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micro economics

Economics 6th edition R. Glenn Hubbard - Solutions

In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom. ... The non-bank financial system grew to be very large. ... The
What is the quantity theory of money? What explanation does the quantity theory provide for inflation?
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically. Do you think any groups in Germany benefited from the hyperinflation? Briefly explain.
Is the quantity theory of money better able to explain the inflation rate in the long run or in the short run? Briefly explain.
What is hyperinflation? Why do governments sometimes allow it to occur?
If the money supply is growing at a rate of 6 percent per year, real GDP is growing at a rate of 3 percent per year, and velocity is constant, what will the inflation rate be? If velocity is increasing 1 percent per year instead of remaining constant, what will the inflation rate be?
If velocity does not change when the money supply of a country increases, will nominal GDP definitely increase? Will real GDP definitely increase? Briefly explain.
During the years from 2010 to 2014, the average annual growth rate of M1 was 12.7 percent, while the inflation rate as measured by the GDP deflator averaged 1.8 percent. Are these values consistent with the quantity equation? If you would need additional information to answer, state what the
In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door.'" In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is
During the Civil War, the Confederate States of America printed large amounts of its own currency-Confederate dollars-to fund the war. By the end of the war, the Confederate government had printed nearly 1.5 billion paper dollars. How would such a large quantity of Confederate dollars have affected
An article in the Economist notes that the government of Venezuela running a large budget deficit "caused the money supply almost to quadruple in two years and led to the world's highest inflation rate, of over 60% a year." a. Why would running a large budget deficit cause the money supply in
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/ fred2/) and find the most recent values for the following four variables: (1) M1 Money Stock (M1), (2) the Currency Component of M1 (CURRENCY), (3) Total Checkable Deposits (TCD), and (4) Travelers Checks
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent values for the following four variables: (1) M2 Money Stock (M2), (2) the Total Savings Deposits at all Depository Institutions (SAVINGS), (3) Retail Money Funds (WRMFSL),
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent monthly values and values from the same month 5 years and 10 years earlier for the M1 Money Stock (M1SL) and the M2 Money Stock (M2SL). a. Using these data, calculate M1 as a
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent values and values for the same quarter in 1985 for the following three variables: (1) Nominal Gross Domestic Product (GDP), (2) the Velocity of M1 Money Stock (M1V), and (3)
a. Using these data, calculate the average annual rate of change in both real GDP and M2 over this 10-year period. b. If we assume that velocity was constant during this period, what was the average annual inflation rate? c. Using the GDP Price Deflator data, calculate the average annual inflation
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent value for Real Gross Domestic Product (GDPC1) and the value from the same quarter eight years in the future for Real Potential Gross Domestic Product (GDPPOT). a. Using these
When Congress established the Federal Reserve in 1913, what was its main responsibility? When did Congress broaden the Fed's responsibilities?
In what sense does the Fed have a "dual mandate"?
What is a bank panic? Why are policymakers more concerned about bank failures than failures of restaurants or clothing stores?
An article in the Wall Street Journal quoted a Federal Reserve economist as referring to "the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability." a. Does "maximum sustainable employment" mean a zero percent unemployment rate? Briefly explain. b.
A former Federal Reserve official argued that at the Fed, "the objectives of price stability and low long-term interest rates are essentially the same objective." Briefly explain his reasoning.
In the summer of 2015, many economists and policymakers expected that the Federal Reserve would increase its target for the federal funds rate by the end of the year. Some economists argued, though, that it would be better for the Fed to leave its target unchanged. At the time, the unemployment
What is a monetary policy target? Why does the Fed use policy targets?
What do economists mean by the demand for money? What is the advantage of holding money? What is the disadvantage? Why does an increase in the interest rate decrease the quantity of money demanded?
Draw a demand and supply graph showing equilibrium in the money market. Suppose the Fed wants to lower the equilibrium interest rate. Show on the graph how the Fed would accomplish this objective.
What is the federal funds rate? What role does it play in monetary policy?
In the following graph of the money market, what could cause the money supply curve to shift from MS1 to MS2? What could cause the money demand curve to shift from MD1 to MD2?
In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-point increase in the Fed's range for overnight target rates," while another article noted, "the U.S. central bank's discount rate ... has been set at 0.75% since February 2010." a. What is the name
In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Economist Price
An article in the New York Times in 1993 stated the following about Fed Chairman Alan Greenspan's decision to no longer announce targets for the money supply: "Since the late 1970's, the Federal Reserve has made many of its most important decisions by setting a specific target for growth in the
Briefly discuss how an increase in interest rates affects each component of aggregate demand.
An article in the Wall Street Journal notes that before the financial crisis of 2007-2009, the Fed "managed just one short-term interest rate and expected that to be enough to meet its goals for inflation and unemployment." a. What short-term interest rate is the article referring to? How would the
Each year, the president's Council of Economic Advisers prepares and sends to Congress The Economic Report of the President. The report published in February 2008 contained the following summary of the economic situation: "Economic growth is expected to continue in 2008. Most market forecasts
The following is from a Federal Reserve publication: In practice, monetary policymakers do not have up-to-the-minute, reliable information about the state of the economy and prices. Information is limited because of lags in the publication of data. Also, policymakers have less-than-perfect
Briefly explain whether you agree with the following statement: "The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount."
