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dynamic macroeconomics

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

Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive$1,000 in the bond market for the bond? Explain.(LO4)
Give two ways that the financial system helps improve the allocation of savings. Illustrate with examples. (LO4)
What is a banking panic? Prior to the introduction of deposit insurance, why might even a bank that had made sound loans have reason to fear a panic? (LO3)
Suppose that the public switches from doing most of its shopping with currency to using checks instead. If the Fed takes no action, what will happen to the national money supply? Explain. (LO2, LO3)
What is money? Why do people hold money even though it pays a lower return than other financial assets? (LO1)
Why is the U.S. trade deficit so large?As shown by Figure 8.1, U.S. trade was more or less in balance until the mid-1970s. Since the late 1970s, however, the United States has run large trade deficits, particularly in the mid-1980s and even more so since the latter part of the 1990s. Indeed, from
For a given real interest rate and riskiness in the home country, how would you expect net capital inflows to be affected by an increase in real interest rates abroad? Show your answer graphically.
A U.S. saver purchases a $20,000 Japanese government bond. Explain why Equation 8.3 is satisfied no matter what the Japanese government does with the $20,000 it receives for its bond.
Why did the U.S. stock market rise sharply and fall sharply in the 1990s and again in the 2000s?Stock prices soared during the 1990s in the United States. The Standard &Poor’s (S&P) 500 index, which summarizes the stock price performance of 500 major companies, rose 60 percent between 1990 and
What are the benefits of diversification?Vikram has $1,000 to invest and is considering two stocks, the Smith Umbrella Company and the Jones Suntan Lotion Company. The price of Smith Umbrella stock will rise by 10 percent if it rains but will remain unchanged if the weather is sunny. The price of
Continuing Example 8.5, suppose that FortuneCookie.com is expected to pay a $1.00 dividend and have a market price of $80.00 per share in one year. The interest rate on government bonds is 6 percent per year. However, to be willing to hold a risky asset like a share of FortuneCookie.com, you
As in Example 8.5, you expect a share of FortuneCookie.com to be worth$80.00 per share in one year and also to pay a dividend of $1.00 in one year. What should you be willing to pay for the stock today if the prevailing interest rate, equal to your required rate of return, is 4 percent?What if the
How much should you pay for a share of FortuneCookie.com?You have the opportunity to buy shares in a new company called FortuneCookie.com, which plans to sell gourmet fortune cookies over the Internet. Your stockbroker estimates that the company will pay $1.00 per share in dividends a year from now
Three-year government bonds are issued at a face value (principal amount) of 100 and a coupon rate of 7 percent, interest payable at the end of each year. One year prior to the maturation of these bonds, a headline reads, “Bad Economic News Causes Prices of Bonds to Plunge,” and the story
What is the relationship between bond prices and interest rates?On January 1, 2020, Tanya purchases a newly issued, two-year government bond with a principal amount of $1,000. The coupon rate on the bond is 5 percent, paid annually. Hence Tanya, or whoever owns the bond at the time, will receive a
According to Table 8.7, the U.S. money supply fell from $44.1 billion to$37.3 billion over the course of 1931. The Fed did use open-market purchases during 1931 to replenish bank reserves in the face of depositor withdrawals. Find (a) the quantity of reserves that the Fed injected into the economy
Using the data from Table 8.7, confirm that the relationship between the money supply and its determinants is consistent with Equation 8.2. Would the money supply have fallen in 1931–1933 if the public had stopped withdrawing deposits after December 1930 so that currency held by the public had
Why did the banking panics of 1930–1933 reduce the national money supply?The worst banking panics ever experienced in the United States occurred during the early stages of the Great Depression, between 1930 and 1933.During this period, approximately one-third of the banks in the United States
Continuing Example 8.3, suppose that instead of an open-market purchase of 100 shekels the central bank conducts an open-market sale of 50 shekels’ worth of government bonds. What happens to bank reserves, bank deposits, and the money supply?
How do open-market operations affect the money supply?In a particular economy, currency held by the public is 1,000 shekels, bank reserves are 200 shekels, and the desired reserve-deposit ratio is 0.2. What is the money supply? How is the money supply affected if the central bank prints 100 shekels
How does Christmas shopping affect the money supply?During the Christmas season people choose to hold unusually large amounts of currency for shopping. With no action by the central bank, how would this change in currency holding affect the national money supply?
What is the money supply in Gorgonzola when there are both currency and bank deposits?Suppose that the citizens of Gorgonzola choose to hold a total of 500,000 guilders in the form of currency and to deposit the rest of their money in banks. Banks keep reserves equal to 10 percent of deposits. What
Find deposits and the money supply in Gorgonzola if the banks’ desired -reserve-deposit ratio is 5 percent rather than 10 percent. What if the total amount of currency circulated by the central bank is 2,000,000 guilders and the desired reserve-deposit ratio remains at 10 percent?
