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dynamic macroeconomics
Applied Intermediate Macroeconomics 1st Edition Kevin D Hoover - Solutions
2. According to the defi nition given in the chapter, which of the following is not an LDC?a. Indiab. Egyptc. Chinad. Ireland
1. An LDC is defi ned as a countrya. without large stocks of advanced capital.b. without well-educated labor.c. with low GDP per capita.d. that is described by all of the above.
An important source of foreign investment for LDCs is multinational corporations that locate plants and other facilities in these countries. LDCs compete with each other for the economic growth and development benefi ts that these multinational corporations can provide. For an LDC to win the
GDP growth alone does not measure the standard of living. You must also consider population. Even though Beta experienced a greater GDP growth rate, its GDP per capita might be less than Alpha’s because its population growth rate is greater. Of course, the reverse is also possible, but without
adequate infrastructure, a favorable business climate, and a cheap labor force. If you said you would not support the president’s proposal to raise the minimum wage because it would place the LDC at a competitive disadvantage in the labor market, thereby reducing foreign private investment and
Does Rapid Growth Mean a Country Is Catching Up?Is the Minimum Wage an Antipoverty Solution for Poor Countries?population data, we cannot say. If you said which country’s people are better off cannot be determined because the GDP must be divided by the population to measure the average standard
For Online Exercises, go to the Tucker Web site at www.cengage.com/economics/tucker.CHECKPOINT ANSWERS
12. Explain the differences among the Agency for International Development (AID), the World Bank, and the International Monetary Fund(IMF).
11. Why would an LDC argue for “trade, not aid”?
10. What are some of the problems for LDCs of accepting foreign aid?
9. Without external fi nancing from foreign private investment, foreign aid, and foreign loans, poor countries are caught in the vicious circle of poverty. Explain. How does external fi nancing help poor countries achieve economic growth and development?
8. Indicate whether each of the following is associated with a high or low level of economic growth and development:
7. Why is the quest for economic growth and development complicated?
6. Explain why it is so diffi cult for poor LDCs to generate investment in capital in order to increase productivity and growth and therefore improve their standard of living.
5. Do you agree with the argument that the rich nations are getting richer and the poor nations are getting poorer? Is this an oversimplifi cation? Explain.
4. What is the difference between economic development and economic growth? Give examples of how each of these concepts can be measured.
3. Assume you are given the following data for country Alpha and country Betaa. Based on the GDP per capita data given above, in which country would you prefer to live?b. Now assume you are given the following additional quality-of-life data. In which country would you prefer to reside?
2. Explain why GDP per capita comparisons among nations are not a perfect measure of differences in economic well-being.
1. What is the difference between industrially advanced countries (IACs) and less-developed countries (LDCs)? List fi ve IACs and fi ve LDCs.
Let real money demand be described by the equation:MD p= 0.05Y − 0.5r and nominal money supply by:MS = M.(a) Write down the general equation for the LM curve in terms of Y, r, M, and p.(b) If M = 10,000 and p = 100, write down the specific equation for the LM curve and draw the curve.
Explain in detail how and why the LM curve shifts when the price level increases.
In the Appendix we derived the money demand curve on the assumption that the real return on money was −pˆ . This was based on the assumption that currency and checking accounts do not bear interest. But, of course, some checking accounts do bear interest. Think about the case in which all money
The stock market is often cited as a leading indicator of the business cycle. Is it? Plot the time series of the S&P 500 stock-price index and indicate the NBER recession dates with shading. (Hint: use a logarithmic scale –why?) Comment on its cyclical properties. Discuss larger downturns in the
Past inflation may not give a good estimate of future inflation.Repeat Problem 7.12 for the 1-year bond rate for the past 15 years, but use the expectations of inflation series of the University of Michigan Survey of Consumers instead of the inflation rate calculated from CPI. Comment on the
Has the success of the Fisher hypothesis changed over time?Repeat Problem 7.12 for the 1-year bond rate only using data for the last 15 years and separately for any other 15-year period in the data. Comment on the relative performance of the hypothesis in each period.
