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Applied Intermediate Macroeconomics 1st Edition Kevin D Hoover - Solutions

What light does the Phillips curve shed on the actual path of the economy? Taking the actual inflation rate in 1990 and the actual unemployment rates, use equation (15.12) to generate a series of predicted changes in the inflation rate (based on the CPI). Start with the actual inflation rate in
Repeat Problem 15.16 using scaled output rather than unemployment in Okun’s law (equation (15.6)). Comparing your results with those in Problem 15.16, which version of Okun’s law does a better job at prediction?
What light does Okun’s law shed on the actual path of the economy? Taking the actual unemployment rate in 1990 and the actual rates of GDP growth, use equation (15.5) to generate a series of predicted changes in the unemployment rate. Start with the actual unemployment rate in 1990 and add to it
Using CPI and unemployment data for each of the G-7 countries(1995–present), estimate a Phillips curve and report in a table the estimates of NAIRU (U∗), the speed-of-adjustment parameter (β), and the fit of the regression equation (R 2). How do the estimates for the other six countries
The CPI is tailored to consumer expenditure and may not be the best measure of inflation overall. To see how a broader measure would affect the analysis of inflation, estimate a Phillips curve using the GDP deflator in place of the CPI for the period 1987–present and write it in standard
Do the curves using the whole population or only prime-age males fit better as judged by R 2? Which pair of curves delivers the more stable estimate of NAIRU?
Some researchers have suggested that one way to account for changing demographics in the Phillips curve is to use the unemployment rate for a demographically homogeneous group of workers. Use the unemployment rate for prime-age males to estimate the Phillips curve for the two periods 1971–1986,
Based on these data why do you think NAIRU shifts over time? Relate your reasons carefully to the data.
To get some idea of why NAIRU might shift over time, make two charts. On the first, plot the participation rates of prime-age men, women, and teenagers in the labor force for the United States and, on a separate scale on the same chart, plot the CBO’s estimate of NAIRU. On the other chart, plot
Write each equation in standard form. What are your estimates of the nonaccelerating inflation rates of scaled output?
Reestimate the Phillips curve using scaled output instead of unemployment for each of the subperiods identified in
Estimate Phillips curves for the United States like that in Figure 15.7 for the periods 1950–1970, 1971–1986, and 1987–present. (Calculate the inflation rate as the change in the current CPI over the previous year.) Write the equation for each in standard form. Create a graph similar to
To get some idea of how well surveys perform relative to past inflation rates as estimates of expected inflation, calculate two series: (1) the ex post or actual rate of inflation calculated as the rate of CPI inflation between the current year and the following year; and (2) the lagged rate of
Assume that equation (15.5) is the true Okun’s law for the U.S. economy today. Locate the most recent GDP and unemployment data(http://www.bea.gov for GDP and http://www.bls.gov for unemployment).Based on the growth rate of GDP for the most recent quarter over the same quarter a year before, what
Using data for each of the G-7 countries for the period 1995–present, estimate Okun’s law and report in a table the estimates of the modified balanced growth rate (Yˆ ∗), the speed-of-adjustment parameter (γ ), and the fit of the regression equation (R 2). How do the estimates for the other
In particular, how do your estimates of the modified natural rate of growth differ from the earlier estimates?
Reestimate Okun’s law for each of the subperiods identified in Problem 15.3 using the change in scaled output in place of the change in unemployment. Put each equation into standard form. Compare your estimates to those in
It has been argued that labor productivity has risen substantially in the late 1990s. Use a scatterplot and regression line (as in Problem 15.3)for U.S. data after 1992 to estimate Yˆ ∗. Has the “speed limit” been raised? By how much? Is there any reason to believe your estimates might
How close do these estimates come to estimates based on the regression of changes in unemployment on growth rates?
Calculate the average growth rates for labor productivity, participation rates, and working-age population and use them to calculate Yˆ ∗for each of the periods in
The growth rates of labor productivity and participation rates are important elements in determining the modified balanced rate of growth (Yˆ ∗).How they change over time will determine how Yˆ ∗changes. The mid-1970s seems to mark a point at which participation rates and the behavior of labor
Think of some concrete examples of cases in which particular economic developments lower the economic stock of capital while leaving the physical stock of capital intact.