An investment blog said about Fed Chair Janet Yellen, "She is arguably the world's most powerful woman, and perhaps the most powerful person in the world. Can you name anybody with more might?" Do you agree with this assessment? Briefly explain.
If the Fed believes the economy is headed for a recession, what actions should it take? If the Fed believes the inflation rate is about to sharply increase, what actions should it take?
What is quantitative easing? Why have central banks used this policy?
A student says the following: "I understand why the Fed uses expansionary policy, but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" Briefly answer the student's question.
In explaining why monetary policy did not pull Japan out of a recession in the early 2000s, an official at the Bank of Japan was quoted as saying that despite "major increases in the money supply," the money "stayed in banks." Explain what the official meant by saying that the money stayed in
An article in the Wall Street Journal discussing the Federal Reserve's monetary policy included the following observation: "Fed officials have been signaling since last year that they expected to raise rates in 2015 ... pushing up the value of the currency and contributing to the economic slowdown
According to an article in the Wall Street Journal, "Brazil's economy grew just 2.3% in 2013, compared with 7.5% in 2010. The country also has struggled with persistently high inflation, which has forced its central bank to raise interest rates." a. Why would the Brazilian central bank have been
William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was once quoted as saying, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going." What did he mean?
An article in the Wall Street Journal in 2015 reported that the interest rate on five-year German government bonds had become negative: "The negative yield means investors are effectively paying the German state for holding its debt." The article quoted an investment analyst as saying: "The
What are the key differences between how we illustrate an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
What are the key differences between how we illustrate a contractionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a
Use the graph to answer the following questions.a. If the Fed does not take any policy action, what will be the level of real GDP and the price level in 2019? b. If the Fed wants to keep real GDP at its potential level in 2019, should it use an expansionary policy or a contractionary policy? Should
The hypothetical information in the following table shows what the situation will be in 2019 if the Fed does not use monetary policy.a. If the Fed wants to keep real GDP at its potential level in 2019, should it use an expansionary policy or a contractionary policy? Should the trading desk be
According to an article in the Wall Street Journal, the Reserve Bank of India lowered its key policy interest rate in 2015, "citing weakness in parts of the economy as well as favorable inflation figures." The article notes that the central bank lists constraints to further interest rate cuts,
What is a monetary rule, as opposed to a monetary policy? What monetary rule would Milton Friedman have liked the Fed to follow? Why has support for a monetary rule of the kind Friedman advocated declined since 1980?
For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. Why doesn't the Fed target the money supply at the same time?
In an interview, Paul Volcker, chairman of the Federal Reserve's Board of Governors from 1979 to 1987, was asked about the Fed's use of monetary policy to reduce the rate of inflation. Volcker replied: The Federal Reserve had been attempting to deal with ... inflation for some time. ... By the time
Suppose that the equilibrium real federal funds rate is 2 percent and the target rate of inflation is 2 percent. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 4 percent Potential GDP = 17.0 trillion Real GDP = 17.17 trillion
In discussing the Taylor rule, John Taylor wrote, "I realize that there are differences of opinion about what is the best rule to guide policy and that some at the Fed (including Janet Yellen) now prefer a rule with a higher coefficient [on the output gap]." a. If Fed policy were guided by a Taylor
While serving as the president of the Federal Reserve Bank of St. Louis, William Poole stated, "Although my own preference is for zero inflation properly managed, I believe that a central bank consensus on some other numerical goal of reasonably low inflation is more important than the exact
October 2015 was the forty-second consecutive month that the rate of inflation as measured by the personal consumption expenditures (PCE) price index was below the Federal Reserve's target of 2 percent. a. Briefly explain why using the consumer price index (CPI) might yield a rate of inflation
What is a mortgage? What were the important developments in the mortgage market during the years after 1970?
Beginning in 2008, the Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize the actions of the Fed and the Treasury.
