Dynamic Macroeconomic Theory 5th Edition Thomas J. Sargent - Solutions

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Ray and Dorothy can both cook and can both pull weeds in the garden on a Saturday afternoon.For every hour of cooking, Ray can pull 50 weeds and Dorothy can pull 100 weeds. Based on this information,(A) Ray pulls weeds since he has absolute advantage in cooking.(B) Dorothy pulls weeds since she has
The shape of this PPF tells us that(A) economic resources are perfectly substitutable from production of tea to production of crumpets.(B) citizens prefer that an equal amount of tea and crumpets be produced.(C) the opportunity cost of producing crumpets rises as more crumpets are produced.(D) the
Economic growth is best represented by a movement from(A) A to B(B) B to C(C) C to D(D) D to E(E) E to A
A student decides that, having already spent three hours studying for an exam, she should spend one more hour studying for the same exam.Which of the following is most likely true?(A) The marginal benefit of the fourth hour is certainly less than the marginal cost of the fourth hour.(B) The
Economics is best described as(A) the study of how scarce material wants are allocated between unlimited resources.(B) the study of how scarce labor can be replaced by unlimited capital.(C) the study of how decision makers choose the best way to satisfy their unlimited material wants with a scarce
Which of the following is a likely effect of a higher tariff imposed by the U.S. on imported automobiles?(A) Net exports will fall and the dollar will appreciate in value.(B) Net exports will fall and the dollar will depreciate in value.(C) The price of automobiles in the U.S. will fall.(D) Net
Suppose the Japanese economy is suffering a prolonged recession. Lower Japanese household incomes will affect U.S. exports to Japan, demand for the dollar, and the value of the dollar relative to the yen in which of the following ways?
If the world price of copper exceeds the domestic(U.S.) price of copper, we would expect(A) The U.S. to be a net exporter of copper.(B) The U.S. to impose a tariff on imported copper to protect domestic producers.(C) The demand for U.S. copper to fall.(D) A growing trade deficit in the U.S. in
Suppose the reserve ratio is 10 percent and the Fed buys $1 million in Treasury securities from commercial banks. If money demand is perfectly elastic, which of the following is likely to occur?(A) Money supply increases by $10 million, lowering the interest rate and increasing AD.(B) Money supply
If a bank has $1000 in checking deposits and the bank is required to reserve $250, what is the reserve ratio? How much does the bank have in excess reserves? What is the size of the money multiplier?(A) 25%, $750, M = 1⁄4(B) 75%, $250, M = 4(C) 25%, $750, M = 4(D) 75%, $750, M = 1⁄4(E) 25%,
Excess reserves in the banking system will increase if(A) the reserve ratio is increased.(B) the checking deposits increase.(C) the discount rate is increased.(D) the Fed sells Treasury securities to commercial banks.(E) income tax rates increase.
Which of the following is an accurate statement of the money supply in the U.S.?(A) The money supply is backed by gold reserves.(B) The least liquid measure of money is M2.(C) M1 is larger than M3.(D) Paper money can be exchanged at commercial banks for an equal amount of gold.(E) The most liquid
Which of the following monetary policies would lessen the effectiveness of expansionary fiscal policy?(A) Decreasing the value of the domestic currency.(B) Lowering the income tax rate.(C) Selling Treasury securities to commercial banks.(D) Lowering the discount rate.(E) Lowering the reserve ratio.
Which of the following is a tool used by the Fed to increase the money supply?(A) A lower discount rate(B) Selling Treasury securities to commercial banks(C) A higher reserve ratio(D) A lower personal income tax rate(E) A lower investment income tax rate
A contractionary monetary policy will cause the nominal interest rate, aggregate demand, output, and the price level to change in which of the following ways?
In a recession, expansionary monetary policy is designed to(A) decrease AD so that real prices will decrease, which is good for the economy.(B) increase AD, which will increase real GDP and increase employment.(C) increase unemployment, but low prices negate this effect.(D) keep interest rates
The “crowding out” effect is the result of(A) decreasing interest rates from contractionary fiscal policy.(B) increasing interest rates from expansionary fiscal policy.(C) increasing interest rates from expansionary monetary policy.(D) increasing unemployment rates from expansionary monetary
Automatic stabilizers in the economy serve an important role in(A) increasing the length of the business cycle.(B) balancing the budget.(C) increasing a budget surplus in a recession.(D) decreasing net tax revenue during economic growth.(E) lessening the impact of a recession.
Of the following choices, the one most likely to be preferred by supply-side economists would be(A) increased government spending.(B) higher tariffs on imported goods.(C) lower taxes on household income.(D) higher welfare payments.(E) a tax credit on capital investment.
