Macroeconomics: A European Perspective 1st Edition Olivier Blanchard, Alessia Amighini, Francesco Giavazzi - Solutions

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9. The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may find making a diagram helpful for part(a). For this problem, you do not need to calculate the magnitudes of changes in economic variables—only the direction of change.a.
8. Investment and income This problem examines the implications of allowing investment to depend on output. Chapter 5 carries this analysis much further and introduces an essential relation—the effect of the interest rate on investment—not examined in this problem.a. Suppose the economy is
7. Taxes and transfers Recall that we define taxes, T, as net of transfers. In other words, T = Taxes - Transfer Paymentsa. Suppose that the government increases transfer payments to private households, but these transfer payments are not financed by tax increases. Instead, the government borrows
6. Balanced budget versus automatic stabilizers It is often argued that a balanced budget amendment would actually be destabilizing. To understand this argument, consider the economy in Problem 5.a. Solve for equilibrium output.b. Solve for taxes in equilibrium.Suppose that the government starts
5. Automatic stabilizers So far in this chapter, we have assumed that the fiscal policy variables G and T are independent of the level of income. In the real world, however, this is not the case. Taxes typically depend on the level of income and so tend to be higher when income is higher. In this
4. The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macroeconomically neutral. Put another way, we examine whether it is
3. Use the economy described in Problem 2.a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand. Is it equal to production?Explain.c. Assume that G is equal to 110, so output
2. Suppose that the economy is characterized by the following behavioral equations:C = 160 + 0.6YD I = 150 G = 150 T = 100 Solve for the following variables.a. Equilibrium GDP (Y)b. Disposable income (YD)c. Consumption spending (C)
1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The largest component of GDP is consumption.b. Government spending, including transfers, was equal to 20.4% of GDP in 2010.c. The propensity to consume has to be positive,
10. Comparing the recessions of 2009 and 2001:One very easy source for data is the Federal Reserve Bank of St. Louis FRED database. The series that measures real GDP is GDPC1, real GDP in each quarter of the year expressed at a seasonally adjusted annual rate (denoted SAAR). The monthly series for
9. Measured and true GDP Suppose that instead of cooking dinner for an hour, you decide to work an extra hour, earning an additional $12. You then purchase some (takeout) Chinese food, which costs you $10.a. By how much does measured GDP increase?b. Do you think the increase in measured GDP
8. Hedonic pricing As the first Focus box in this chapter explains, it is difficult to measure the true increase in prices of goods whose characteristics change over time. For such goods, part of any price increase can be attributed to an increase in quality. Hedonic pricing offers a method to
7. Using macroeconomic relations:a. Okun’s law stated that when output growth is higher than usual, the unemployment rate tends to fall. Explain why usual output growth is positive.b. In which year, a year where output growth is 2% or a year where output growth is –2%, will the unemployment
6. Consider the economy described in Problem 4.a. Construct real GDP for years 2005 and 2006 by using the average price of each good over the two years.b. By what percentage does real GDP change from 2005 to 2006?c. What is the GDP deflator in 2005 and 2006? Using the GDP deflator, what is the rate
5. Consider the economy described in Problem 4.a. Use the prices for 2005 as the set of common prices to compute real GDP in 2005 and in 2006. Compute the GDP deflator for 2005 and for 2006 and compute the rate of inflation from 2005 to 2006.b. Use the prices for 2006 as the set of common prices to
4. An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2005 and 2006 are as follows:2005 2006 Quantity Price Quantity Price Cars 10 $2000 12 $3000 Computers 4 $1000 6 $500 Oranges 1000 $1 1000 $1 Chapter 2 A Tour of the Book 37 Key Termsa. What is
3. During a given year, the following activities occur:i. A silver mining company pays its workers $200,000 to mine 75 pounds of silver. The silver is then sold to a jewelry manufacturer for $300,000.ii. The jewelry manufacturer pays its workers $250,000 to make silver necklaces, which the
2. Suppose you are measuring annual U.S. GDP by adding up the final value of all goods and services produced in the economy. Determine the effect on GDP of each of the following transactions.a. A seafood restaurant buys $100 worth of fish from a fisherman.b. A family spends $100 on a fish dinner at
1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. U.S. GDP was 28 times higher in 2010 than it was in 1960.b. When the unemployment rate is high, the participation rate is also likely to be high.c. The rate of unemployment
6. From Problem 5, write down the quarters in which the six traditional recessions started. Find the monthly series in the Federal Reserve Bank of St. Louis (FRED) database for the seasonally adjusted unemployment rate. Retrieve the monthly data series on the unemployment rate for the period 1969
5. U.S. postwar recessions This question looks at the recessions over the past 40 years.To work this problem, first obtain quarterly data on U.S. output growth for the period 1960 to the most recent date from the Web site www.bea.gov. Table 1.1.1 presents the percent change in real gross domestic
4. Deficit reduction was identified as the major issue facing the United States as of the writing of this chapter.a. Go to the most recent Economic Report of the President to ascertain whether deficits as a percent of GDP have increased or decreased compared to what was expected for 2011 and 2012
3. Chinese economic growth is the outstanding feature of the world economic scene over the past two decades.a. In 2010, U.S. output was $14.7 trillion, and Chinese output was $5.8 trillion. Suppose that from now on, the output of China grows at an annual rate of 10.5% per year, while the output of
2. Macroeconomic policy in Europe Beware of simplistic answers to complicated macroeconomic questions. Consider each of the following statements and comment on whether there is another side to the story.a. There is a simple solution to the problem of high European unemployment: Reduce labor market
1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Output growth was negative in both advanced as well as emerging and developing countries in 2009.b. Stock prices fell between 2007 and 2010 around the world.c. In the 1960s
For any of the debates covered in this chapter (for example, about the role of relative prices or the causality between output growth and capital accumulation), propose an econometric strat egy for testing the alternative hypotheses empirically.