To see how well the Fisher hypothesis fits the data, estimate the expected rate of inflation using the actual past annual rate of CPI inflation( ˆp =pt pt−12− 1). On separate graphs, plot the 1-year and the 10-year Treasury bond rates on the vertical axis against the inflation rates on the
A 3-month Treasury bill rate should have a low (virtually no) price risk. Estimate the term premium for each maturity of Treasury bond by subtracting the time series for the 3-month rate from each of the others and calculating the mean. Present your results in a table. Comment on the relationship
Using the information from Problems 7.7–7.9, write a brief note on the relationship of the yield curve and the business cycle. (Both describe your findings and attempt to give an explanation of what you find.)
To create a measure of the business cycle, first detrend industrial production using a 73-month moving average, expressing industrial production as a percentage of its trend. Then, create a scatterplot with detrended industrial production on the horizontal axis and yieldslope (created in Problem
To get an idea of how the slope of the yield curve changes over time, create a series: yieldslope = yield on 10-year Treasury bond rate – yield on 1-year Treasury bond rate. When yieldslope is positive, the yield curve slopes up(at least between a maturity of 1 and 10 years), and when negative,
For a recent business cycle, plot the yield curve for 1-, 2-, 3-, 5- 7-, and 10-year U.S. Treasury bonds at the NBER peak and trough of the same recession and for a date about midway through the expansion (preceding or following the recession). Depending on which business cycle you choose, two out
Suppose that the real rate of interest on a 1-year risk-free bond is constant at 2 percent. Suppose that people expect the following path for yearon-year inflation:From Year to Year Expected Rate of Inflation (percent)2010 to 2011 2 2011 to 2012 3 2012 to 2013 4 2013 to 2014 5 2014 to 2015 6
Which is more risky: stocks, short-term bonds, or long term bonds?Which has the highest rate of return? Is there a clear trade-off between risk and return? Indices of total return measure both the direct yields and the capital gains to different assets on the assumption that interest payments or
How does default risk vary across the business cycle? Plot the risk premia for Aaa and Baa corporate bonds calculated in Problem 7.3 against the NBER recession dates. Comment on their cyclical properties.
Differences in default risk should be reflected in interest rates as risk premia (section 7.3.1). To see how much, calculate the typical risk premia between the rates on 10-year constant-maturity U.S. Treasury bonds (as a measure of a bond free of default risk) and separately on Moody’s Aaa and
A radio advertisement states that gasoline prices in the United States rise every summer and fall every winter, so that there is money to be made from buying gasoline futures in the winter and holding them until summer. (A future is a financial instrument that promises delivery of a commodity or
Consider the scenario of section 7.2.1 (especially Figure 7.2).(a) What would happen to the yields on P&G and Clorox bonds if Clorox decided to use extraordinary profits to buy back some of its bonds?Explain each step carefully.(b) Assume that both Clorox and P&G bonds start with an AAA rating.
Define share price, dividend, and P/E ratio of a firm. Record the actual values of these items for the last trading day before today for a firm listed on a major stock exchange. Provide an accurate citation of your source.
Imagine that you are a shareholder in Orbit3, a company whose sole purpose is to win a prize for the first private spacecraft to orbit the earth three times. At the time that you purchase your shares, all the expenses of the firm up to the point of the prize mission have already been paid. If your
A consol (or perpetuity) is a bond that pays a coupon expressed as a percentage of its notional face value, but never matures (i.e., it pays its coupon forever). What is the value of a 3-percent consol with a face value of$1,000 when the yields on other long-term bonds are 4 percent? (Hint: use the
Using the PV function in Excel (or the equivalent in another spreadsheet or business calculator), to calculate the relevant bond prices, what is the capital gain or loss from an initial yield of 5 percent on:(a) a 5-year pure discount bond with a $100 face value going to a yield of(i) 4 percent or
Using the RATE function in Excel (or the equivalent in another spreadsheet or business calculator), calculate the yield on a 10-year bond with a face value of $100 and a semi-annual, 5-percent coupon purchased at prices of:(a) $108.18;(b) $100.00;(c) $92.56.Comment.[Excel hint: enter funds received
Repeat Problem 6.20, but assume that the same coupons are paid in two semi-annual installments.
Calculate (showing your work) the price of the following 2-year bonds when the yields on similar assets are 4 percent and the bonds have $100 face values and annual coupons of:(a) 3 percent;(b) 4 percent;(c) 5 percent.Comment on the relationship between the prices that you calculate and the face
Calculate the yield on a 3-month Treasury bill sold at $9,878.76.