Imagine the unfortunate event of a new plague that kills a quarter of the population of a country. Use labor-supply/labor-demand analysis to analyze the effects of such a misfortune on real wages, employment, and real GDP.
In Chapter 13, you saw how government spending or tax cuts might have a multiplied effect on aggregate demand. Governments sometimes seek to “prime the pump” – in other words, to use a small stimulus to generate response from the private sector greater than the government expenditure
Use your knowledge of the factors that govern aggregate investment to discuss the likely effects of the following on both aggregate investment and aggregate demand (note that in some cases there may be effects working in opposite directions):(a) a war in an oil-producing region of the Middle
When fully operational, a semiconductor factory is expected to generate $30 million in net revenue per year for fifteen years. There is no cost or scrap value in winding up the plant at the end of its useful life. The plant can be built in one year at a cost of $250 million; in two years at a cost
A power company has to decide whether to build a nuclear reactor. It estimates that it will take ten years to build at a cost of $250 million per year; it will earn $300 million per year net of operating costs for the thirty years following its completion; and it will cost $100 million to
What general lessons can you draw about investment based on the results in Problems 14.7–14.9?
Use the information in Problem 14.7 to calculate the internal rate of return for the base case and each of the cases (a)–(c). [Excel hint: use the function IRR, enter the initial cost in the top cell of a column as a negative number and enter all the income flows for each succeeding year in
Use the same information as the base case in Problem 14.7 to show that the internal rate of return is 10.5 percent (show your work).
Consider the example of a present-value calculation in equation(14.19) in which a car that costs the rental car company $15,000 is expected to earn $3,000 per year for two years and to be sold at the end of two years for$12,000. When the relevant market interest rate is 5 percent, its present value
Economic theory suggests that investment and real interest rates should be related inversely ceteris paribus. Use quarterly data on 1-year and 10-year Treasury bonds and inflation rates calculated from the GDP deflator(current quarter over the same quarter in the previous year) to calculate the
Investment consists of a variety of different sorts of capital goods.Use quarterly data to express aggregate investment and some of its subcomponent (residential investment, nonresidential structures, equipment [including software], and consumer durables) variables as a percentage of potential GDP.
In section 14.2.3, we asserted that a new energy source that generates $100 million per year forever to the economy adds $100 million/rr to life-cycle wealth and, therefore, $100 million per year to permanent income.Prove this result by using the definition of life-cycle wealth. (The trick is to
Using quarterly data, calculate the coefficient of variation of detrended personal disposable income (YDP), consumption (C), consumption of durables (C D), and consumption of nondurables plus services (C NDS). (Use real data and detrend the original data, not the data expressed as a share of
Plot the time series of the variables C, YDP, S P, and S as defined in Problem 14.1 and indicate the NBER recession dates with shading. Comment on their cyclical behavior and their relationships to each other.
Use quarterly data to create a table of the mean values of total consumption (C), personal disposable income (YDP), personal savings (S P), and total savings (S). Express each variable as a share of potential GDP. What proportion of personal disposable income is consumed on average? How large is
Use the IS-LM model and assume that the economy is at full employment to determine how a 10-percent increase in the supply of money would affect the price level and the real rate of interest. Be specific about the quantitative effects.
Use the IS-LM model and assume that the economy is at less than full employment to determine how each of the following affect aggregate demand and the real interest rate.(a) A cut in the money supply;(b) An increase in the speculative demand for money;(c) The substitution of ATM cards for cash and
Use the IS-LM model and assume that the economy is at less than full employment to determine how each of the cases in Problem 13.12 would affect aggregate demand and the real interest rate.
How do the following affect the IS curve?(a) A decrease in exports;(b) A decrease in imports;(c) An increase in the marginal propensity to import (i.e., the rate at which imports increase with an increase in GDP);(d) An increase in investment risk;(e) An increase in the savings rate;(f) A decrease
Using the illustrative model in the text (see section 13.3.3, case 5), work out a numerical example and a diagram to show that an increase in the marginal tax rate results in a leftward movement of the IS curve.
