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dynamic macroeconomics

Principle Of Macroeconomics 4th Edition FRANK; Ben Bernanke; Kate L. Antonovics; Ori Heffetz - Solutions

What is the difference, if any, between the following?An upward shift in the Fed’s policy reaction function.A response by the Fed to higher inflation, for a given policy reaction function.How does each scenario affect the AD curve?
Explain why a shift in monetary policy like that shown in Figure 11.3 can be interpreted as a decline in the Fed’s long-run “target” for the inflation rate. (Hint: In the long run, the real interest rate set by the Fed must be consistent with the real interest rate determined in the market
Determine how the following events will affect the AD curve.Due to widespread concerns about future weakness in the economy, businesses reduce their spending on new capital.The federal government reduces income taxes.
Discuss the short-run and long-run effects of an anti-inflationary monetary policy.
Analyze how the economy is affected by aggregate spending shocks, inflation shocks, and shocks to potential output.
Define the long-run and short-run aggregate supply curves, explain their orientation, and explain what may shift them. In particular, show how the curves capture the idea of inflation inertia and the link between inflation and the output gap.
Define the aggregate demand curve, explain why it slopes downward, and explain what may shift it.
What are some of the uncertainties that Fed policymakers face, and how do these uncertainties affect monetary policymaking? (LO6)
In mid-2002, with inflation at 2 percent, some economists estimated the size of the recessionary gap to be about 2 percent of potential output. At that time, the Fed was holding the (nominal) federal funds rate at 1.75 percent. How does the Fed’s setting of the federal funds rate compare with
11. Supposing that the Fed follows the Taylor rule (The Economic Naturalist 10.6), find the real interest rate and the nominal interest rate that the Fed will set in each of the following situations. (LO5)a. Inflation of 4 percent and an expansionary gap equal to 1 percent of potential output.b.
An economy with a potential output Y* of 4,000 is described by the equation below. (LO5)Y = 5,800 −12,000r If real interest rate is 0.10 (10%), compute the numerical value for aggregate expenditure and output Y, and determine if the economy is at its potential or experiencing an output gap.If
An economy is described by the following information. (LO5)State the relationship between aggregate expenditure and output Y to the real interest rate r for this economy in the format of an equation. [Hint: it should follow the format Y = a − b(r).]Assuming that the real interest rate is 0.10
Explain why an increase in interest that banks receive from the Fed on the required and excess reserves that banks hold with the Fed would also increase the interest rates that commercial banks charge their borrowers.(LO4)
Which of the following is not an example of an “unconventional”monetary policy tool available to the Fed when the federal funds rate is already at or close to zero: forward guidance, quantitative easing, or discount lending? (LO4)
In August 2015, the Chinese central bank decided to reduce China’s required reserve-deposit ratio from 18.5 percent to 18 percent.Assuming no change in the amount of cash held by the Chinese public, that commercial banks lend all their excess reserves, and that bank reserves was a constant 4,329
Assume that the central bank of a nation decides to lower the reserve requirements for commercial banks. What changes can one predict regarding the amount of: required reserves, excess reserves, the amount of loans generated by commercial banks, the economywide money supply, and finally interest
Using a supply and demand graph of the market for money, show the effects on the nominal interest rate if the Fed takes the following monetary policy actions:(LO2, LO3)The Fed lowers the discount rate and increases discount lending.The Fed increases the reserve requirements for commercial banks.The
How would you expect each of the following to affect the economywide demand for U.S. money? Explain. (LO1)Competition among brokers forces down the commission charge for selling holdings of bonds or stocks.Grocery stores begin to accept credit cards in payment.Financial investors become concerned
The following table shows Uma’s estimated annual benefits of holding different amounts of money. (LO1)How much money will Uma hold on average if the nominal interest rate is 9 percent? 5 percent? 3 percent?Assume that she wants her money holding to be a multiple of $100. (Hint: Make a table
During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. (LO1)What would you expect to happen to the money demand curve during the Christmas season? Show graphically.If the Fed took no action, what would happen to nominal
Discuss why the analysis of this chapter overstates the precision with which monetary policy can be used to eliminate output gaps. (LO6)
The Fed decides to take a contractionary policy action.What would you expect to happen to the nominal interest rate, the real interest rate, and the money supply? Under what circumstances would this type of policy action most likely be appropriate? (LO5)