U.S. Treasury bills are pure discount bonds sold with face values of $10,000. Calculate the price for a Treasury bill that:(a) matures in 3 months when yields on similar assets are 4 percent;(b) matures in 6 months when yields on similar assets are 2 percent;(c) matures in 9 months when yields on
Calculate the yield on the following pure discount bonds:(a) a $75,000 bond maturing in 1 year with a price of $70,754.72;(b) a $1,000 bond maturing in 5 years with a price of $862.61;(c) a $5,000 bond maturing in 10 years with a price of $1,283.37.For Problems 6.18 –6.23, recall that the yields
Calculate the bond price of the following pure discount bonds:(a) a $1,000 bond maturing in 1 year when yields on similar assets are 3 percent;(b) a $1,000 bond maturing in 2 years when yields on similar assets are 5 percent;(c) a $5,000 bond maturing in 10 years when yields on similar assets are
Redo Problem 6.14 using the 10-year constant-maturity bond rate and the actual rate of inflation over the preceding year as an estimate of the expected rate of inflation. How does the real rate on 10-year bonds compare to that on 1-year bonds? Note to compute the ex post real rate, the inflation
Redo Problem 6.13 but use the actual rate of inflation ( ˆp et =(pt/pt−12) − 1) over the preceding year instead of the survey-based expectations as the best estimate of expected future inflation when computing the ex ante real rate of interest. Are there important differences in this graph
Using monthly data, measure the annual rate of CPI inflation ex post as ˆpt = (pt+12/pt) − 1 and express your calculations in percentage points.Measure ex ante inflation using the Michigan Survey of Expected CPI Inflation(rate of inflation expected over the twelve months following the reported
Using the exact and the approximate formulae, what is the rate of inflation when:(a) the real rate of interest is 4 percent and the market rate of interest is 8 percent?(b) the real rate is 4 percent and the market rate is 4 percent?(c) the real rate is −1 percent and the market rate is 8
Using the exact and the approximate formulae, what is the market rate of interest when:(a) the real rate of interest is 2 percent and the inflation rate is 3 percent?(b) the real rate is 2 percent and the inflation rate is 14 percent?(c) the real rate is 10 percent and the inflation rate is 3
Using both the exact and the approximate formulae, what is the real rate of interest when:(a) the market rate of interest is 7 percent and the rate of inflation is 2 percent?(b) the market rate is 35 percent and inflation is 29 percent?(c) the market rate is 4 percent and inflation is 2 percent?(d)
Using a spreadsheet and presenting your results on a single graph, calculate the present value of $1 for every year from the present (0) up to 100 years in the future, for each of the discount rates 0 percent, 1 percent, 5 percent, and 10 percent. What conclusions can you draw from your graph for
Suppose that you earn $100 and decide to keep it in your non-interest-bearing checking account. Thinking of your actual situation, what would you regard as a good estimate of the opportunity cost of your action?
For each of the scenarios in Problem 6.6, take Table 6.2 as the starting point and state how the 2010 asset-and-liability table would be different(i.e., indicate the column and row numbers and dollar values of any cell that would have changed). If the problem does not specify enough information to
Consider a flow-of-funds table like Table 6.1 but referring to a hypothetical 2010. Imagine that the Federal government ran a deficit of $500 billion.How would that deficit be reflected in the table (i.e., which cells would change –give the column and row numbers – by how much) if the deficit
Give three examples of different types of financial intermediaries and explain from whom they are likely to raise money (i.e., who is the source of their funds) and to whom are they likely to lend money (i.e., what is the use of their funds). In each case, what features make the financial
Think about the economic activities of different financial actors.Create a T-account and list on the appropriate side the kinds of goods and financial instruments that are likely to appear as assets and liabilities of:(a) households.(b) a nonfinancial corporation (e.g., the Ford Motor Company).(c)
Suppose that you finance the car purchase in Problem 6.1 through a$12,000 loan from your father, who took the funds from his checking account.What are the effects on each of your T-accounts from your purchase? What would be the effect on your family’s T-account – treating your father and
Consider the effects of the car purchase in the last problem on the balance sheets of financial intermediaries. What are the effects on the Taccounts of each financial intermediary in Problem 6.1 if the funds supplied to you are:(a) raised by the credit union through additional deposits?(b) raised
Suppose that you buy a car for $12,000. Consider the effects on different balance sheets of alternative ways of financing your purchase. (Show your answers on a T-account and identify changes with a “+” or “−”, the dollar value and the type of instrument – e.g., “+$1,800 stocks” or
As observed in Chapter 3, section 3.6.2 (especially Figure 3.6), the 2001 recession appears not to have been a recession at all when judged by the revised data for real GDP. Using whatever data, calculations, and graphical analysis that you find helpful, does a wider range of data support the
Read the Guide, Section G.12.3, on detrending using growth rates.Calculate the time series for the annualized quarterly rate of real GDP growth.Plot this series against the NBER business-cycle dates. Does your graph conform roughly to the stylized relationship between fluctuations in a level series
Using whatever calculations and graphical analysis that you find helpful, examine the unemployment rate and identify its cyclicality; is it ?