Any outflow from the domestic private sector that rises in the boom and falls in the slump might act as an automatic stabilizer. As well as taxes, candidates include transfer payments, imports, and inventory investment.(a) To get an idea of which of these act as automatic stabilizers, express each
For the same economy as described in Problem 13.8:(a) Write down the equation for the IS curve. Sketch the curve.(b) Starting from the situation in Problem 13.8(a) show that the IS curve implies that Y is what you calculated in Problem 13.8(a).(c) What would be the effect on Y and the budget
Consider an economy in which aggregate demand is described by the following equations:C = 100 + 0.9(Y + TR − T)I = 300 − 20rr G = 400 TR = 200 T = τY NEX = 100(Note that the real rate of interest (rr) is measured in percentage points, not as a natural fraction.)(a) Initially if rr = 6 percent
Consider an economy in which aggregate demand is described by the following equations:C = 200 + 0.9(Y + TR − T)I = 200 − 25rr T = τY.(Note that the real rate of interest (rr) is measured in percentage points, not as a natural fraction.) Initially, G = 400, TR = 100, the market rate of interest
Consider an economy with no foreign trade whose consumption function is given as C = c(Y + TR − T).Taxes are determined as T = τY and transfer payments are determined as TR = tr0 − trY, where tr0 and tr are positive constants.Suppose that initially c = 0.9, τ = 0.2, tr0 = 666.67, tr = 0.05; I
Consider an economy with no foreign trade and no transfer payments whose consumption function is given as C = 100 + 0.9(Y − T).
Are the marginal propensity to consume and the multiplier stable over time? Look again at Figure 13.2. Choose a date that divides the sample into two parts – one in which the apc is trending downward and one in which it is trending upward. Using the procedure in Problem 13.3 (or just using the
Although the average propensity to consume in the United States (Figure 13.2) does not trend uniformly downward over the whole post-World War II period, it does trend down until the early 1980s and sharply upward after that. We might obtain a better estimate of the marginal propensity to consume if
In the subsection of section 13.1.4 The Multiplier Process, we showed using a particular example that the process of spending becoming income becoming spending becoming income and so on ultimately resulted in the same multiplier as the static multiplier given in equation (3.16). Prove that this is
The multiplier formula (13.17) was derived on the assumption that the consumption function passed through the origin – that is, it took the form given in (13.2) with the intercept c0 set to zero. Assume that c0 = 0 and, following the same steps as the text, derive the three equations analogous to
Section 12.3.3 discusses the relationship of employment to productivity and the relative prices of goods. Make three charts: (1) plot the productivity indices for nonfarm business (as a proxy for productivity in services), durable goods manufacturing, and nondurable goods manufacturing; (2) plot
Repeat Problem 12.9 using the diffusion index for all nonagricultural firms. Note any salient differences.
Diffusion indices compare the number of industries increasing to the number decreasing employment. More precisely, the index is the percentage of industries increasing employment plus one-half the percentage with unchanged unemployment. An index of 50 means that increases and decreases exactly
Plot the data on unemployment by duration (i.e., unemployed for less than 5 weeks, 5–14 weeks, 15–26 weeks, and more than 27 weeks al expressed as a percentage of total unemployment) and indicate the NBER recession dates with shading.(a) How does turnover of the unemployment pool vary with the
Consider three scenarios for annual wage increases and rates of inflation: (1) inflation is zero and wages fall by 5 percent; (2) inflation is 5 percent and wages stay constant; (3) inflation is 10 percent and wages rise at 5 percent.(a) Before doing any calculations, choose which scenario you
Recently, it has been argued that workers have fared poorly and that real wages have not grown much since the early 1970s. In particular, it has been claimed that workers have not shared in large increases in labor productivity. To investigate that claim, using quarterly data, first, start with the
Plot average overtime hours (available only for manufacturing industries) and indicate NBER recession dates with shading. Discuss the cyclical and secular behavior of overtime.
Figure 12.3 shows involuntary part-time employment as a share of all part-time employment. Examine part-time employment in more detail by plotting involuntary and voluntary part-time employment as separate series, indicating the NBER recession dates with shading. Compare and discuss their cyclical
Calculate and plot the minimum-wage rate as a share of the average hourly wage rate. Discuss the relationship of the two rates over time.Is there anything in the data that would suggest that the importance of the minimum-wage rate for unemployment might have changed over time?
