Macroeconomics A Contemporary Introduction 8th Edition William A. McEachern - Solutions

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The worker gets n offers per period, where n is now generated by a Markov chain so that the number of offers is possibly correlated over time.a. Let v(w, n) be the value of Eo By, for an unemployed worker who has received n offers this period, the best of which is w. Formulate Bellman's equation
Cyclical Fluctuations in Number of Job Offers Modify Exercise 2.3 as follows. Let the number of job offers n follow a Markov process, with prob{number of offers next period mnumber of offers this period = n} = Tmn. N m=1,...,N, for n 1,..., N. n = 1,...,N Here [] is a "stochastic matrix" generating
A Random Number of Offers per Period An unemployed worker is confronted with a random number, n, of job offers each period. With probability ,, the worker receives n offers in a given period, where , 0 for n 1, and = 1 for N
Being Unemployed with Only a Chance of an Offer An unemployed worker samples wage offers on the following terms. Each period, with probability o, 1>> 0, she receives no offer (we may regard this as a wage offer of zero forever). With probability (1) she receives an offer to work for w forever,
Investment with Signal Extraction Consider a firm that maximizes expected present value of dividends. It is assumed that the price of the good produced by the firm is constant and equal to one. Production requires the use of a single input: capital that is firm specific. Total production, f(k,), is
Investment with Adjustment Costs A firm maximizes present value of cash flow, with future earnings dis- counted at the rate . Income at time t is given by sales, p, q,, where p, is the price of good, and q, is the quantity produced. The firm behaves competi- tively and therefore takes prices as
Learning to Enjoy Spare Time A worker's instantaneous utility, u(), depends on the amount of market- produced goods consumed, c,, and also on the amount of home-produced goods, c2, (for example, entertainment, leisure). In order to acquire market- produced goods, the worker must allocate some
Two-Sector Growth Modelsa. Consider the following two-sector model of optimal growth. A social planner seeks to maximize the utility of the representative agent given by Zo'u(c,, !), wherec, is consumption of good I att, whereas, is leisure atf. Sector 1 produces consumption goods using capital, k,
Interrelated Factor Demand For another illustration of a problem that can readily be mapped into the linear regulator framework, consider the interrelated factor demand prob- lem, to maximize -EB{yFy,+ [G(L)y]'[H(L)y] + J/y} 1-0 where y = ("). J. (JM), J= F is positive semidefinite; G(L)
Lucas and Prescott (1971) and Kydland and Prescott (1982) Meet a Linear Regulator Consider a linear quadratic version of a Lucas and Prescott (1971) model that has been modified to incorporate a rich time-to-build structure, la Kydland and Prescott (1982). We first describe the model in terms of
Habit Persistence: 2 Consider the more general version of the preceding problem, to maximize Bride, C.-1), 0 0,c, given, where u(c,, C-1) is twice con- tinuously differentiable, bounded, increasing in bothc, and c-1, and con- cave in (c,, c). and where f'(0) = +,'>0,f"
Habit Persistence: I Consider the problem of choosing a consumption sequencec, to maximize B(In c+ Inc,-1). 1-0 subject to c,+k+1 = Ako, A> 0, 0 0,
Levhari and Srinivasan (1969) Assume that u(c 1cl-a, a > 0. Assume that R, is independently and identically distributed and is such that ER!
Howard Policy-Improvement Algorithm Consider the Brock-Mirman problem: to maximize Eo B'Inc., 1-0 subject to c,+k+1 Aka,, ko given, A> 0, 1>a> 0, where (0,) is an i.i.d. sequence with In 0, distributed according to a normal distribution with mean zero and variance .
Brock-Mirman (1972) Consider the Brock-Mirman problem of maximizing B'Inc., 0
(Worlds Apart) GDP Per capita income most recently was about 63 times greater in the richest country on Earth than in the poorest country. Suppose GDP per capita grows an average of 3 percent per year in the richest country and 6 percent per year in the poorest country. Assuming such growth rates
(Big Bang Versus Gradualism) Explain the difference between the big bang and gradualism approaches to moving from central planning to market coordination.
(Markets and Institutions) Why is a system of welldefined and enforceable property rights crucial when a country is converting to a market-based system of resource allocation?
(Case Study: Ownership and Resource Use) In what ways were the incentives of private ownership evident even in the former Soviet Union?
(Transitional Economies) What special problems are faced by Eastern European economies as they make the transition from central planning to competitive markets?
(Types of Economic Systems) One question every economic system must answer is: for whom is output produced?How is the answer determined in a market system?How is it answered in a centrally planned system?
(Foreign Aid and Economic Development) It is widely recognized that foreign aid that promotes productivity in developing economies is superior to merely shipping products like food to these countries. Yet the latter is the approach frequently taken. Why do you think this is the case?
