Questions and Answers of Foundations Macroeconomics

Monetarists believe that money is neutral in that it has no real effect on interest rates, output, or employment. Keynes, alternatively, believed that money is not neutral in both the short and long
Why would a bank hold Treasury bills as secondary reserves when it could simply hold primary reserves—cash?
If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves?
What is meant by the Federal funds rate?
If the Federal Reserve announces a change in the direction of monetary policy, is it describing an offensive or defensive action? Explain your answer.
Some individuals have suggested raising the required reserve ratio for banks to 100 percent.a. What would the money multiplier be if this change were made? Assume people hold no cash.b. What effect
Congratulations! You have been appointed adviser to the Federal Reserve Bank.a. The Federal Open Market Committee decides that it must increase the money supply by $60. Committee members tell you the
The table below gives the Fed funds rate target at the end of each year shown.YearFederal Funds Target Rate15.00%25.2534.2540.25Using these figures, describe how the monetary policy directions
What is an inverted yield curve?
Are you more likely to see an inverted yield curve when the Fed is implementing contractionary or expansionary monetary policy?
Fill in the blanks in the following table: Expected Real Nominal Interest Rate Interest Rate Inflation 2 a. b. 3 4 3 C. d. ? 5 1
Why is the Fed’s role as lender of last resort an important function of the Fed?
Ron Paul, a 2012 and 2016 presidential candidate, believes that the Federal Reserve should be abolished and our monetary system should be replaced by a gold standard. How does the experience of the
If a country goes bankrupt and cannot pay its debts, which of its responsibilities should take precedence: paying bondholders or paying the pensions of its employees?
What role did liquidity play in the financial crisis in 2008? What caused this lack of liquidity?
Hyman Minsky's theory of fluctuations in output in a capitalist economy was ignored by mainstream economics but has proven to be much closer to reality than are theories suggested by mainstream
If the U.S. economy were to go into another financial crisis and additional monetary stimulus were needed to prevent a financial collapse, what measures would you suggest the government take?
What is the role of extrapolative expectations in increasing the price level and creating an asset price bubble?
Post-Keynesian macroeconomist Paul Davidson has argued that the central characteristic of the Keynesian view of markets is nonergodicity, which in simple terms implies the lack of an ability to know
If asset markets aren't efficient, then it should be possible for investors to consistently make money by betting that the price of an asset will return to its "correct" value. That doesn't seem to
If you invest $100 in a stock, borrowing 90 percent of the $100 at 10 percent interest, and the stock price rises by 20 percent, what is the return on your investment?
If Greece makes its bonds legal payment for taxes, it will be able to sell all the bonds it wants to without worrying about discounts. What prevents the Greek government from following this solution?
Why did the Fed follow far more expansionary policy than the Taylor rule suggested?
Many of the regulators and overseers of the government bailout came from the same firms that brought about the crisis in the first place. Can we expect reasonable regulation when that is the case?
If you had a son whom you had forbidden to drink and drive, threatening to throw him out of the house if he does drink and drive, do you throw him out of the house if he does so?
In the standard AS/AD model, what role does a financial bubble play in determining whether an economy exceeds potential output? Explain your answer.
What is the efficient market hypothesis and how does it relate to government regulation?
What is the moral hazard problem and how does deposit insurance lead to it?
What are three reasons why the Glass-Steagall Act became less and less effective?
What distinguishes credit easing from quantitative easing? What problem was each designed to address?
What distinguishes operation twist from credit easing?
Demonstrate the different effects that quantitative easing and operation twist were expected to have on the yield curve. Explain your answer.
How was operation twist expected to avoid the criticisms of quantitative easing?
How would a precommitment policy address problems in the economy? What is the risk of such a policy?
Draw a short-run Phillips curve. What does it say about the relationship between inflation and unemployment?
If people’s expectations of inflation didn’t change, would the economy move from a short-run to a long-run Phillips curve?
If all currencies were on a gold standard, there would be no exchange rates between currencies and we would not face the difficulties presented by fluctuating exchange rates.a. What would be the
According to economist Gary North in Priorities and Dominion: An Economic Commentary on Matthew, in the book of Matthew, Jesus teaches about the rate of exchange between earthly wealth and eternal
During the 1995–96 Republican presidential primaries, Patrick Buchanan wrote an editorial in The Wall Street Journal beginning, “Since the Nixon era the dollar has fallen 75 percent against the
Most traders in currencies are men.a. Why is this?b. Why has it remained even though there is supposed to be no discrimination in employment?c. The language of traders is often quite coarse; does
Nobel Prize-winning economist James Tobin has suggested that a method of decreasing unwanted sudden capital flows among countries would be to place a small tax on such flows. Post-Keynesian economist
Most economists favor lowering barriers to trade. But even among mainstream economists there is far less support for financial liberalization-the removal of government regulation of financial and
Dr. Dollar Bill believes price stability is the main goal of central bank policy. Is the doctor more likely to prefer fixed or flexible exchange rates? Why?
Draw the schematics to show the effect of expansionary monetary policy on the exchange rate.
If U.S. inflation is 4 percent, Japan’s inflation is 1 percent, and the nominal U.S. dollar exchange rate falls by 3 percent relative to the yen, what happens to the real exchange rate?
How is forcing governments to make adjustments to meet their international problems both an advantage and disadvantage of fixed exchange rates?
In the early 2000s, China was running a large current account surplus.a. What did this suggest about its financial and capital account?b. China's private balance of payments was in surplus. What does
What are four economic advantages of the euro for Europe?
What are three disadvantages of the euro for Europe?
Is it better to have a low or high exchange rate?