Determine what the balance sheet of the banking system of Gorgonzola will look like after a third round of lending to farmers and redeposits of guilders into the commercial banking system. What is the money supply at that point?
From Ithaca Hours to Bitcoin: What is private money, communally created money, and open-source money?Since money is such a useful tool, why is money usually issued only by governments? Are there examples of privately issued, or communally created, money?
Show how the financial market improves the allocation of saving to productive uses.
Describe the role of financial intermediaries such as commercial banks in the financial system and differentiate between bonds and stocks.
For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment. Show all your diagrams. (LO5)The legislature passes a 10 percent investment tax credit. Under this program, for every $100 that a firm
The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available. (LO4)After paying the movie distributors and meeting all other noninterest
Ellie and Vince are trying to decide whether to purchase a new home.The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the home’s value. If properly maintained, the house’s real value is not expected to change. The real
In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. (LO3)Household saving = 200 Business saving = 400 Government purchases of goods and services = 260 Government transfers and interest payments = 135 Tax
Individual retirement accounts, or IRAs, were established by the U.S.government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds in the
Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms of the basic motivations for saving. (LO2)Ellie learns she is pregnant.Vince reads in the paper about
State whether each of the following is a stock or a flow, and explain.(LO1)The gross domestic product.National saving.The value of the U.S. housing stock on January 1, 2020.The amount of U.S. currency in circulation as of this morning.The government budget deficit.The quantity of outstanding
Corey has a mountain bike worth $300, credit card debt of $150,$200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. (LO1) Construct Corey’s balance sheet and calculate his net worth. For each remaining part, explain how the event
Why do increases in real interest rates reduce the quantity of saving demanded? (Hint: Who are the “demanders” of saving?) (LO4, LO5)
Household saving rates in the U.S. are very low. Is this fact a problem for the U.S. economy? Why or why not? (LO3)
Define national saving, relating your definition to the general concept of saving. Why does the standard U.S. definition of national saving potentially understate the true amount of saving being done in the economy? (LO3)
Give three basic motivations for saving. Illustrate each with an example. What other factors would psychologists cite as being possibly important for saving? (LO2)
Why have real interest rates declined globally in recent decades?Real interest rates around the world have declined appreciably in the past few decades. In the U.S., the real interest rate on 10-year Treasury bonds—funds borrowed by the federal government for a term of 10 years—declined from
Suppose the general public becomes more “grasshopper-like” and less“ant-like” in their saving decisions, becoming less concerned about saving for the future. How will the change in public attitudes affect the country’s rate of capital formation and economic growth?
How does an increase in the government budget deficit affect saving, investment, and the real interest rate?Suppose the government increases its spending without raising taxes, thereby increasing its budget deficit (or reducing its budget surplus). How will this decision affect national saving,
How does the introduction of new technologies affect saving, investment, and the real interest rate?The late 1990s saw the introduction and application of exciting new technologies, ranging from the Internet to new applications of genetics. A number of these technologies appeared at the time to
Repeat Example 16.5, but assume that, over the course of the year, wear and tear reduces the resale value of the lawn mower from $4,000 to$3,800. Should Lauren buy the mower?
How do changes in the costs and benefits affect Lauren’s decision?With all other assumptions the same as in Example 16.5, decide whether Lauren should buy the mower:If the interest rate is 12 percent rather than 6 percent.If the purchase price of the mower is $7,000 rather than $4,000.If the tax
Should Lauren buy a riding lawn mower?Lauren is thinking of going into the lawn care business. She can buy a$4,000 riding mower by taking out a loan at 6 percent annual interest. With this mower and her own labor, Lauren can net $6,000 per summer, after deduction of costs such as gasoline and
Continuing Example 16.4, here are the analogous data on government revenues and expenditures for 2018, in billions of dollars. Again, find (a)the federal government’s budget surplus or deficit, (b) the budget surplus or deficit of state and local governments, and (c) the contribution of the
Why do U.S. households save so little?Household saving in the United States, which has always been comparatively low, has fallen even further in the past decades. (Figure 7.1 shows a long-term fall from 13.1 percent in 1975 to 7.9 percent in 2019.)Surveys show that a significant fraction of
By how much does a high saving rate enhance a family’s future living standard?The Spends and the Thrifts are similar families, except that the Spends save 5 percent of their income each year and the Thrifts save 20 percent. The two families began to save in 1995 and plan to continue to save until
Why do Chinese households save so much?A few years ago, economists estimated that Chinese households save more than 25 percent of their disposable income, an unusually high rate.2 Although some suggested that the Chinese “are known to be thrifty,” it is unlikely that cultural factors are a main
Why are racial and ethnic wealth disparities so persistent?Wealth disparities between U.S. families in different racial and ethnic groups are substantial. Recent data and analyses show that in 2019, before the COVID-19 pandemic hit, the median white family had almost eight times the wealth of the
How did many American households increase their wealth in the 1990s and 2000s while saving very little?On the whole, Americans felt prosperous during the 1990s and, with a short pause around the relatively minor 2001 recession, the feeling of prosperity continued until the eve of the 2007–2009
How would each of the following actions or events affect Consuelo’s saving and her wealth?Consuelo deposits $20 in the bank at the end of the week as usual.She also charges $50 on her credit card, raising her credit card balance to $300.Consuelo uses $300 from her checking account to pay off her
What is the relationship between Consuelo’s saving and her wealth?Consuelo saves $20 per week. How does this saving affect her wealth?Does the change in her wealth depend on whether Consuelo uses her saving to accumulate assets or to pay down her liabilities?