(Case Study: The Poorest Billion) What three poverty traps help explain the plight of nations comprising the poorest billion people?
(Classification of Economies) What are the arguments for using real per capita GDP to compare living standards between countries? What weakness does this measure have?
(Productivity and Development) Among the problems that hinder growth in developing economies are poor infrastructure, lack of financial institutions and a sound money supply, a low saving rate, poor capital base, and lack of foreign exchange. Explain how these problems are interconnected.
(Worlds Apart) Compare developing and industrial market economies on the basis of each of the following general economic characteristics, and relate the differences to the process of development:a. Diversity of the industrial baseb. Child mortality ratesc. Educational level of the labor force
(Developing Countries) Why is agricultural productivity in developing countries usually so low?
(Balance of Payments) Explain where in the U.S. balance of payments an entry would be recorded for each of the following:a. A Hong Kong financier buys some U.S. corporate stock.b. A U.S. tourist in Paris buys some perfume to take home.c. A Japanese company sells machinery to a pineapple company in
(Balance of Payments) The following are hypothetical data for the U.S. balance of payments. Use the data to calculate each of the following:a. Merchandise trade balanceb. Balance on goods and servicesc. Balance on current accountd. Financial account balancee. Statistical discrepancy Billions of
(Case Study: What about China?) Why would China want its own currency to be undervalued relative to the U.S. dollar? How does China maintain an undervalued currency?
(Merchandise Trade Balance) Explain why a U.S. recession that occurs as the rest of the world is expanding will tend to reduce the U.S. trade deficit.
(Case Study: The Big Mac Index) The Big Mac Index computed by the Economist magazine has consistently found the U.S. dollar to be undervalued against some currencies and overvalued against others. This finding seems to call for a rejection of the purchasing power parity theory. Explain why this
(Purchasing Power Parity) According to the theory of purchasing power parity, what will happen to the value of the dollar (against foreign currencies) if the U.S. price level doubles and price levels in other countries remain constant? Why is the theory more suitable for analyzing events in the
(Arbitrageurs) How do arbitrageurs help ensure that exchange rates are the same in markets around the world?
(Foreign Exchange) What is the difference between a depreciation of the dollar and a devaluation of the dollar?
(Balance of Payments) Suppose the United States ran a surplus in its balance on goods and services by exporting goods and services while importing nothing.a. How would such a surplus be offset elsewhere in the balance-of-payments accounts?b. If the level of U.S. production does not depend on the
(Trade Restrictions) Suppose that the world price for steel is below the U.S. domestic price, but the government requires that all steel used in the United States be domestically produced.a. Use a diagram like the one in Exhibit 7 to show the gains and loses from such a policy.b. How could you
(Import Quotas) How low must a quota be in effect to have an impact? Using a demand-and-supply diagram, illustrate and explain the net welfare loss from imposing such a quota. Under what circumstances would the net welfare loss from an import quota exceed the net welfare loss from an equivalent
(Comparative Advantage) The consumption possibilities frontiers shown in Exhibit 5 assume terms of trade of 1 unit of clothing for 1 unit of food. What would the consumption possibilities frontiers look like if the terms of trade were 1 unit of clothing for 2 units of food?
(Case Study: Steel Tariffs) How did the steel tariff affect the domestic steel industry, the workers in the steel industry, workers in steel-use industries, and consumers?
(Arguments for Trade Restrictions) Firms hurt by cheap imports typically argue that restricting trade will save U.S. jobs. What’s wrong with this argument?Are there ever any reasons to support such trade restrictions?
(Case Study: The Doha Round and Round) What was the major sticking point holding up progress in the Doha Round?
(Trade Restrictions) Exhibits 7 and 8 show net losses to the economy of a country that imposes tariffs or quotas on imported sugar. What kinds of gains and losses would occur in the economies of countries that export sugar?
(Tariffs) High tariffs usually lead to black markets and smuggling. How is government revenue reduced by such activity? Relate your answer to the graph in Exhibit 7 in this chapter. Does smuggling have any social benefits?
(Gains from Trade) Complete each of the following sentences:a. When a nation has no economic interaction with foreigners and produces everything it consumes, the nation is in a state of ________.b. According to the law of comparative advantage, each nation should specialize in producing the goods
(Reasons for Trade) What are the primary reasons for international trade?
(Profile of Imports and Exports) What are the major U.S. exports and imports? How does international trade affect consumption possibilities?
(Long-Run Phillips Curve) Suppose the economy is at point d on the long-run Phillips curve shown in Exhibit 6. If that inflation rate is unacceptably high, how can policy makers get the inflation rate down?Would rational expectations help or hinder their efforts?
