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Macroeconomics 1st Edition Glenn Hubbard, Anthony Patrick O'Brien, Matthew P Rafferty - Solutions

The chapter states that households own all the factors of production in the economy and receive income from them. Explain why this is true.
What are the four categories of expenditures included in GDP? Briefly describe each.
What is the difference between GDP and GNP? Briefly explain whether the difference is important for the United States.
How would each of the following events change measured GDP? a. There is an increase in illegal drug sales. b. More women stop being full-time homemakers and enter the labor force. c. An oil spill causes pollution on beaches in California. d. More families prepare meals at home instead of eating out.
By the 1960s, a larger percentage of women were entering the labor force. Because more women were working, their production of services within the home, such as cooking and cleaning, may have fallen. In addition, they may have employed others to do some tasks that they had previously done
Which of the following goods and services are included in GDP? If a good or service is not included, state why. a. Cynthia buys some house paint. b. Cynthia uses the paint that she purchased to paint her own house. c. Bruce hires a painter to paint his house. d. Randy sells the house that he bought
Suppose that a simple economy produces pizza, video games, and candy. The following table gives quantities and prices for each good in three successive years:a. Calculate GDP in 2010, 2011, and 2012.b. What is the growth rate of GDP between 2010 and 2011?c. What is the growth rate of GDP between
What is the difference between nominal GDP and real GDP? Why do changes in nominal GDP usually overstate changes in total production in the economy?
Use the values for nominal GDP and real GDP given in the following table to calculate the inflation rate during 1930:
Suppose that the current exchange rate between the Chinese yuan and the U.S. dollar is 10 yuan = $1. Suppose that you can buy more goods and services in China with 1,000 yuan than you can in the United States with $100.Will China’s GDP in dollars be greater if the current exchange rate is used
In 2008, the World Bank estimated that, at current exchange rates, Kenya’s GDP per capita (in U.S. dollars) was $730. For the same year, U.S. GDP per capita was $47,580.a. The World Bank uses the Atlas method to convert data into U.S. dollars at current exchange rates. The Atlas method uses an
What is a price index? How can values for nominal GDP and real GDP be used to calculate a price index?
What is a purchasing power parity exchange rate? How can it be used to compare GDP across countries?
What is the difference between GDP and national income? What is the difference between national income and personal income?
What are the five main categories of national income? Which category is the largest? Has any of the categories significantly increased or decreased its share over the past 40 years?
In January 2010, the approximate value of U.S. oil imports was $26.5 billion. In January 2011, the approximate value of U.S. oil imports was $35.2 billion. a. Given the information above, can you conclude that there has been a significant increase in the number of barrels of oil that the United
The information in the table to answer the following questions. Assume that 2010 is the base year.a. Calculate real GDP in 2010, 2011, and 2012. b. Did output in the economy grow by more in percentage terms between 2010 and 2011 or between 2011 and 2012? Briefly explain.
Use the information in the following table to calculate nominal and real GDP for 2005 and 2012. Assume that 2005 is the base year.
The answer to Solved Problem 2.2a includes the following statement: “Notice that because the prices of three of the four products increased between 2005 and 2012, for 2012 the value of real GDP is significantly less than the value of nominal GDP.” Construct an example similar to the one in the
How is the CPI calculated? What biases in the way the CPI is calculated may cause it to overstate the actual inflation rate?
How is the PCE calculated? What is the difference between the PCE and the GDP deflator? What is the difference between the PCE and the core PCE?
What is the difference between real and nominal interest rates? If the actual inflation rate is greater than the expected inflation rate, do borrowers gain or lose? Briefly explain.
Explain the major difference between the CPI and the PCE deflator. Why does the Federal Reserve prefer to use the core PCE to measure the inflation rate?
Suppose that a virus wipes out half the apple crop, causing the quantity produced to go down and the price to increase. Other fruits can be substituted for apples in many cases, so some consumers will switch to other items. What would be the effect of this on the CPI? On the PCE deflator?
This Making the Connection indicates that indexing Social Security payments to the CPI has resulted in a reduction in the standard of living for retirees, because their benefits have not kept up with the rising cost of medical care.a. Do you think that this situation will improve or worsen in
During the 2007–2009 crises, nominal interest rates fell to nearly 0%, while the rate of inflation remained positive.a. What happened to the real interest rate?b. How would this affect savers and borrowers?c. If nominal interest rates were negative, what would happen if you put money in a savings
What is meant by discouraged workers?