The Fed faces a recessionary gap. How would you expect it to respond? Explain step by step how its policy change is likely to affect the economy. (LO5)
Why does the real interest rate affect aggregate expenditure?Give examples. (LO5)
In a situation where short-run interest rates have hit their zero lower bound, can the Fed still lower other, higher, longer-term interest rates? Discuss specific actions that the Fed can take and how they would work. (LO4)
What other methods does the Fed have for affecting short-run interest rates besides open-market operations? Discuss whether these methods can be used for only lowering short-run interest rates, for only increasing them, or for both lowering and increasing them.(LO3)
What effect does an open-market purchase of bonds by the Fed have on nominal interest rates? Discuss in terms of (a) the effect of the purchase on bond prices and (b) the effect of the purchase on the -supply of money. (LO2)
Show graphically how the Fed controls the nominal interest rate. Can the Fed control the real interest rate? (LO2)
What is the demand for money? How does the demand for money depend on the nominal interest rate? On the price level? On income?Explain in terms of the costs and benefits of holding money. (LO1)
This exercise asks you to apply the Taylor rule. Suppose inflation is 3 percent and the output gap is zero. According to the Taylor rule, at what value should the Fed set the real interest rate? The nominal interest rate?Suppose the Fed were to receive new information showing that there is a 1
What is the Taylor rule?In 1993, economist John Taylor proposed a “rule,” now known as the Taylor rule, to describe the behavior of the Fed.14 What is the Taylor rule? Does the Fed always follow it?
Why does news of inflation hurt the stock market?Financial market participants watch data on inflation extremely closely. A report that inflation is increasing or is higher than expected often causes stock prices to fall sharply. Why does bad news about inflation hurt the stock market?
How can monetary policy eliminate an expansionary gap?For the economy studied in Examples 19.4 and 19.5, assume that potential output is 4,600 rather than 5,000. At the initial real interest rate of 5 percent, short-run equilibrium output is 4,800, so this economy has an expansionary gap of 200.
How did the Fed respond to recession and the terror attacks in 2001?The U.S. economy began slowing in the fall of 2000, with investment in high-tech equipment falling particularly sharply. According to the National Bureau of Economic Research, a recession began in March 2001. To make matters worse,
Continuing Example 10.5, suppose that potential output is 4,850 rather than 5,000. By how much should the Fed cut the real interest rate to restore full employment?You may take as given that the multiplier is 5.
How can monetary policy eliminate a recessionary gap?For the economy described in Example 10.4, suppose potential output Y*equals 5,000. As before, the Fed has set the real interest rate equal to 5 percent. At that real interest rate, what is the output gap? What should the Fed do to eliminate the
For the economy described in Example 10.4, suppose the Fed sets the real interest rate at 3 percent rather than at 5 percent. Find short-run equilibrium output
How does the interest rate translate to a specific level of shortrun equilibrium output?In the economy described in Example 10.3, the real interest rate r is set by the Fed to equal 0.05 (5 percent). Find short-run equilibrium output.
How does the interest rate affect aggregate expenditure and short-run equilibrium output?In a certain economy, the components of spending are given byFind the relationship of aggregate expenditure and output Y to the real interest rate r in this economy C 640 +0.8(Y-7)-400, 1 = 250 - 600r. G = 300,
Describe the adjustment process in the market for money if the nominal interest rate is initially above rather than below its equilibrium value.What happens to the price of bonds as the money market adjusts toward equilibrium?
Why does the average Argentine hold more U.S. dollars than the average U.S. citizen?Estimates are that the value of U.S. dollars circulating in Argentina exceeds$1,000 per person, which is higher than the per capita dollar holdings in the United States. A number of other countries, including those
The interest rate on government bonds falls from 6 percent to 4 percent.How much cash should Kim’s restaurants hold now?
How much money should Kim’s restaurants hold? Kim owns several successful restaurants. Her accountant informs her that on a typical day, her restaurants are holding a total of $50,000 in cash on the premises. The accountant points out that if Kim’s restaurants reduced their cash holdings, Kim
What is Consuelo’s demand for money, and how could she increase or reduce her money holdings?Consuelo’s balance sheet is shown in Table 10.1. What is Consuelo’s demand for money? If she wanted to increase her money holdings by $100, how could she do so? What if she wanted to reduce her money
Discuss the extent to which monetary policymaking is an art or science.