If the economy is experiencing a recession, how will a plan to decrease taxes for consumers and increase spending on government purchases affect real GDP and the price level?(A) GDP rises and the price level falls.(B) GDP falls and the price level rises.(C) GDP rises and the price level rises.(D)
The Phillips curve represents the relationship between(A) inflation and the money supply.(B) unemployment and the money supply.(C) the money supply and the real interest rate.(D) inflation and unemployment.(E) investment and the real interest rate.
The best example of a negative supply shock to the economy would be(A) a decrease in government spending.(B) a decrease in the real interest rate.(C) an increase in the money supply.(D) unexpectedly higher resource prices.(E) technological improvements.
The spending multiplier is often smaller than predicted because of(A) lower taxes.(B) increasing net exports.(C) falling unemployment.(D) lower interest rates.(E) rising price levels.
Suppose the economy is operating beyond full employment. Which of the following is true at this point?(A) The short-run AS curve is horizontal.(B) Further increases in AD will result in a lower price level.(C) A decrease in AD will result in a lower price level if prices are sticky.(D) Further
If the economy is operating below full employment, which of the following will have the greatest positive impact on real GDP?(A) The government decreases spending with no change in taxes.(B) The government increases spending with no change in taxes.(C) The government decreases spending and matches
An increase in investor optimism will have which of the following effects in the market for loanable funds?(A) An increase in supply, lowering the interest rate.(B) A decrease in demand, increasing the interest rate.(C) An increase in both supply and demand, and an ambiguous change in interest
A stronger stock market is likely to cause which of the following changes in the consumption function, the MPC, and aggregate demand?
To deflate nominal GDP, you must(A) divide nominal GDP by the GDP deflator.(B) multiply real GDP by the GDP deflator.(C) divide real GDP by the GDP deflator.(D) multiply nominal GDP by the GDP deflator.(E) divide nominal GDP by real GDP.
If the CPI increases by 2 percent and your nominal income increases by 8 percent, your real income has(A) increased by 4 percent.(B) decreased by 4 percent.(C) increased by 6 percent.(D) decreased by 6 percent.(E) increased by 10 percent.
For years you work as a grocery checker at a supermarket and one day you are replaced by selfserve checkout stations. What type of unemployment is this?(A) Cyclical(B) Structural(C) Seasonal(D) Frictional(E) Discouraged
If an American firm moves a plant from the U.S.to Brazil,(A) U.S. GDP falls and Brazil’s GDP falls.(B) U.S. GDP rises and Brazil’s GDP falls.(C) U.S. GDP falls and U.S. GNP rises.(D) U.S. GDP falls and Brazil’s GDP rises.(E) U.S. GDP rises and Brazil’s GDP rises.
If DVD players are a normal good, an increase in household income will(A) increase the equilibrium quantity and increase the price.(B) decrease the equilibrium quantity and increase the price.(C) increase the equilibrium price, but the change in quantity is ambiguous.(D) decrease the equilibrium
Using the graph above (Figure D.4), which of the following movements would be described as economic growth?(A) W to X(B) X to Y(C) W to Y(D) Z to W(E) X to Z
Which of the following statements is true of these production possibilities?(A) Nation X has comparative advantage in paper production and should trade paper to Nation Y in exchange for crepes.(B) Nation X has comparative advantage in crepe production and should trade crepes to Nation Y in exchange
Which of the following resources are examples of capital?I. An electric typewriter II. A barrel of crude oil III. A registered nurse IV. A share of corporate stock(A) I only(B) II only(C) III only(D) II and IV only(E) I and IV only
Which of the following tax systems is designed to redistribute income from the wealthy to the poor?(A) A progressive tax system.(B) A regressive tax system.(C) A proportional tax system.(D) An excise tax system.(E) A tariff system.
A negative externality from the production of a good exists when(A) the market overallocates resources to the production of this good.(B) spillover benefits are received by society.(C) the marginal social benefit equals the marginal social cost.(D) total welfare is maximized.(E) the marginal
Which of the following is the best example of a public good?(A) A visit to the orthodontist.(B) A session at the tanning salon.(C) A large pizza.(D) A cup of coffee.(E) The Hubble telescope.
If the above firm were a monopsonist, the wage would be _________ and employment would be _________ the competitive outcome.(A) greater than; less than(B) less than; greater than(C) greater than; greater than(D) less than; less than(E) less than; the same as
If a firm is hiring labor in the perfectly competitive labor market, the wage and employment will be(A) $4 and zero.(B) $5 and 10.(C) $6 and 20.(D) $7 and 30.(E) $8 and 40.