How good are the leading indicators as predictors of recessions?One rule (see section 5.3.3) states that if the index of leading economic indicators turns down two months in succession, then a recession should be expected.Statisticians recognize two types of error. Type I error (false negative)
Use data on real GDP to establish the dates of the peaks and troughs of the Japanese business cycle. Explain your procedure. What is the typical Japanese business like measured by the size and durations of its recessions, expansions, and complete cycles? Should we characterize Japan as having
Use data on real GDP to establish the dates of the peaks and troughs of the Canadian business cycle. Explain your procedure. What is the typical Canadian business like measured by the size and durations of its recessions, expansions, and complete cycles? Do Canadian business cycles seem to be
Which of the four hypotheses (or which other pattern) do your calculations favor? Compare these results to those using GDP.
Instead of focusing on the size of changes as measured by GDP as in Problem 5.6, consider the same set of hypotheses using the duration of the recessions and expansions. Using the data in Table 5.1 for post-World War II recessions and expansions (measured in months), repeat the calculations of
There are a number of competing theories of the business cycle. One suggests that the seeds of the slump are sown in the boom, so that the higher the peak, the lower the subsequent trough. Another suggests that the economy is like a guitar string: the further it is plucked (the lower the trough),
Using the data from Table 5.1 and the statistics reported in Problems 5.2, 5.3, and 5.4, describe the quantitative and temporal characteristics of the “typical” post-World War II business cycle.
Using monthly unemployment rates for the period since 1947, calculate the change in unemployment rates (difference in percentage points, not percentage change) for each recession (peak to trough), expansion (trough to peak), and complete cycles (peak to peak and trough to trough) and enter them as
Using quarterly real GDP data for the period since 1947, calculate the percentage change in GDP for each recession (peak to trough), expansion(trough to peak), and complete cycles (peak to peak and trough to trough) and enter them as separate time series on a spreadsheet. For each series calculate
(a) Using Table 5.1, construct your own table identifying by date and duration in months the shortest and longest booms, slumps, and complete cycles (peak to peak and trough to trough) for the period from 1946 to the present. Also identify by date and duration the median boom, slump, and complete
In Problem 2.16 you were supposed to have identified the peaks and troughs of the business cycle using the two-quarter rule. If you have not done this exercise already, do it now. Table 5.1 gives the NBER monthly dates in which peaks and troughs occurred. Convert these to the equivalent quarters
The idea of categorizing producer prices by stages of processing is that crude prices pass on to intermediate prices, which in turn pass on to final producer prices. Compare the PPI at these three stages of processing using whatever graphics and calculations you deem appropriate. At which stage of
(a) Calculate the difference between the annual rates of CPI and core CPI inflation reported in Figure 4.4. Visually, which is more variable? Calculate and report the mean, the variance, and the standard deviation of this difference.(b) Using the calculation of the standard deviation, we can get an
Here are some actual prices of past goods stated in 1992 constant dollars (using CPI-U): (i) One-Bedroom Apartment (Sacramento, California),$906 in 1960; (ii) Men’s Necktie, $8.90 in 1965; (iii) Reclining Chair, $300.51 in 1972; (iv) Coffee (2 lbs.), $4.53 in 1981; (v) Ford Sedan (Galaxie),
Here are some actual prices of goods in the third quarter of 1998: (i)Vacuum Cleaner, $169; (ii) 10-piece Cookware Set, $299.99; (iii) Man’s Sport Shirt, $24.99; (iv) 24” Television, $219.99; (v) Personal Computer, $604.00.What would their prices have been in the fourth quarter of 1980 and in
Here are some actual prices of goods in past years, recorded in November of the indicated year: (i) Men’s sport coat, $22.85 in 1960; (ii) Coffee(2 lbs.), $1.09 in 1965; (iii) Ford Sedan (Galaxie), $3,939 in 1972; (iv) Reclining Chair, $299 in 1981; Washing Machine, $349 in 1988. What are their
Explain the advantages and disadvantages of the Laspeyres, Paasche, and chain-weighted indices.