Continuing the example of the bathtub: If there are 40 gallons of water in the tub at 7:15 p.m. and water is being drained at the rate of 3 gallons per minute, what will be the stock and flow at 7:16 p.m.? At 7:17 p.m.? Does the flow still equal the rate of change in the stock?
What would Consuelo’s net worth be if her student loan were for $6,500 rather than $3,000? Construct a new balance sheet for her.
What is Consuelo’s wealth?To take stock of her financial position, Consuelo lists her assets and liabilities on a balance sheet. The result is shown in Table 7.1. What is Consuelo’s wealth?
Discuss the reasons firms choose to invest in capital.
Discuss the reasons people save and how psychological factors influence saving.
For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer. (LO4)Ted lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed for over a year Alice was laid off from
Skilled or unskilled workers can be used to produce a small toy.Initially, assume that the wages paid to both types of workers are equal. (LO3)Suppose that electronic equipment is introduced that increases the marginal product of skilled workers (who can use the equipment to produce more toys per
How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3)Demand for the type of car made by the plant increases.A sharp increase in the price of gas causes many commuters to switch to mass transit.Robots are
How would each of the following factors be likely to affect the economywide supply of labor? (LO2)The age at which people are eligible for Medicare is increased.Increased productivity causes real wages to rise.War preparations lead to the institution of a national draft, and many young people are
The following table lists the marginal product per hour of workers in a lightbulb factory. Lightbulbs sell for $2 each, and there are no costs to producing them other than labor costs. (LO2)The going hourly wage for factory workers is $24 per hour. How many workers should the factory manager hire?
Production data for Bob’s Bicycle Factory are as follows.Other than wages, Bob has costs of $100 (for parts and so on)for each bike assembled. (LO2)Bikes sell for $130 each. Find the marginal product and the value of the marginal product for each worker (don’t forget about Bob’s cost of
Data on the average earnings of people of different education levels are available from the Bureau of the Census(try online at www.census.gov/population/socdemo/education/tableA-3.txt). Using these data, prepare a table showing the earnings of college graduates relative to high school graduates and
List three types of unemployment and their causes. Which of these types is economically and socially the least costly? Explain. (LO4)
Acme Corporation is considering hiring Marisa Fabrizio.Based on her other opportunities in the job market, Marisa has told Acme that she will work for them for $40,000 per year. How should Acme determine whether to employ her? (LO2)
List and discuss the five important labor market trends given in the first section of the chapter. How do these trends either support or qualify the proposition that increasing labor productivity leads to higher standards of living? (LO1)
How did the COVID-19 pandemic affect the demand for U.S.jobs?In the 10 years from February 2010 to February 2020, the U.S. economy created on average 190,000 new jobs each month, or almost 2.3 million new jobs each year. But the streak of good employment news ended in March 2020, when the U.S. was
As we have just discussed, relatively weak growth in productivity and relatively strong growth in labor supply after about 1973 can explain (1)the slowdown in real wage growth and (2) the more rapid expansion in employment after about 1973. Show this point graphically by drawing two supply and
Labor unions typically favor tough restrictions on immigration, while employers tend to favor more liberal rules. Why? (Hint: How is an influx of potential workers likely to affect real wages?)
You want to make a career in broadcasting. The local radio station is offering an unpaid summer internship that would give you valuable experience. Your alternative to the internship is to earn $3,000 working in a car wash. How would you decide which job to take? Would a decision to take the
Will you clean your neighbor’s basement or go to the beach?You were planning to go to the beach today, but your neighbor asks you to clean out his basement. You like the beach a lot more than fighting cobwebs. Do you take the job?