What is the difference between the household survey and the establishment survey? Why do some economists prefer to use the employment data from the establishment survey?
For each of the following, state whether the individual is included or not included in the labor force and, if included, whether that person is counted as employed or unemployed. a. Soma is employed as a chef at a restaurant in Maine. b. Randy is working part time but is looking for a full-time
During recessions, industries such as construction often cut back on employees. The newly unemployed workers may seek jobs for a while and then become discouraged if they do not find new jobs. a. If workers are seeking jobs, how does the BLS count those workers? b. If workers have stopped seeking
Suppose that all workers in the economy are currently working 40 hours a week.a. If all employers cut worker hours so that each employee is working 20 hours a week, what would happen to the unemployment rate?b. What would happen to real GDP?c. The unemployment rate is sometimes used as a measure of
Could an economy function without a financial system? Briefly explain.
For each of the following transactions, identify whether a financial intermediary is involved and, if it is a market transaction, state whether it occurs in a primary or secondary market: a. A bank makes a mortgage loan to a home buyer. b. The bank sells the mortgage loan to Fannie Mae. c. A
For each of the following cases, explain what service the financial intermediary is providing to savers or borrowers: risk sharing, liquidity, or information a. A mutual fund allows savers to purchase shares in a large basket of stocks. b. A bank takes in small deposits and makes large mortgage
Many banks sell most of the mortgage loans that they originate within a few years. Assuming that a bank is not worried about default risk, why would it want to sell the mortgage loans it makes rather than hold them in its portfolio?
In testimony to Congress on the failure of Lehman Brothers, former CEO Richard Fuld stated: As C.E.O., I ran more of a “what do I really need to be focused on” mentality. . . . I was focused on less-liquid assets—commercial real estate, residential mortgages, leveraged loans. I was not
Checking accounts and savings accounts at banks are insured by the FDIC, up to at least $250,000. How might the knowledge that deposits are insured create a moral hazard problem?
For years, General Motors was willing to make car loans through its GMAC subsidiary to car buyers who could not borrow money from a bank. If a bank fails to make a loan to someone who wants to borrow money to buy a car, the bank is giving up the profit it could earn making the loan. If the bank
How does the globalization of financial markets improve the ability of intermediaries to provide risk-sharing, information, and liquidity?
What is a financial intermediary, and what are some examples of financial intermediaries?
What is an asset bubble, and why are asset bubbles bad for the economy?
Explain the process of securitization.
What are adverse selection and moral hazard? What causes them?
How are the functions of a central bank different from those of a conventional bank?
How does a bank run cause a bank to fail?
What is the difference between a bank run and a bank panic? How might a bank run lead to a bank panic?
Why do the government bailouts during the 2007–2009 financial crisis create worries about moral hazard?
The Fed used broad powers to act as a lender of last resort during the 2007–2009 financial crises. If there had not been a lender of last resort, what would the effect have been on banks and other financial firms? What would the effect have been on the U.S. economy?
During the Great Depression of the 1930s, prices of many assets, including stocks, bonds, real estate, and farm land, fell rapidly.a. What problems did banks encounter during the Great Depression?b. How did these problems contribute to asset price deflation?c. Compare the effects of the problems
An article in the New York Times states:In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’
Bank failures are caused by banks having insufficient funds to cover withdrawals of deposits.a. Should Congress require banks to hold 100% of deposits as reserves instead of the 10% now required?b. What would happen to the availability of credit if banks held 100% reserves?
The price of a bond is inversely related to its return, or interest rate. Using the market for money model, explain why, all other things held constant, an increase in real GDP causes a fall in bond prices.
Draw a graph of the market for money. Show the effect on the money demand curve, the money supply curve, and the equilibrium nominal interest rate of each of the following:a. The Fed decreases the money supply.b. A recession causes real GDP to fall.c. The price level increases.d. The Fed increases
During the 2007–2009 financial crises, the Fed increased the money supply. In the same period, real GDP declined.a. Assuming the price level remained constant, use a graph of the market for money to analyze the effect of these events on the equilibrium nominal interest rate.b. During the
Suppose that the loanable fund market is in equilibrium at real interest rate r1. The government then decides to spend more, increasing the budget deficit. The new supply curve (S2) is shown in the graph below:a. Identify the new equilibrium real interest rate and quantity of loanable funds.b. How
What determines the supply of loanable funds?