Explain how changes in real interest rates affect aggregate expenditure and how the Fed uses changes in the real interest rate to fight a recession or inflation.
Describe the additional monetary policy tools that the Fed can use when interest rates hit the zero lower bound.
Discuss how the Fed uses its ability to affect bank reserves and the reserve-deposit ratio to affect the money supply.
Explain how the Fed uses its ability to affect the money supply to influence nominal and real interest rates.
Give three examples of automatic stabilizers of the economy.
For each of these hyperbolized statements, identify the fiscal policy qualification to which it is related. (LO8)Fiscal policy is just as likely to impact a nation’s actual GDP as its potential GDP.Given the average duration of recent recessions, fiscal policy is destined to provide help that
An economy is described by the following equations. (LO7)What is aggregate expenditure when Y = 600?Consumers and businesses alike become more pessimistic about the future and reduce their expenditures by 10 each. Immediately following this change, what is aggregate expenditure if Y is still
Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below. (LO6)Find the Simpson household’s marginal propensity to consume.How much would you expect the Simpsons to consume if their income was $32,000 and they paid taxes of
According to Keynes’s assumption about the short run, firms that are experiencing a reduction in sales due to a recession will respond by (LO5)lowering pries to bring sales in line with their production capacity.reducing production to meet demand at the existing price.charging higher prices per
Of the following, identify the incorrect statement. (LO4)Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy.Low aggregate spending can make output fall below potential output.When spending is high, output may rise above potential
From the home page of the Bureau of Labor Statistics (www.bls.gov), obtain the most recent available data on the unemployment rate for workers aged 16–19 and workers aged 20 or over. How do they differ? What are some of the reasons for the difference? How does this difference relate to the
Given below are data on real GDP and potential GDP for the United States for the years 2005–2016, in billions of 2009 dollars. For each year, calculate the output gap as a percentage of potential GDP and state whether the gap is a recessionary gap or an expansionary gap. Also calculate the
From the home page of the Bureau of Economic Analysis (www.bea.gov), obtain quarterly data for U.S. real GDP from these recessions: 1981–1982, 1990–1991, 2001, and 2007–2009. (LO1)How many quarters of negative real GDP growth occurred in each recession?Which, if any, of the recessions
Using Table 9.1, find the average duration, the minimum duration, and the maximum duration of expansions in the United States since 1929. Are expansions getting longer or shorter on average over time? Is there any tendency for long expansions to be followed by long recessions? (LO1)
Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model.
The government is considering two alternative policies, one involving increased government purchases of 50 units, the other involving a tax cut of 50 units. Which policy will stimulate aggregate expenditure by more?Why? (LO7)
Define the multiplier. In economic terms, why is the multiplier greater than one? (LO6)
Define aggregate expenditure and list its components. Why does spending change when output changes? (LO6)
Give an example of a good or service whose price changes very frequently and one whose price changes relatively infrequently. What accounts for the difference? (LO5)
What is the key assumption of the basic Keynesian theory? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term economic fluctuations. (LO5)
True or false: When output equals potential output, the unemployment rate is zero. Explain. (LO3)
True or false: All recessions are the result of output gaps. Explain. (LO2)
Define potential output. Is it possible for an economy to produce an amount greater than potential output? Explain. (LO2)
How is each of the following likely to be affected by a recession: the natural unemployment rate, the cyclical unemployment rate, the inflation rate, the poll ratings of the president? (LO1, LO3)
Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service? Which is likely to see its profits reduced the least? Explain. (LO1)
Why is the traditional term business cycles a misnomer? How does your answer relate to the ease of difficulty of forecasting peaks and troughs?(LO1)
Define recession and expansion. What are the beginning and ending points of a recession called? In the postwar United States, which have been longer on average: recessions or expansions? (LO1)
Does military spending stimulate the economy?An antiwar poster from the 1960s bore the message “War is good business,”referring to the uncomfortable fact that there are sectors in the economy that can do quite well during wars. War itself poses too many economic and human costs to be good
Consider the economy in Example 18.1, but now suppose that instead of becoming more pessimistic, consumers and investors become more optimistic about the future, leading to an initial increase of $10 billion in C and $5 billion in I. Discuss how a change in government purchases G could be used to
By how much should the government increase its purchases in order to eliminate a recessionary gap?Consider an economy that starts in equilibrium with Y = Y*. Suppose, though, that consumers become more pessimistic about the future, so that they begin to spend less at every level of current
Will new technologies eliminate menu costs?Thanks to new technologies, changing prices and informing customers about price changes is becoming increasingly less costly. Will technology eliminate menu costs as a factor in price setting?