A newspaper article in the fall of 2007 stated, the luxury-home builder Hovnanian Enterprises reported its fourth consecutive quarterly loss on Thursday, citing continuing problems of credit availability and high inventory. Why was Hovnanian suffering losses? What does the article mean by "credit
An article in a Federal Reserve publication observes that "20 or 30 years ago, local financial institutions were the only option for some borrowers. Today, borrowers have access to national (and even international) sources of mortgage finance." What caused this change in the sources of mortgage
The Federal Reserve releases transcripts of its Federal Open Market Committee (FOMC) meetings only after a five-year lag in order to preserve the confidentiality of the discussions. When the transcripts of the FOMC's 2008 meetings were released, one member of the Board of Governors was quoted as
In late 2012, the U.S. Treasury sold the last of the stock it had purchased in the insurance company AIG. The Treasury earned a profit on the $22.7 billion it had invested in AIG in 2008. An article in Wall Street Journal noted, "This step in AIG's turnaround, which essentially closes the book on
Recall that securitization is the process of turning a loan, such as a mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist notes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper
In 2015, Richard Fuld, the last CEO of Lehman Brothers, gave a talk in which, according to an article in the Wall Street Journal, "He outlined what he called the 'perfect storm' of events that led to the financial crisis, saying 'it all started with the government' and policies that subsidized
Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $165,000. What is the return on your investment in the house if you made a down payment of 20 percent and took out a mortgage loan for the other 80 percent? What if you made a down payment of 5 percent
Go to www.federalreserve.gov, the Web site for the Federal Reserve Board of Governors, and read the most recent Federal Open Market Committee (FOMC) press release. At the Web site, select "Monetary Policy" at the top of the screen and then select "Federal Open Market Committee" on the far left of
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2) and download and graph the data series for the effective federal funds rate (DFF), the upper limit of the target range for the federal funds rate (DFEDTARU), and the lower limit for the target range
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent values and values from the same month one year before for the following three measures of the price level: (1) the Consumer Price Index for All Urban Consumers: All Items
Economist Mark Thoma wrote, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." What are automatic stabilizers? Name two examples
What is the difference between federal purchases and federal expenditures? Are federal purchases higher today as a percentage of GDP than they were in 1960? Are federal expenditures as a percentage of GDP higher?
In 2009, Congress and the president enacted "cash for clunkers" legislation that paid up to $4,500 to people buying new cars if they traded in an older, low-gas-mileage car. Was this legislation an example of fiscal policy? Does your answer depend on what goals Congress and the president had in
Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. a. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. b. The Federal
The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in 1983? Briefly explain.
According to a Congressional Budget Office (CBO) report: During the next decade alone, the number of people age 65 or older is expected to rise by more than one-third, and the share of the population age 65 or older is projected to grow from the current 15 percent to 21 percent in 2040. Why is the
What is an expansionary fiscal policy? What is a contractionary fiscal policy?
If Congress and the president decide that an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? What changes should they make if they decide that a contractionary fiscal policy is necessary?
Briefly explain whether you agree with the following statements: "An expansionary fiscal policy involves an increase in government purchases or an increase in taxes. A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."
Identify each of the following as (1) part of an expansionary fiscal policy, (2) part of a contractionary fiscal policy, or (3) not part of fiscal policy. a. The corporate income tax rate is increased. b. Defense spending is increased. c. The Federal Reserve lowers the target for the federal funds
Use an aggregate demand and aggregate supply graph to illustrate the situation where equilibrium initially occurs with real GDP equal to potential GDP and then the aggregate demand curve shifts to the left. What actions can Congress and the president take to move real GDP back to potential GDP?
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase? Briefly explain.
A political commentator argues: "Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular." Briefly explain whether you agree.
In 2015, in proposing a $478 billion increase in federal spending on infrastructure, President Obama argued that the spending would increase total employment in the United States. a. Will increases in federal spending always increase real GDP and employment in the short run? Briefly explain. b. Are
What are the key differences between how we illustrate an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
What are the key differences between how we illustrate a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
A report from the Congressional Budget Office (CBO) notes, "Potential GDP is CBO's estimate of the maximum sustainable output of the economy." In early 2015, the CBO estimated that the gap between real GDP and potential GDP would fall from 2.9 percent in 2014 to zero in 2017. In 2014, real GDP was
Use the graph to answer the following questions.a. If the government takes no policy actions, what will be the values of real GDP and the price level in 2019?b. What actions can the government take to bring real GDP to its potential level in 2019?c. If the government takes no policy actions, what
The hypothetical information in the following table shows what the situation will be in 2019 if Congress and the president do not use fiscal policy:a. If Congress and the president want to keep real GDP at its potential level in 2019, should they use an expansionary policy or a contractionary
Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2019 to 2020, assuming that the economy experiences deflation during 2020. In order for deflation to take place in 2020, does the economy also have to be experiencing a recession?
Why can a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Define government purchases multiplier and tax multiplier.
Why does a higher income tax rate reduce the multiplier effect?
Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott Tunnel project would have a
In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote: If the Treasury were to f ill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise ... to dig
Suppose that real GDP is currently $17.1 trillion, potential GDP is $17.4 trillion, the government purchases multiplier is 2, and the tax multiplier is 21.6. a. Holding other factors constant, by how much will governments purchases need to be increased to bring the economy to equilibrium at
Briefly explain whether you agree with the following statement: Real GDP is currently $17.7 trillion, and potential GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium
A Federal Reserve publication argues that the size of the multiplier "depends on the type of fiscal policy changes in question and the environment in which they are implemented." a. What does the author mean by "the type of fiscal policy changes in question"? Why does the type of policy matter for
If the short-run aggregate supply (SRAS) curve were a horizontal line at the current price level, what would be the effect on the size of the government purchases and tax multipliers? Briefly explain.
Which can be changed more quickly: monetary policy or fiscal policy? Briefly explain.

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