output, but not in output per worker. Do you think this would still be true if the production function exhibited
6. Many demographers predict that the United States will have zero population growth in the twenty-first century, in contrast to average population growth of about 1 percent per year in the twentieth
5. One view of the consumption function is that workers have high propensities to consume and capitalists have low propensities to consume. To explore the implications of this view, suppose that an
4. “Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards.’’ Do you agree with this claim? Explain.
3. Consider an economy described by the production function: Y = F(K, L) = K0.3L0.7.a. What is the per-worker production function?b. Assuming no population growth or technological progress, find the
2. In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly
1. Country A and country B both have the production function Y = F(K, L) = K1/2L1/2.a. Does this production function have constant returns to scale? Explain.b. What is the per-worker production
4. In the Solow model, how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?
3. Might a policymaker choose a steady state with more capital than in the Golden Rule steady state? With less capital than in the Golden Rule steady state? Explain your answers.
2. Why might an economic policymaker choose the Golden Rule level of capital?
1. In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?
8. In any city at any time, some of the stock of usable office space is vacant. This vacant office space is unemployed capital. How would you explain this phenomenon? Is it a social problem?
7. When workers’ wages rise, their decision about how much time to spend working is affected in two conflicting ways—as you may have learned in courses in microeconomics. The income effect is the
6. Suppose that a country experiences a reduction in productivity—that is, an adverse shock to the production function.a. What happens to the labor demand curve?b. How would this change in
5. Consider an economy with the following Cobb–Douglas production function:Y = K1/3L2/3.The economy has 1,000 units of capital and a labor force of 1,000 workers.a. Derive the equation describing
4. Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An example is a law requiring severance pay for fired workers.) If this legislation reduces the rate
3. The residents of a certain dormitory have collected the following data: People who live in the dorm can be classified as either involved in a relationship or uninvolved. Among involved people, 10
2. In this chapter we saw that the steady-state rate of unemployment is U/L = s/(s + f ). Suppose that the unemployment rate does not begin at this level. Show that unemployment will evolve over time
1. Answer the following questions about your own experience in the labor force:a. When you or one of your friends is looking for a part-time job, how many weeks does it typically take? After you find
5. How do economists explain the high natural rate of unemployment in the 1970s and 1980s?How do they explain the fall in the natural rate in the 1990s and early 2000s?
4. Is most unemployment long-term or short-term? Explain your answer.
3. Give three explanations the real wage may remain above the level that equilibrates labor supply and labor demand.
2. Describe the difference between frictional unemployment and structural unemployment.
1. What determines the natural rate of unemployment?
1. In the Cagan model, if the money supply is expected to grow at some constant rate m (so that Emt+ s = mt + sm), then Equation A9 can be shown to imply that pt = mt + gm.a. Interpret this result.b.
13. Macroeconomic data do not show a strong correlation between investment and interest rates.Let’s examine why this might be so. Use our model in which the interest rate adjusts to equilibrate the
12. If consumption depended on the interest rate, how would that affect the conclusions reached in this chapter about the effects of fiscal policy?
11. When the government subsidizes investment, such as with an investment tax credit, the subsidy often applies to only some types of investment.This question asks you to consider the effect of such
10. Suppose that the government increases taxes and government purchases by equal amounts. What happens to the interest rate and investment in response to this balanced-budget change? Does your
9. Consider an economy described by the following equations:Y = C + I + G Y = 5,000 G = 1,000 T = 1,000 C = 250 + 0.75(Y − T)I = 1,000 − 50 r.a. In this economy, compute private saving, public
8. Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases the amount they want to consume today. This might be interpreted as an
7. The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall?By what amounts?a. Public saving.b. Private saving.c.
6. (This problem requires the use of calculus.)Consider a Cobb–Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is
5. According to the neoclassical theory of distribution, the real wage earned by any worker equals that worker’s marginal productivity. Let’s use this insight to examine the incomes of two groups
4. Figure 3-5 shows that in U.S. data, labor’s share of total income is approximately a constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor
3. Suppose that an economy’s production function is Cobb–Douglas with parameter = 0.3.a. What fractions of income do capital and labor receive?b. Suppose that immigration increases the labor
2. If a 10-percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale. If it causes output to
1. Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events:a. A wave of immigration increases the labor
8. Explain what happens to consumption, investment, and the interest rate when the government increases taxes.
7. What makes the demand for the economy’s output of goods and services equal the supply?
6. Explain the difference between government purchases and transfer payments. Give two examples of each.
5. What determines consumption and investment?
4. Write down a Cobb–Douglas production function for which capital earns one-fourth of total income.
3. What is the role of constant returns to scale in the distribution of income?
2. Explain how a competitive, profit-maximizing firm decides how much of each factor of production to demand.
1. What determines the amount of output an economy produces?
9. In a speech that Senator Robert Kennedy gave when he was running for president in 1968, he said the following about GDP:[It] does not allow for the health of our children, the quality of their
8. Consider how each of the following events is likely to affect real GDP. Do you think the change in real GDP reflects a similar change in economic well-being?a. A hurricane in Florida forces Disney
7. Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green
6. Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years.Year Year 2000 2010 Good Quantity Price Quantity Price Automobiles 100
5. Find data on GDP and its components, and compute the percentage of GDP for the following components for 1950, 1980, and the most recent year available.a. Personal consumption expendituresb. Gross
4. Place each of the following transactions in one of the four components of expenditure:consumption, investment, government purchases, and net exports.a. Boeing sells an airplane to the Air Force.b.
3. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an
2. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for$3.00. The baker uses the flour to make bread and
1. Look at the newspapers for the past few days.What new economic statistics have been released? How do you interpret these statistics?
4. Describe the two ways the Bureau of Labor Statistics measures total employment.
3. List the three categories used by the Bureau of Labor Statistics to classify everyone in the econ- omy. How does the Bureau compute the unemployment rate?
2. What does the consumer price index measure?
1. List the two things that GDP measures. How can GDP measure two things at once?

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