Which of the following statements is true about the demand for labor?(A) It rises if the price of a substitute resource falls and the output effect is greater than the substitution effect.(B) It falls if the price of the output produced rises.(C) It falls if the price of a complementary resource
Which of the following is most likely to decrease the demand for kindergarten teachers?(A) An increase in K–12 funding.(B) Increased immigration of foreign citizens and their families.(C) A decrease in the average number of children per household.(D) Subsidies given to college students who major
If the government wishes to regulate a natural monopoly so that it produces an efficient level of output it would be(A) where price is equal to average total cost.(B) where marginal revenue equals marginal cost.(C) where normal profits are made.(D) where price is equal to average variable cost.(E)
The market structures of perfect competition and monopolistic competition share which of the following characteristics?(A) Ease of entry and exit in the long run.(B) Homogenous products.(C) Perfectly elastic demand for the firm’s product.(D) Long-run positive profits.(E) Rigid or “sticky”
Which of the following is necessarily a characteristic of oligopoly?(A) Free entry into and exit from the market.(B) A few large producers.(C) One producer of a good with no close substitutes.(D) A homogenous product.(E) No opportunities for collusion between firms.
Which of the following statements describes a profit-maximizing monopolist?I. Output is set where marginal revenue equals marginal cost, creating an efficient allocation of economic resources.II. Dead weight loss is eliminated in the long run.III. Price is set above marginal cost, creating
If the perfectly competitive price is currently below minimum average total cost, we can expect which of the following events in the long run?(A) The price will rise and each firm’s output will fall as firms exit the industry.(B) Market equilibrium quantity will increase as firms exit the
If the market price of the output increases from P1 to P3, the profit-maximizing firm will(A) increase output from q1 to q4 and earn positive economic profits.(B) increase output from q1 to q4 and earn a normal profit.(C) increase output from q1 to q3 and earn positive economic profits.(D) increase
The shutdown point is seen at:(A) P0, q0(B) P1, q1(C) P2, q2(D) P3, q3(E) P3, q4
Monopolistic competition is often characterized by(A) strong barriers to entry.(B) long-run price that exceeds average total cost.(C) price that exceeds average variable cost, causing excess capacity.(D) a homogenous product.(E) many resources devoted to advertising.
At a quantity of 4, what is the total cost of production?(A) $7.50(B) $2.50(C) $15(D) $30(E) $14.50
The range of diminishing marginal productivity begins at what level of output?(A) 1(B) 2(C) 3(D) 4(E) 5
The total fixed cost of producing a quantity of 4 is(A) $5(B) $7.50(C) $7(D) $2.50(E) $10
In the short run, a firm employs labor and capital to produce gadgets. If the annual price of capital increases, what will happen to the short-run cost curves?(A) The marginal cost and average variable cost curves will shift upward.(B) The average fixed cost and average total cost curves will shift
If a consumer is not required to pay a monetary price for each cookie she consumes, the consumer will stop eating cookies when(A) the total utility from eating cookies is equal to zero.(B) the substitution effect outweighs the income effect from eating cookies.(C) the ratio of marginal utility
Which of the following describes the theory behind the demand curve?(A) Decreasing marginal utility as consumption rises.(B) Increasing marginal cost as consumption rises.(C) Decreasing marginal cost as consumption rises.(D) Increasing total utility at an increasing rate as consumption rises.(E)
If the price of firm A’s long-distance service rises by 5 percent and the quantity demanded for firm B’s long-distance service increases by 10 percent, we can say that(A) demand for firm B is price elastic.(B) supply for firm B is price elastic.(C) firms A and B are substitutes because the
Suppose the price of beef rises by 10 percent and the quantity demanded of beef falls by 20 percent. We can conclude that(A) demand for beef is price elastic and consumer spending on beef is falling.(B) demand for beef is price elastic and consumer spending on beef is rising.(C) demand for beef is
In Figure D.2 above, identify the area of consumer surplus.(A) 0ACB (B) 0FCB (C) AFC (D) ACE (E) FCE Price E FI A 0 B S D Figure D.2 Quantity
If the demand for grapes increases simultaneously with an increase in the supply of grapes, we can say that(A) equilibrium quantity rises, but the price change is ambiguous.(B) equilibrium quantity falls, but the price change is ambiguous.(C) equilibrium quantity rises, and the price rises.(D)
The competitive market for gasoline is currently in a state of equilibrium. Which of the following would most likely increase the price of gasoline?(A) Household income falls.(B) Technology used to produce gasoline improves.(C) The price of subway tickets and other public transportation falls.(D)
Which of the following is true of equilibrium in a purely (or perfectly) competitive market for good X?(A) A shortage of good X exists.(B) The quantity demanded equals the quantity supplied of good X.(C) A surplus of good X exists.(D) The government regulates the quantity of good X produced at the
The graph above (Figure D.1) shows a nation’s production possibility frontier (PPF) for the production of bread and butter. Which of the following is true?(A) The opportunity cost of producing more butter is a decreasing amount of bread.(B) Point X represents unemployed economic resources.(C) The
Which of the following statements describes a capitalist market economy?I. Economic resources are allocated based upon relative prices.II. Private property is fundamental to innovation, growth, and trade.III. A central government plans the production and distribution of goods.(A) I only(B) II
Scarcity is best defined as(A) the difference between limited wants and limited economic resources.(B) the difference between the total benefit of an action and the total cost of that action.(C) the difference between unlimited wants and limited economic resources.(D) the opportunity cost of
Asset Pricing Associated with Lucas's asset-pricing model (Chapter 3) is the functional equation?