In developed countries, the usefulness of an activist monetary and fiscal policy is highly questionable. Why is it even more questionable in developing countries? (Austrian)
Is it better to have a trade deficit or a trade surplus?
The United States has been consuming more than it has been producing for more than 30 years, making it the largest debtor nation in the world. Deuteronomy 28:43–44 warns against such indebtedness
Why can’t a country target both its interest rate and exchange rate?
In 2015, the U.S. federal budget deficit (how much greater government spending was than taxes) was about 2.5 percent of GDP. That year the trade deficit (how much imports surpassed exports) was about
What effect on the U.S. trade deficit would result if China and Japan ran an expansionary monetary policy?
The U.S. trade deficit was about $531 billion, or 3 percent of GDP, in 2015. Some economists argue that this gap is truly frightening because the current account deficit is the amount of money the
What would be the effect on the U.S. trade deficit if China and Japan ran a contractionary fiscal policy?
What has happened to world income inequality is a matter of sharp dispute. Many analysts claim that world incomes converged in the second half of the 20th century, leading to a sharp reduction in
Draw the schematics to show the effect of expansionary monetary policy on the trade deficit.
Congratulations! You’ve been hired as an economic adviser to the government of a country that has perfectly flexible exchange rates. State what monetary and fiscal policy you might suggest in each
Is the United States justified in complaining about Japan’s and China’s use of an export-led growth policy? Why or why not?
Countries must choose an exchange rate policy.a. Why is currency stabilization limited through direct purchases?b. What are a country’s other options?
Why are there strong political forces to manage exchange rates?
Why don’t foreign countries want the U.S. dollar to fall precipitously?
International issues aside, what limits government’s ability to undertake monetary or fiscal policy? (Austrian)
"Budget deficits should be avoided, even if the economy is below potential, because they reduce saving and lead to lower growth." Does this policy directive follow from the short-run or the long-run
To help understand the distributional consequences of the tax cuts advocated by many conservative politicians, answer the following:a. What income groups have the largest marginal propensity to
After President George W. Bush’s election in 2000, he proposed cutting taxes.a. Would you consider that proposal to follow the short-run or long-run framework, or a combination of the two?b. From
Suppose a country's debt is $630 billion before Year 1. Using the information below (in billions of dollars), fill in the blanks for its budget balance and debt for the following years: Revenues
Over 40 countries in the world now report what has been called a “women’s budget,” analyzing public expenditures and revenue from a gender perspective.a. What might be an example of a gender
What are the two ways government can finance a budget deficit?
If the structural budget deficit is $100 billion and the actual deficit is $300 billion, what is the size of the cyclical deficit?
If the actual budget deficit is $100 billion, the economy is operating $250 billion above its potential, and the marginal tax rate is 20 percent, what are the structural deficit and the cyclical
How would your answer to question 9 differ if you knew that expected inflation was 15 percent?
If all of the government’s debt were internal, would financing that debt make the nation poorer?
Why is who holds the debt an important factor when comparing debt-to-GDP ratios among countries?
How can a debt that is too high lead to an even higher debt?
What might keep the Fed from buying up more bonds if the debt gets too high?
According to the Ricardian equivalence theorem, what is the effect of each of the following on output in the economy? Explain your answers.a. Government pays for an increase in spending by raising
During the Depression, unemployment rose to 25 percent. The AS/AD model presented in the book suggests that a fall in the price level would have solved the problem. Keynesians are not so convinced
In this chapter you learned the importance of automatic stabilizers. At the state level, “rainy-day” funds play a crucial role in maintaining services when state revenues decrease during a
The economy has often been far from full employment.a. What would it take to run a regime of continuous full employment?b. How would the establishment of a full-employment regime alter the relations
President Bill Clinton's policies were designed to reduce the deficit but increase employment.a. Why would such a policy not fit well in the multiplier model?b. Explain in words how such a policy
It is often argued that saving should be encouraged. If one believes in the free market, does encouraging saving make sense? Why or why not? (Austrian)
If productivity growth is 3 percent and wage increases are 5 percent, what would you predict inflation would be?
Any policy has both advantages and disadvantages, implying that policy makers must weigh both the advantages and disadvantages when deciding what policy to follow.a. Does society share absolute,
Demonstrate the effect of the following on output and the price level in the AS/AD model:a. Full crowding out.b. Partial crowding out.c. Full crowding out and private investment is more productive
Suppose one economist believes the target rate of unemployment is 4.5 percent while another believes it is 5.5 percent. By how much would you expect their estimates of potential GDP to differ in a
Why has the assumption that the size of the debt doesn’t matter been called into question even more fervently than ever?
How can automatic stabilizers slow an economic recovery?
If you had no income and no one to help you, could you create a job for yourself? How would you go about doing it?
What happened to the duration of unemployment during the 2008/2009 recession and what is the likely reason?
Some economists believe the target rate of unemployment is about 6 to 7 percent. William Vickrey, a Nobel Prize- winning economist, argued that the target unemployment rate should be seen as being
Does government owe everyone a job who wants one?
During the past few recessions, government ran expansionary policies, but the duration of unemployment has risen. What does this suggest about the change in structural unemployment over this time
The text treats the unemployed as if both sexes are equally considered full persons within a capitalist market economy. The historic public/private split of employment for women, however, denies
What could government do to reduce structural unemployment?
If unemployment rises by 2 percentage points, what will likely happen to output in the United States relative to its growth trend? (Use Okun's rule of thumb.)
The type of employment available to different workers is inherently tied to income distribution. With globalization, the market favors those with access to higher education, which tends to be those

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