In what sense can the BPCG model be regarded as applying to the long run, while the ELCC model of Chapter 8 can be regarded as applying only in the ‘medium run’? What kind of transi tion would need to occur for an economy to move from a medium-run growth path character ized by cumulative
Review the debate over the importance (or lack of importance) of relative price or RER effects in BPCG models. Does it matter if relative prices or the RER are considered in rates of change or levels? What are the parallels between this debate and the debate over ‘Kaldor’s paradox’ as
Why can the BPCG model be considered a type of ‘supermultiplier’ model, and how does it compare with the other supermultiplier models covered in Chapters 7 and 8? Discuss the simi larities and differences.
Why is it a problem that the BP-equilibrium growth rate may not coincide with the ‘natural rate of growth’, and what mechanisms have been proposed to reconcile these two rates? What are the different implications of the alternative reconciliation mechanisms in regard to both theory and policy?
How does the analysis of BP-constrained growth differ in the case of a pure, price-taking small country? How does the analysis differ for a medium-large country, defined as one that is big enough to influence world prices of its export products, but not big enough to affect foreign income? Answer
What have been the main criticisms of the BPCG model and empirical tests of Thirlwall’s law?How would defenders of this approach respond to those criticisms? Discuss and evaluate.
Explain how the BPCG model can be modified for the cases of (a) partial exchange rate pass through and (b) incorporating Verdoorn productivity effects. What assumption(s) of a stand ard BPCG model has (have) to be suspended for these factors to matter to the BP-equilibrium growth rate?
Using a model of two large countries, compare the prospects for a domestic demand-driven increase in long-run growth if the demand stimulus is applied only in one country versus coor dinated between the two countries. Also consider the case of a demand expansion in one large country if the other
Does capital mobility significantly alter the results and implications of the BPCG model?Discuss.
How can the post-Keynesian BPCG model and a neoclassical model of real exchange rate(RER) adjustment be considered to be two alternative ‘solutions’ to a common underlying framework of BP adjustment?
Does trade liberalization necessarily improve a country’s BP-equilibrium growth rate? Apply both the basic BPCG model and any relevant extensions in your analysis.
In what sense is long-run growth export-led in the BPCG model? How does this compare with the mechanism of export-led growth in ELCC?
What are the key assumptions, conclusions and policy implications of the BPCG model? How do these compare with the same for the ELCC model from Chapter 8?
Is the Beckerman model, as revived by Boggio and Barbieri, an alternative to a Kaldorian approach, or a better way of representing Kaldor’s original ideas about export-led growth?Discuss, making sure to refer to the debate over ‘Kaldor’s paradox’.
What criticisms have been made of the ELCC model? How might Kaldorians respond to the criticisms?
What are the policy implications of the ELCC model?
Outline the ways in which the actual and natural rates of growth can be reconciled in an ELCC model.
Construct a basic model of export-led cumulative causation, and use this model to show how different forms of path dependence (weak and strong) can affect the growth process.
Summarize the relationship between Kaldorian growth theory, the Hicks supermultiplier and the Harrod foreign trade multiplier. How does supermultiplier analysis in Kaldorian theory differ from its Sraffian and Kaleckian counterparts, and why might this be important?
Why is the manufacturing sector so important in Kaldorian growth theory and how, as a result, might structural change affect the rate of growth?
Discuss the ‘turn to exogenous growth theory’ in HGT. How might this help neo-Kaleckians to reconcile results such as the paradox of thrift and paradox of costs with a constant long-run equilibrium rate of capacity utilization? Why is exogenous growth theory controversial?
Show how the Sraffian supermultiplier model gives rise to an endogenous investment to output ratio. How and why does this property contrast with other HGT models?
What is a supermultiplier? What is the basic implication of the supermultiplier for analysis of long-run growth?
How can the introduction of household debt into a model of growth alter the relationship between distribution and growth? Why is this significant?