Use the labor-supply/labor-demand diagram to show how an economy that starts at full employment would generate unemployment through adopting a minimum wage above the market-clearing wage. Discuss how the quantitative effects of the minimum wage depend on the steepness of the labor-supply and
The following are selected data for Australia:Labor Force Employment Population Year (thousands) (thousands) (millions)1998 9,343 8,618 18.73 1999 9,470 8,785 18.95 2008 11,186 10,712 21.07(a) Calculate the unemployment rate for 2008 and the participation rate for 1998.(b) If employment is
The state of Alaska gives an annual rebate of oil revenues to each of its citizens – a flat dollar amount (approximately $3,300 in 2008) independent of income or personal characteristics. Assume that Alaska can be treated as a separate economy from the rest of the United States. Use
In the Middle Ages, the “Black Death” killed one-third of the population of Europe. Use labor-supply/labor-demand analysis to conjecture the effects this would have had on employment and real wages provided that full employment was maintained at all times.
During the Iraqi occupation of Kuwait (1990–1991), substantial parts of the Kuwaiti capital stock were destroyed. Use labor-supply/labordemand analysis to conjecture the effects this would have had on employment and real wages provided that full employment was maintained at all times.
Repeat Problem 11.12 (a) using the information in Problem 11.13 and replacing hours of labor with the number of workers wherever applicable.Would the answers to Problem 11.12 (b)–(e) be the same or different using this new information? Explain.
The production function referred to in Problem 11.12 (and in Chapters 9 and 10) measured labor in hours of work. It is sometimes convenient to measure it in numbers of workers. In 2008, total employment in the United States was 137,588,000 workers. Recompute the Cobb-Douglas production function
Use the data and the (Cobb-Douglas) functional forms of equations (9.17′) and (9.18) in Chapter 9 and assume that the economy is and remains fully employed:(a) Compute the real wage consistent with the actual hours of employment.(b) How much would the real wage have to change to justify an
Plot average weekly hours of work for males, females, and teenagers (16–19-year-olds, male and female) and indicate NBER recession dates with shading. Describe and compare the secular and cyclical behavior of hours for the three groups. What social and economic factors might account for their
Referring to the data plotted in Problem 11.9, describe the differences in the secular (i.e., long-term) and cyclical behavior of participation rates. How do they differ by age and sex? What social and economic factors might account for the differences?
As Figure 11.11 shows, between the 1950s and the early 2000s, the participation rate for all civilian workers steadily increased, even as that for prime-age male workers steadily declined. Before doing any data analysis, conjecture what might account for this difference. Then plot the time series
Unemployment compensation pays a fixed amount to workers who have been laid off from their jobs.(a) Assume (which is not generally true in the United States) that there is no time limit to receipt of unemployment compensation for those workers who report themselves as seeking work. Conjecture how
Conjecture what the effects would be on labor supply of an earnedincome credit paid as a 10-percent premium on the wages of low-income workers.
Conjecture how winning $1 million from the state lottery would affect a worker’s labor supply.
Assume that the labor-supply curve is backward-bending as in Figure 11.5. Show graphically the effect of an increase in marginal tax rates on this labor-supply curve.
Conjecture the effect of an increase in the marginal rate of taxation on labor supply of each of the two taxpayers as in Problem 11.3.
The U.S. tax code assumes that each taxpayer begins to pay taxes only after having achieved a certain minimum income (the standard deduction).Use the labor-supply analysis of this chapter to conjecture what effect raising the standard deduction by $1,000 would have on the labor supply of a
A car manufacturer in 2010 produced a single model that it sells for $12,900. It pays a wage of $42,500/year. The CPI in 2010 was 217 (1982–1984 = 100). What is the value of the product-real wage and the consumptionreal wage? (Be careful to specify the units precisely.) When is each of these
Use the production function and the rule for profit maximization to show graphically how to derive the labor-demand curve. What effect would an increase in the stock of capital ceteris paribus have on labor demand? What effect would a decrease in real wage rates have on labor demand?