How is the market for money model different from the loanable funds model?
How is the equilibrium real interest rate determined? How is the equilibrium nominal interest rate determined?
Draw a graph of the market for loanable funds. Show the effect on the equilibrium real interest rate and quantity of funds loaned and borrowed of each of the following events:a. Consumers decide to spend less.b. The government decreases its spending.c. Businesses become pessimistic about future
During the late 1990s, U.S. asset markets were growing rapidly, making the United States attractive to foreign savers. At the same time, strong economic growth made firms optimistic about the future, and the government was reducing the size of its budget deficit.a. Use the loanable funds model to
Suppose that the domestic quantity of loanable funds supplied equals the domestic quantity of loanable funds demanded. In other words, there is no foreign lending or borrowing. If the government budget deficit increases, what will happen in the market for loanable funds? Will the country lend or
Assume that initially the government has a balanced budget. However, to finance infrastructure investment, the government decides to increase spending. Show the effect on the loanable funds market in each of the following cases:a. The government raises taxes on consumers.b. The government raises
Yield curves generally slope upward. A downward sloping, or “inverted,” yield curve is often thought to signal a future recession. Why might this be true?
With a zero-coupon bond, the buyer receives only the face value of the bond at maturity—the bond pays no coupons. Suppose that for a price of $675, you buy a 10-year, zero-coupon with a $1,000 face value. a. What interest rate will you receive over the life of the bond if you hold the bond to
Imagine that you have won the lottery. You get to choose between a prize of $100,000 today and a total of $200,000 paid in 10 annual payments of $20,000 (paid at the end of each year).Which prize would you choose if the interest rate is 5%? Would your answer change if the interest rate is 20%?
Suppose that a Treasury bond was issued 27 years ago, so it will mature in three years. If the bond pays a coupon of $50 per year and will make a final face value payment of $1,000 at maturity, what is its price if the relevant market interest rate is 5%? What is its price if the relevant market
Bonds and loans have interest rates that vary according to how many years until they mature their risk, and their liquidity. For each of the following pairs of loans and bonds, explain which would be likely to have the higher interest rate. a. A credit card and an auto loan b. A 10-year Treasury
In the production function, Y = A F (K, L), identify each variable. What does an increase in A mean?
Current labor hours worked is 50,000 per year. The capital stock is $100,000. Total factor productivity is 2.a. If the production function is Y = A K1/3L2/3, what is real GDP?b. If the labor force increases to 100,000, what will happen to real GDP?c. If total factor productivity doubles, what will
In the 1950s, China had a very rapid population growth rate, which it was able to reduce dramatically over the next half century. Over the past two decades, China has experienced rapid growth in both technology and the capital stock.a. Draw a graph of China’s aggregate production function. Put
The Organization for Economic Co-operation and Development (OECD) measures the productivity of its member countries as GDP per hour worked. The highest productivities reported in 2007 were in Luxemburg and Norway, and the lowest were in Poland and Mexico. easured in U.S. dollars, highest
What is total factor productivity, and how is it calculated?
Draw a graph of the aggregate production function with capital, K, on the horizontal axis.a. Why does it have the shape that you have drawn?b. How would the graph change if there is an improvement in technology?c. How would the graph change if there is an increase in the productivity of labor?
Suppose that the production function is Y = A K1/4L3/4.a. What is the marginal product of labor (MPL)?b. What is the marginal product of capital (MPK)?c. Graph the approximate shapes of the MPL and MPK curves.
Suppose that the production function were Y = A K1/4L3/4. Assume that A = 100,000, and that the current level of the capital stock is 10,000.a. Find the marginal product of labor.b. Graph the marginal product of labor.c. Graph the production function, putting labor on the horizontal axis and
Some firms produce in both China and the United States. Suppose that the marginal product of capital in the United States is 100 units of output per hour, and the real rental cost of capital is $50. Assume further that the marginal product of capital in China is 20, and the real rental rate on
International data on labor’s share of total national income shows variation between countries and over time. In Europe, for example, in 2006, labor’s share was between 60% and 70% for most countries. While labor’s share is similar today, its share varied widely in these countries some years
How do individual markets for capital and labor relate to aggregate capital and labor markets?