Can new technology hurt workers?Technological progress typically makes workers more productive. Examples are abundant. Electric hair dryers and hair clippers, invented more than a hundred years ago by individuals seeking to improve barber tools, make hairstylists more productive. The Global
Refer to Example 6.3. How many workers will BCC hire after the 50 percent increase in productivity if the going real wage for technicians is$50,000 per year? Compare this figure to the demand for workers at a$50,000 wage before the increase in productivity.
Will BCC hire more workers if their productivity rises? Suppose BCC adopts a new technology that reduces the number of components to be assembled, permitting each technician to build 50 percent more machines per year. Assume that the relative price of computers is$3,000 per machine. How many
Will BCC hire more workers if the price of computers rises?Suppose an increase in the demand for BCC’s computers raises the relative price of its computers to $5,000 each. How many technicians will BCC hire now, if the real wage is $60,000 per year? If the real wage is $50,000?
Continuing with Example 6.1, how many workers will BCC hire if the going wage for technicians is $35,000 per year?
How many workers should BCC hire?Suppose that the going wage for computer technicians is $60,000 per year.BCC managers know that this is the wage being offered by all their competitors, so they cannot hire qualified workers for less. How many technicians will BCC hire? What would the answer be if
Explain how changes in the supply of and demand for labor -account for trends in real wages and employment in the past few decades.
Discuss five important trends that have characterized labor markets in the industrialized world in the past few decades.
Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the United States is exceptionally strong, relative to other countries? Areas where the United States is less strong than some
Discuss the following statement, using concrete examples where possible to illustrate your arguments: For advances in basic science to translate into improvements in standards of living, they must be supported by favorable economic conditions. (LO3, LO6)
We discussed how the opportunity cost of sending children to school affects the level of school enrollment across countries. The United Nations Human Development Report 2019 reports the following data for per capita income in 2018 (in the equivalent of 2011 U.S. dollars). (LO4)Which country would
The government is considering a policy to reduce air pollution by restricting the use of “dirty” fuels by factories. In deciding whether to implement the policy, how, if at all, should the likely effects of the policy on real GDP be taken into account? (LO4)
Hester’s Hatchery raises fish. At the end of the current season, Hester has 1,000 fish in the hatchery. She can harvest any number of fish that she wishes, selling them to restaurants for $5 apiece. Because big fish make little fish, for every fish that she leaves in the hatchery this year she
Harrison, Carla, and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour using a standard paintbrush, and Fred can paint 80 square feet per hour. Any of the three can paint 200 square feet per hour using a roller. (LO3)Assume Harrison, Carla, and Fred have only
The Good’n’Fresh Grocery Store has two checkout lanes and four employees. Employees are equally skilled, and all are able either to operate a register (checkers) or bag groceries (baggers). The store owner assigns one checker and one bagger to each lane. A lane with a checker and a bagger can
Joanne has just completed high school and is trying to determine whether to go to community college for two years or go directly to work. Her objective is to maximize the savings she will have in the bank five years from now. If she goes directly to work she will earn $20,000 per year for each of
Consider the following table containing data for Germany and Japan on the ratio of employment to population in 1980 and 2010.Using data from Table 5.1, find average labor productivity for each country in 1980 and 2010. How much of the increase in output per person in each country over the 1980 to
The “graying of America” will substantially increase the fraction of the population that is retired in the decades to come. To illustrate the implications for U.S. living standards, suppose that over the 56 years following 2016, the share of the population that is working returns to its 1960
Suppose labor productivity in the United States was $100,000 per worker in 2015. Calculate the value of labor productivity in the year 2035 (20 years later) if (LO1)productivity continues to grow by 3.1 percent per year.productivity growth falls to 1.4 percent per year. (Note: You do not need to
Richland’s real GDP per person is $40,000, and Poorland’s real GDP per person is $20,000. However, Richland’s real GDP per person is growing at 1 percent per year and Poorland’s is growing at 3 percent per year.Compare real GDP per person in the two countries after 10 years and after 20
Discuss the following statement: “Because the environment is fragile and natural resources are finite, ultimately economic growth must come to an end.” (LO7)
What major contributions can the government make to the goal of increasing average labor productivity? (LO6)
What are the costs of increasing economic growth? (LO5)
What has happened to real GDP per person in the industrialized countries over the past century? What implications does this have for the average person? Are there implications for different countries in different regions(e.g., Japan versus Ghana)? (LO1)
Why do almost all countries provide free public education?All industrial countries provide their citizens free public education through high school, and most subsidize college and other postsecondary schools. Why?
Why do far fewer children complete high school in poor countries than in rich countries?One possible explanation is that people in poor countries place a lower priority on getting an education than people in rich countries. This seems unlikely since immigrants from poor countries often put a heavy

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