(Rational Expectations) Using an AD–AS diagram, illustrate the short-run effects on prices, output, and employment of an increase in the money supply that is correctly anticipated by the public. Assume that the economy is initially at potential output.
(Policy Lags) What lag in discretionary policy is described in each of the following statements? Why do long lags make discretionary policy less effective?a. The time from when the government determines that the economy is in recession until a tax cut is approved to reduce unemploymentb. The time
(Problems with Active Policy) Use an AD–AS diagram to illustrate and explain the short-run and long-run effects on the economy of the following situation: Both the natural rate of unemployment and the actual rate of unemployment are 5 percent. However, the government believes that the natural
(Case Study: Active Versus Passive Presidential Candidates)What were the main differences between can didates Bush and Clinton in the 1992 presidential campaign? Illustrate their ideas using the aggregate supply and demand model.
(Active Versus Passive Policy) Discuss the role each of the following plays in the debate between the active and passive approaches:a. The speed of adjustment of the nominal wageb. The speed of adjustment of expectations about inflationc. The existence of lags in policy creation and
(Phillips Curves) Describe the different policy tradeoffs implied by the short-run Phillips curve and the long-run Phillips curve. What forces shift the long-run Phillips curve?
(Potential GNP) Why is it hard for policy makers to decide whether the economy is operating at its potential output level? Why is this uncertainty a problem?
(Rational Expectations) Suppose that people in an election year believe that public officials are going to pursue expansionary policies to enhance their reelection prospects. How could such expectations put pressure on officials to pursue expansionary policies even if they hadn’t planned to?
(Rationale for Rules) Some economists call for predetermined rules to guide the actions of government policy makers. What are two contrasting rationales that have been given for such rules?
(Case Study: Central Bank Independence and Price Stability) One source of independence for the Fed is the term length for members of the Board of Governors.In the chapter before last, we learned that the Fed is a “money machine.” Does this suggest another source of Fed independence from
(Policy Credibility) What is policy credibility and how is it relevant to the problem of reducing high inflation?How is credibility related to the time-inconsistency problem?
(Anticipating Monetary Policy) In 1995, the Fed began announcing its interest rate targets immediately following each meeting of the FOMC. Prior to that, observers were left to draw inferences about Fed policy based on the results of that policy. What is the value of this greater openness?
(The Role of Expectations) Some economists argue that only unanticipated increases in the money supply can affect real GDP. Explain why this may be the case.
(Review of Policy Perspectives) Why might an active policy approach be more politically popular than a passive approach, especially during a recession?
(Active Versus Passive Policy) According to advocates of passive policy, what variable naturally adjusts in the labor market, shifting the short-run aggregate supply curve to restore unemployment to the natural rate?Why does the active policy approach assume that the short-run aggregate supply
(Active Policy) Why do proponents of active policy recommend government intervention to close an expansionary gap?
(Active Versus Passive Policy) Contrast the active policy view of the behavior of wages and prices during a contractionary gap to the passive policy view.
(Money Supply Versus Interest Rate Targets) Assume that the economy’s real GDP is growing.a. What will happen to money demand over time?b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time?c. If the Fed changes the money supply to match the change in
(Quantity Theory of Money) What basic assumption about the velocity of money transforms the equation of exchange into the quantity theory of money? Also:a. According to the quantity theory, what will happen to nominal GDP if the money supply increases by 5 percent and velocity does not change?b.
(Equation of Exchange) Calculate the velocity of money if real GDP is 3,000 units, the average price level is $4 per unit, and the quantity of money in the economy is$1,500. What happens to velocity if the average price level drops to $3 per unit? What happens to velocity if the average price level
(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.a. Should the Fed increase or decrease the money supply?b. If the Fed uses open-market operations, should it buy or sell government securities?c. Determine whether each of the
(Monetary Policy and Aggregate Supply) Assume that the economy is initially in long-run equilibrium. Using an AD–AS diagram, illustrate and explain the shortrun and long-run impacts of an increase in the money supply.
(Money and Aggregate Demand) Would each of the following increase, decrease, or have no impact on the ability of open-market operations to affect aggregate demand? Explain your answer.a. Investment demand becomes less sensitive to changes in the interest rate.b. The marginal propensity to consume
(Money Demand) Suppose that you never carry cash.Your paycheck of $1,000 per month is deposited directly into your checking account, and you spend your money at a constant rate so that at the end of each month your checking account balance is zero.a. What is your average money balance during the
(Money Supply Versus Interest Rate Targets) In recent years the Fed’s monetary target has been the federal funds rate. How does the Fed raise or lower that rate, and how is that rate related to other interest rates in the economy such as the prime rate?
(How Stable Is Velocity?) What factors have led to changes in the velocity of M1 and M2 over the past three decades?