Why is the aggregate supply curve of labor vertical?
Show how the markets for labor and capital are related to the aggregate production function and real GDP.
The graph below shows the production function and the labor market. The labor market is currently in equilibrium at point A.Suppose that total factor productivity decreases.a. Show the effect on the real wage rate and on real GDP.b. Now suppose that, at the same time, there is an increase in the
Suppose that the production function is given by Y = A K1/5L4/5.a. If A = 1, K = 10,000, and L = 10,000, what is real GDP?b. The demand for labor in this economy is given by MPL= (4/5) AK1/5 ÷ L1/5. Find the real wage.c. The demand for capital in this economy is given by MPK = (1/5) AL4/5 ÷ K
Consider the economy described in problem 2.7. Graph and explain the likely changes in output, the real wage, and the real rental cost of capital under each of the following scenarios:a. There are breakthroughs in technology that improve the productivity of all factors of production.
The productivity of labor is usually a function of at least three factors: available technology, the amount of capital available to use, and the human capital (skills) of the workforce. Compare the likely real wages in the following pairs of countries, assuming that all other things are identical,
How has U.S. capital, labor, and total factor productivity changed over time?
How have capital, labor, and total factor productivity contributed to U.S. real GDP growth?
From 1990 to 2004, labor’s share of income averaged 60% in Ireland, while real GDP grew at an average annual rate of 6.7%.a. Write an equation similar to Equation (4.5) on page 121 to show growth accounting for this economy.b. The average annual growth of the capital stock over this period was
Calculate the following growth rates for Ireland.a. Based on problem 3.4, write Ireland’s growth accounting equation for labor productivity growth.b. Find the relative contribution of growth in the capital–labor ratio to the growth rate of real GDP per hour worked.c. Find the relative
In the study discussed on page 124, the authors found a real GDP growth rate of 9.3% for China from 1978 to 2004. In terms of the simple growth equation discussed, 2 percentage points of the growth was due to adding workers, 3.2 percentage points was due to capital accumulation, and 3.9 percentage
Ray J. Barrell, Catherine Guillemineau, and Dawn Holland Barrell, economists at the National Institute of Social and Economic Research in the United Kingdom, studied the growth rates of Germany and the United Kingdom from 1993 to 2005. Prior to 1993, both countries grew at about the same rate.
Section 4.3 of this chapter showed that real wages have risen over time, while the real rental cost of capital has remained roughly constant. Can you explain this through the relative growth of the capital stock and the labor force? What role does technology play in explaining the relative growth
Graphically show the following:a. Why countries with higher capital-labor ratios will have higher levels of real GDP per worker.b. How differences in technology can cause countries with identical capital-labor ratios to have different levels of real GDP per worker.
The share of income going to physical capital in both Colombia and Costa Rica is about 10%, so we can represent the production function for real GDP per worker as y = Ak1/10. The capital–labor ratio is $15.25 for Colombia, and it is $23.12 for Costa Rica. Real GDP per worker is $12.18 in Colombia
If the rates of return on capital in Colombia and Costa Rica are what you found in problem 4.5b, what will happen to the capital stocks of the two countries over time? How is this likely to change output per worker in each country?
Briefly explain whether you agree with the following statement: “Because capital will move to the location in which it receives the highest return, over time, per capita incomes of all countries should become the same.”
Between 1990 and 2010, real GDP per capita grew much more rapidly in India than in the United States. Based on the discussion in this chapter, do you think that India’s growth rate will be permanently higher than the U.S. growth rate? Briefly explain.
In what sense is real GDP per capita a measure of the standard of living?
According to the CIA World Factbook, Kuwait has the 8th highest per capita GDP in the world. However, life expectancy in Kuwait is only 66th in the world. Briefly discuss whether per capita real GDP or life expectancy is likely to be a better measure of the standard of living in Kuwait
In the spring of 2010, a large oil spill threatened the coasts of Louisiana and surrounding areas. The oil company in charge, BP, and various environmental agencies spent millions of dollars on the cleanup. a. What happened to the usual measure of real GDP per capita in the area for this period? b.
Describe how real GDP per capita has changed throughout the world from 1820 to the present.

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