Periodic Difference Equation Consider the periodic linear difference equation y= 2+1+x Suppose that x, 10, todd 10, t even. [0, ). Assume that || < 1.a. Prove that the difference equation given above has a unique solution (y) in /[0, ),b. Describe an algorithm for computing this solution.c. Find
Altered Version of Logarithmic Preferences Alter Example 8,1 as follows, Assume that u*[ch(t), c(t + 1)] = In[c (t) + a] + In[c(t + 1) + y'], Assume that all other features of the example are the same.a. Show that there is a stationary equilibrium in which s, and s continue to be given by (v) and
Altered Version of Logarithmic Preferences Alter Example 8.1 as follows, Assume that u[ch(t), c(t + 1)] In[c (t) + a] + In[c(t + 1) + 2],
Constancy of Fiscal Policy In Proposition 5.1, in what sense is fiscal policy being held constant across equilibria?
Walras's Law: 2 Verify that Equations (8.5) and (8.6) are satisfied for the caret-bearing equi- librium described in Theorem 8.1.
Walras's Law: I In the model of Section 8.2, prove that (8.2), (8.3), and (8.7) imply that wt) cht) K(t) + p(t)M(t). h Interpret this equality,
The Term Structure of State-Contingent Claims Consider the economy described in Wallace's "A Modigliani-Miller Theorem for Open Market Operations." Let s (1,1+1;j, i) denote the price at time t when x(t) = x, of a claim to one unit of consumption at date (t + 1) when x(t + 1)=x; [this is Wallace's
A Version of Kareken-Wallace Exchange Rate Indeterminacy This problem concerns a two-country version of Wallace's model in his "A Modigliani-Miller Theorem for Open Market Operations," Residents in each country are free to hold assets issued by residents or the government of the other country. In
Computing Equilibrium Interest Rates Suppose that there are N^ agents with endowment stream (y), t=0,..., T, and NB agents with endowment stream (y), 1-0, ..., T. We require that y0 but otherwise leave the streams of endowments unrestricted. Assume that the preferences of all agents are described
Value of Unbacked Currency Prove that, in the T= + version of the model of Section 6.3 in which private loan markets are permitted to operate and NA NB, there exists no equilibrium in which unbacked currency is valued.
Other Interest-on-Reserve Schemes Consider three different schemes for paying interest on reserves as in Section 5.5. The first guarantees a real return similar to the return on a risk-free claim to one unit of consumption. This scheme is the one analyzed in Section 5.5 and pays interest on
Incentives for "Private Currencies" The cash that appears in the model of this chapter is all issued by the government, with the printing of government notes assumed to be costless. Suppose that private agents have access to the same costless technology for printing "notes." Show that, at
A Useful Identity under Interest on Reserves Prove that for the model of Section 5.5 (R)-1-1)g(x, x-1)q(x)-1, x-2) q(x1, xo) dx, dx-1...dx = 1.Exercise 5.6 Computing an Equilibrium Consider a one-nonstorable-good nonstochastic Lucas cash-in-advance economy. A single representative household
A Permanent (McCallum) Government Deficit - Consider McCallum's definition of the government deficit, d,(t)= [b,(x)-fbx)q(x, x-1) dx]+g. Let (g)o be a given stochastic process. Given g,, let the government run a constant "deficit" d,(t) =d, for all t 0.
Unpleasant Monetarist Arithmetic Describe what is happening to the quantity of one-period government bonds in the example in Proposition 5.5.