(Case Study: The Money Supply and Inflation Around the World) According to Exhibit 8 in this chapter, what is the relationship between the rate of money supply growth and the inflation rate? How does this explain the hyperinflation experienced in some economies?
(Quantity Theory of Money) The quantity theory states that the impact of money on nominal GDP can be determined without details about the AD curve, so long as the velocity of money is predictable. Discuss the reasoning behind this claim.
(Velocity of Money) Determine whether each of the following would lead to an increase or a decrease in the velocity of money:a. Increasing the speed of funds transfersb. Decreased use of credit cardsc. Decreasing the frequency that workers are paidd. Increased customer use of ATM, or debit, cards
(Velocity) Why do some economists believe that higher expected inflation will lead to a rise in velocity?
(Equation of Exchange) Using the equation of exchange, show why fiscal policy alone cannot increase nominal GDP if the velocity of money is constant.
(Case Study: Targeting the Federal Funds Rate) Why has the Federal Reserve chosen to focus on the federal funds rate rather than some other interest rate as a tool of monetary policy?
(Monetary Policy) What is the impact of a decrease in the required reserve ratio on aggregate demand?
(Demand for Money) If money is so versatile and can buy anything, why don’t people demand all the money they can get their hands on?
(Demand for Money) Determine whether each of the following would lead to an increase, a decrease, or no change in the quantity of money people wish to hold.Also determine whether there is a shift of the money demand curve or a movement along a given money demand curve.a. A decrease in the price
(Monetary Control) Suppose the money supply is currently$500 billion and the Fed wishes to increase it by $100 billion.a. Given a required reserve ratio of 0.25, what should it do?b. If it decided to change the money supply by changing the required reserve ratio, what change should it make?
(Money Creation) Suppose Bank A, which faces a reserve requirement of 10 percent, receives a $1,000 deposit from a customer.a. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank A’s balance sheet.b. Assuming that the loan shown in
(Money Multiplier) Suppose that the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05.How does this affect the simple money multiplier, assuming that excess reserves are held to zero and there are no currency leakages? What are the money multipliers for required reserve ratios of
(Reserve Accounts) Suppose that a bank’s customer deposits $4,000 in her checking account. The required reserve ratio is 0.25. What are the required reserves on this new deposit? What is the largest loan that the bank can make on the basis of the new deposit? If the bank chooses to hold reserves
(Money Creation) Show how each of the following would initially affect a bank’s assets and liabilities.a. Someone makes a $10,000 deposit into a checking account.b. A bank makes a loan of $1,000 by establishing a checking account for $1,000.c. The loan described in part (b) is spent.d. A bank
(Money Creation) Show how each of the following initially affects bank assets, liabilities, and reserves. Do not include the results of bank behavior resulting from the Fed’s action. Assume a required reserve ratio of 0.05.a. The Fed purchases $10 million worth of U.S. government bonds from a
(Monetary Aggregates) Calculate M1 and M2 using the following information:Large-denomination time deposits $304 billion Currency and coin held by the nonbanking public $438 billion Checkable deposits $509 billion Small-denomination time deposits $198 billion Traveler’s checks $18 billion Savings
(Case Study: Banking on the Net) What impact is increased Internet banking likely to have on money’s function as a medium of exchange?
(The Fed Is a Money Machine) Why is the Fed both literally and figuratively a money machine?
(Federal Funds Market) What is the federal funds market?How does it help banks strike a balance between liquidity and profitability?
(Discount Rate) What is the difference between the federal funds rate and the discount rate? What is the ultimate impact on the money supply of an increase in the discount rate?
(Fed Tools of Monetary Control) What three tools can the Fed use to change the money supply? Which tool is used most frequently? What are three limitations on the money expansion process?
(Creating Money) Often it is claimed that banks create money by making loans. How can commercial banks create money? Is the government the only institution that can legally create money?
(Liquidity Versus Profitability) Why must a bank manager strike a balance between liquidity and profitability on the bank’s balance sheet?
(Reserve Accounts) Explain why a reduction in the required reserve ratio cannot, at least initially, increase total reserves in the banking system. Is the same true of lowering the discount rate? What would happen if the Fed bought U.S. bonds from, or sold them to, the banking system?
(Bank Deposits) Explain the differences among checkable deposits, savings deposits, and time deposits. Explain whether each of these deposits represents a bank asset or a bank liability.
(Money Aggregates) Suppose that $1,000 is moved from a savings account at a commercial bank to a checking account at the same bank. Which of the following statements are true and which are false?a. The amount of currency in circulation will fall.b. M1 will increase.c. M2 will increase.

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Macroeconomics A Contemporary Introduction 8th Edition William A. McEachern - Solutions

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