The table gives actual expenditure shares and price indices for broad components of the CPI.Expenditure) Price Indices Expenditure Price Indices Shares 2002 2002 (1982–84 Shares 2010 2010 (1982–84(percent) = 100) (percent) = 100)Food and Beverages 15.583 177.8 15.384 184.1 Housing 40.854 181.1
(This question draws on ideas from Chapter 3 as well as Chapter 4.) Elbonia is a country richly endowed with water and reeds, which are both free goods. It produces mud, which is used exclusively for making bricks.Bricks are baked in brick kilns and 10 percent of every batch of bricks must be used
(a) Show in detail how the Paasche and chain-weighted indices for 2012 were computed in Table 4.2.(b) Using the chain-weighted index, show how real GDP for 2012 was computed in Table 4.2 for 2012 in the constant dollars of 2010, 2011, and 2012.
For the couch-potato economy of Table 4.1:(a) Use 2010 as the base year (i.e., using the expenditure shares of 2010)to compute the price factor that measures how much prices increased between 2010 and 2012;(b) Use the price factor to compute the price index for 2010 with a reference year of 2012
Consider an economy completely described by the following goods and prices:Wine Hotel Accommodation CDs(bottles) (nights) (disks)price $5 $100 $12 2009 quantity 50 5 10 2010 price $6 $110 $15 quantity 48 6 7 2011 price $7 $120 $16 quantity 45 7 8
The following information describes the “cop economy” in which the only two final goods are coffee and doughnuts.Coffee Doughnuts Quantity Prices Quantity Prices Year (cups) (dollars) (number) (dollars)2010 20 0.75 20 0.50 2011 30 1.00 18 0.75(a) Compute the Laspeyres, Paasche, and Fisher-ideal
The data for this problem are found on the Bureau of Economic Analysis’s (BEA’s) website (www.bea.gov/) in the News Release Archive(www.bea.gov/newsreleases/relsarchivegdp.htm).(a) Consider the quarter two before the current quarter. Go to the BEA website and locate the releases with the
Name the factors not counted in GDP that, in your view, most affect human welfare or happiness. How do you imagine that modifying GDP to account for these factors would raise or lower current U.S. GDP relative to earlier times or other countries? (Be specific in your references to time and country
(a) Estimates of the size of the black economy are hard to come by and somewhat speculative because the participants try to hide their activities. One method used to estimate the size of the black economy starts with the observation that the ratio of U.S. cash (notes and coins) to the U.S.
Name two productive unpaid household activities – one that passes and one that fails the third-party test. Explain your choices.
The most familiar element of investment to most people is housing (investment in residential structures). How important an element of the economy is it? And how has it changed over time? On a single graph for the post-World War II era plot: investment as a percentage of GDP and residential
Yet more insight can be gained into the patterns of government spending by looking at the difference between defense and nondefense spending. Make a single graph of four U.S. Federal government expenditure series:(1) nondefense consumption; (2) nondefense investment; (3) defense consumption; and
To gain further insight into the differences between Federal and state and local spending, make a graph of U.S. Federal and state and local investment spending as a percentage of GDP for the post-World War II era.What historical events might account for the patterns that you find?
Which level of government claims the largest share of GDP – Federal or state and local? Has the pattern changed over time? Make a graph of total government spending on goods and services in the United States, as well as its Federal and state and local components as percentages of GDP for the
Figure 3.3 shows that goods make up about a third of total consumption in the United States in 2009, with durable goods making up only about a tenth. Is this a permanent pattern? Make a graph of durable, nondurable, and service consumption as percentages of GDP for the post-World War II
Another take on the question in Problem 3.6: make a graph showing gross investment, net investment, and capital consumption as percentages of U.S. GDP for the post-World War II era. Split the sample in half and make a table displaying the mean values for each series in two halves of the
Figure 3.2 shows that capital consumption (depreciation) was about 13 percent of U.S. GDP in 2008. Make a graph of the ratio of capital consumption to GDP (expressed as a percentage) for the post-World War II era. Describe your findings. Speculate on the causes of any patterns that you find.
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