Why has the natural rate of unemployment in the United States declined?According to the Congressional Budget Office, which regularly estimates the natural rate of unemployment in the United States, the long-term natural rate has been falling almost steadily since 1978, when it was 6.2 percent (this
Using the National Bureau of Economic Research website(www.nber.org/cycles.html), is the U.S. economy currently in recession or expansion? How much time has elapsed since the last peak or trough? Explore the NBER website to find additional useful information about current conditions in the U.S.
How was the 2020 recession called?The Business Cycle Dating Committee of the National Bureau of Economic -Research determined that a recession began in February 2020. What led the committee to choose that date?
Do economic fluctuations affect presidential elections?In early 1991, following the defeat of Iraq in the Gulf War by the United States and its allies, one poll showed that 89 percent of the American public approved of the job George H. W. Bush was doing as president. Prior to Bush, the last
Discuss the qualifications that arise in applying fiscal policy to realworld situations.
Explain why basic Keynesian theory suggests that fiscal policy is useful as a stabilization policy.
Show how a change in aggregate expenditure can cause a change in short-run equilibrium output and how this is related to the income expenditure multiplier.
Identify the key assumptions of Keynesian theory and explain their implications regarding the production decisions made by firms and the consumption decisions made by households.
Discuss the basic differences between how the economy operates in the short run versus the long run.
Define the natural rate of unemployment and show how it is related to cyclical unemployment.
Use potential output and the output gap to analyze an economy’s position in the business cycle.
List the four phases of the business cycle and explain the primary characteristics of recessions and expansions.
Use a diagram like Figure 8.4 (solid lines only) to show the effects of each of the following on the real interest rate and capital investment of a country that is a net borrower from abroad. (LO6)Investment opportunities in the country improve owing to new technologies.The government budget
How do each of the following transactions affect (1) the trade surplus or deficit and (2) capital inflows or outflows for the United States?Show that in each case, the identity that the trade balance plus net -capital inflows equals zero applies. (LO6)A U.S. exporter sells software to Israel. She
You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats are elected, an event you believe to have a 40 percent probability; otherwise, the shares pay a zero
Shares in Brothers Grimm Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5.50 in one year and to sell for $99.00 per share at that time. How much should you be willing to pay today per share of Grimm if the safe rate of interest(LO4)is 5.1 percent and you believe that
Simon purchases a bond, newly issued by the Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end of the third year. (LO4)What are the principal amount, the term, the coupon rate, and the coupon
The Federal Reserve System was created by the Federal Reserve Act, passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the following statements about the Fed is false? (LO3)The Fed has the power to supervise and regulate
Refer to Table 8.7. Suppose that the Fed had decided to set the U.S.money supply in December 1932 and in December 1933 at the same value as in December 1930. Assuming that the values of currency held by the public and the reserve-deposit ratio had remained as given in the table, by how much more
Answer each of the following questions. (LO2)Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply.The money supply is 500, and currency held by the public equals bank reserves. The desired reserve-deposit ratio is
Redo the example of Gorgonzola in the text (see Tables 17.2 to 17.6), assuming that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation, and (2) commercial banks desire to hold reserves of 20 percent of deposits. As in the text, assume that the public holds no
During World War II, an Allied soldier named Robert Radford spent several years in a large German prisoner-of-war camp. At times, more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described
Explain with examples why, in any period, a country’s net capital inflows equal its trade deficit. (LO6)
Suppose you are much less concerned about risk than the typical person. Are stocks a good financial investment for you? Why or why not? (LO4, LO5)

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