Using the neoclassical growth model (the Solow-Swan model), what would be the effect on adjusted output (i.e.,output adjusted for technological progress or⌣Y), adjusted capital (⌣K), and the rate of balanced growth of an increase in the rate of labor-augmenting technological progress (Aˆ
Some economists have suggested that the adoption of computer technology involves faster rates of capital depreciation. Assume that there is no technological progress (aside from the change in the depreciation rate).Using the neoclassical growth model (the Solow-Swan model), what would you expect to
Assume that there is no technological progress. Explain carefully, using the neoclassical growth model (the Solow-Swan model), the short-term and long-term effects on GDP per worker, capital per worker, and the rate of growth of GDP of (i) a decrease in the rate of investment and (ii) a decrease in
Repeat the last problem, but use the rate of population growth instead of the rate of growth of the labor force for n. Why are the results different? Under what circumstances might population growth be a more meaningful measure than labor-force growth for estimating the balanced growth path?
As we saw in section 10.4.1, the balanced growth path for an economy is a sort of long-term “speed limit.” Consider whether the speed limit has changed recently. An economy is more likely to be close to its balanced growth path at the business-cycle peak than at other times. Identify the last
In the discussion of unbalanced growth in section 10.4.1, we considered the case in which labor grew faster than capital. Now analyze a case in which capital grows faster than labor using a diagram analogous to Figure 10.8 and noting particularly what happens to labor and capital productivity and
Suppose that labor productivity grows at a steady rate θˆand capital productivity is constant on average (φˆ = 0). Prove that the capital-labor ratio(κ) must grow at θˆ.
So far, our growth-accounting exercises focused on the growth of real GDP. But real GDP per capita is probably more important for people’s well-being. To shift the focus to real GDP per capita, first, divide both sides of the Cobb-Douglas production function by L to get Y L = ALα−1K1−α.
A recent study by two economists at the Federal Reserve Board, Stephen Oliner and Daniel Sichel, tried to assess the importance of computer technology for economic growth through an extension of the growthaccounting framework. They divided the capital stock into four groups: computer hardware,
Capital productivity is defined as output per unit of capital, φ =Y/K. Given the information that Y is increasing at 5.2 percent per year and K is increasing at 4.8 percent per year, use the algebra of growth rates to compute the rate of growth of capital productivity.
In a well-known study in 1992, Alwyn Young tried to understand the growth experience of two rapidly developing countries, Hong Kong and Singapore, using a growth-accounting exercise like that in section 10.2.3. The table presents a small part of Young’s data (note that percentage changes are not
How much has technology changed in your lifetime? Repeat the counterfactual experiment in Problem 10.2 and the one in section 10.2.2 for the year of your birth and 2008.
In section 10.2.2, we quantified the effect of technological change by using the values for capital and labor for 2008 in the production function of 1948 and comparing the resulting output with the actual output in 2008.The reverse exercise should also be informative. Write down the production
(a) Use the data in Table 2.3 to compute the rates of growth of real GDP per capita that would be needed for Burundi, Ethiopia, and Russia (countries mentioned in the introduction to section 10.1) to catch up to the 2008 level of GDP per capita in the United States in 100 years. In 200 years.(b)
Use quarterly data on real GDP and worker-hours to calculate labor productivity as Y/L. On the same graph, plot your series and (using a separate scale) the government’s index of labor productivity. Compute the compound annual quarterly rate of growth for each series (to remove the trends), then
Assume that the economy was fully employed and efficiently operating at the peak of the business cycle in 1990:3.(a) Write down the equation of the short-run labor production function that corresponds to the segment of the ray from the origin to point A in Figure 9.15,(b) Noting how far real GDP
Use quarterly data for the United States from 1948 to the present to compute capital productivity. Use this series to repeat steps (a)–(d) in Problem 9.7, substituting capital productivity for labor productivity where appropriate.(Because capital productivity does not have a significant trend,
Detrend quarterly data for labor productivity in the United States from 1948 to the present (use the Bureau of Labor Statistics productivity index; see the Guide, section G.12, on detrending data. Explain your choice of detrending method.)(a) Before attempting any data analysis, think about the
Explain your finding.(d) Before the recession of 2007–2009, the U.S. economy was often characterized favorably compared to European economies as a “job creation machine.” What light do the data in parts (a) and (b) shed on the costs of this success? (Be careful to relate your conclusions to
(a) Using the same data and calculations from Problem 9.5, compute the implied real wage in 1948, 1978, and 2008.(b) Compute the average growth rates of the real wage in (a) for 1948–2008, 1948–1978, and 1978–2008.(c) Compare the result for 1948–2008 to your computation of the growth rate

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