Private Wealth Prove that in equilibrium the wealth 0(x,) that appears in Equation (5.6) satisfies 0(x)=(t,+&&)+ ) + dXXxx, XX+; +45 86+;) d14)-
Pricing One-Period Options Consider a one-tree, one-good Lucas tree model. Preferences of the repre- sentative agent are EoB'u(c.). 0
Arbitrage Pricing and the Term Structure of Interest Rates Let R2, be the two-period sure rate of interest. Construct an arbitrage argu- ment to show that Rz - q (x1+42, x) dx142-
Modigliani-Miller An agent L lives in a Lucas tree economy with a very large number of other agents. The one-step-ahead equilibrium pricing kernel in this economy is q(x', x). At time 1, the agent L is given a gift of a lottery ticket that has a nonnegative function w(x') written on it. The lottery
Arbitrage Pricing Att when x, x, an asset A promises to pay off w(x') when X,+1 = x'. The price of this asset at I, DA, is given by the function pa = g(x). Construct an argument to show that, unless g(x) = w(x')q(x', x) dx', there exist arbi- trage opportunities.
A Generalization of Logarithmic Preferences Consider an economy with a single representative consumer who maximizes EB'u(c). 1-0 0
Tobin's q Consider a version of Lucas's one-kind-of-tree model in which "fruit" is storable with no physical depreciation. Letting k, be the amount of fruit stored per representative agent from time (t-1) to time t, the social plan- ning problem is: maximize Eo-o'u(c), subject toc, +k+1 (d + k)
Trees (Stocks) in the Utility Function Consider the following version of Lucas's tree economy. There are two kinds of trees. The first kind is ugly and gives no direct utility in itself but yields a stream of fruit (d), whered, is a positive random process obeying a first- order Markov process. The
Contingent Claims Prices in a Brock-Mirman Economy Consider the stochastic growth model: maximize Eoo' In c,, subject to c+k+Ako,,A>0,0 < a
Taxation and Stock Prices Consider a version of Lucas's one-tree model along the lines of the discussion in Section 3.3, with u(c) = Inc. Letd, follow a Markov process with prob(d,+, d'\d,d)=ff(s,d) ds. Let a government spend or "throw away" g, per capita in period t, where 0g,
Search and Asset Accumulation A worker receives, when unemployed, an offer to work forever at wage w, where w is drawn from the distribution F(w). Wage offers are identically and independently distributed over time. The worker maximizes EBuc,
Search and Nonhuman Wealth An unemployed worker receives every period an offer to work forever at wage w, where w is drawn from the distribution F(w). Offers are indepen- dently and identically distributed. Every agent has another source of income, which we denote ,, and that may be regarded as
Pissarides' Analysis of Taxation and Variable Search Intensity An unemployed worker receives each period a zero offer (or no offer) with probability [1-(e)]. With probability (e) the worker draws an offer w from the distribution F. Here e stands for effort-a measure of search intensity-and (e) is
Finite Horizon and Mean-Preserving Spread Consider a worker who draws every period a job offer to work forever at wage w. Successive offers are independently and identically distributed drawings from a distribution F(w), i = 1,2. Assume that F, has been obtained from F by a mean-preserving spread
Search with a Finite Horizon Consider a worker who lives two periods. In each period the worker, if unemployed, receives an offer of lifetime work at wage w, where w is drawn from a distribution F. Wage offers are identically and independently distrib- uted over time. The worker's objective is to
Wage Growth Rate and the Reservation Wage An unemployed worker receives each period an offer to work for wage w forever, where w, win the first period and w, o'w after t periods in the job. Assume > 1, that is, wages increase with tenure. The initial wage offer is drawn from a distribution F(w)
Variable Labor Supply An unemployed worker receives each period a wage offer w drawn from the distribution F(w). The worker has to choose whether to accept the job-and therefore to work forever-or to search for another offer and collect c in unemployment compensation. The worker who decides to
Mortensen Externality Two parties to a match (say, worker and firm) jointly draw a match parame- ter from a c.d.f. F(0). Once matched, they stay matched forever, each one deriving a benefit of 0 per period from the match. Each unmatched pair of agents can influence the number of offers received in
Choosing the Number of Offers An unemployed worker must choose the number of offers n to solicit. At a cost of k(n) the worker receives n offers this period. Here k(n + 1)> k(n) for n1. The number of offers n must be chosen in advance at the beginning of the period and cannot be revised during the

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Dynamic Macroeconomic Theory 5th Edition Thomas J. Sargent - Solutions

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