Show how the interaction of the goods and financial markets can generate a Goodwin-like pattern of co-movements in the wage share and level of output. What is the significance of this result?
Explain how the degree to which an economy has wage-led or profit-led demand becomes endogenous in models with a financial sector, debt service, dividend payouts to equity holders, and/or interest income of rentiers.
In what sense does monetary policy, considered as the setting of interest rates by a country’s central bank, have distributional effects? Can interest rates affect the distribution of income between wages and profits, as well as between firms and rentiers, and if so how?
Does greater wage equality between production workers and corporate managers, or between female and male labour, necessarily have an expansionary impact? Compare alternative models and discuss why they reach different conclusions or under what conditions different scenarios result.
Outline the debate between neo-Kaleckians and neo-Harrodians over the responsiveness of investment and saving behaviour to variations in the rate of profit/utilization.
Can monetary policy contain Harrodian instability and, if so, is the result necessarily a stable, steady-state equilibrium (warranted) growth rate?
Is it possible to reconcile long-run variation in the utilization rate with the concept of a normal rate of capacity utilization?
Outline two processes capable of taming Harrodian instability – one classical-Marxian and one neo-Kaleckian. What significance, if any, attaches to the difference between these mechanisms?
How does the profit-squeeze mechanism contribute to neo-Harrodian growth dynamics?
What might create ceilings and floors capable of containing the instability associated with the second Harrod problem?
In recent decades, inflation rates have come down while wage shares have also decreased in many industrialized and emerging economies. Is this just a coincidence, or could there be a relationship, and what do you think could be the causality involved? Discuss with reference to the concepts and
In the model of Barbosa-Filho and Taylor (2006), what difficulties are associated with using the slope of the AD curve to determine whether an economy has wage-led or profit-led aggre gate demand?
Given that the wage share is an endogenous variable in any model with both a distributive curve (DC) and an aggregate demand (AD) relationship, what meaning can be given to the idea that demand is ‘led’ by either wages or profits? Discuss.
Summarize the main methodologies and results associated with the empirical literature that investigates the relationship between distribution and growth. How do the results differ by methodology, time frame and type of country considered?
Suppose one believes that growth is profit-led. How could one then explain the fact that, over the past few decades, many economies have experienced simultaneous reductions in their wage shares and slowdowns in their growth? Discuss.
Under what theoretical or empirical conditions do neo-Goodwin cycles emerge? What are the main criticisms of neo-Goodwinian models, and how do you think proponents of these models would respond?
Derive the distributive curve. What does this curve add to the analytics of the basic neo Kaleckian model outlined in Chapter 4? How do the dynamics vary depending on whether adjustments in output occur faster than, or at approximately the same rate as, adjustments in wages, prices and distributive
Show how distributive conflict can generate inflation. What relationship, if any, exists between the conflicting claims inflation process and the Phillips curve?
Should the neo-Kaleckian models be considered useful for short-run analysis only, or can they be considered to represent long-run, steady-state equilibria as defined in Chapter 1? Discuss.
Suppose you wanted to estimate empirically whether a given country has wage-led or profit-led demand (output or utilization). Which parameters in the saving, investment and net export functions would you need to estimate and how would you determine whether the economy in question had wage-led or
Are the results of the open economy model qualitatively changed if we use the Kalecki–Steindl investment function (4.19) in place of equation (4.44)? Analyse and discuss your results.
Demonstrate how the Kalecki–Steindl model of a closed economy predicts that a rise in the average markup rate, as a result of increased monopoly power of firms, will lead to sustained economic stagnation. Does the same result necessarily obtain in more general neo-Kaleckian models? Why or why not?
Same as question 2, but for the ‘widow’s cruse’: consider the effects of an increase in the animal spirits of business firms that increases the intercept g0 in the investment function (4.19). What is the key difference in the adjustment mechanism for the widow’s cruse (and also for the
Do the neo-Kaleckian models imply a paradox of thrift, similar to what we saw in the neo Robinsonian model in Chapter 3? Using the model with positive saving out of both wages and profits, evaluate the effects of an increase in either saving propensity sr or sw on the equilibrium levels of u*, r*
How do the neo-Kaleckian and neo-Keynesian models differ in their treatment of prices, capacity utilization and income distribution?
How does Marglin synthesize neo-Marxian and neo-Keynesian principles in his hybrid growth model? In what respects is the hybrid model more classical-Marxian and in what respects is it more Keynesian? What role, if any, does aggregate demand play in Marglin’s synthesis?
Demonstrate the ‘paradox of thrift’ and ‘widow’s cruse’ implications of the neo-Robinsonian growth model. What is the policy significance of these results?
Draw a diagram similar to Figure 3.3 for the early Kaldor model of growth and distribution.Which version of a classical-Marxian model from Chapter 2 does it most resemble, and in what respects is it similar or different?
Which of the two Harrod problems are addressed (or not addressed) in the contributions of Kaldor and Robinson?
Many development economists have recommended a strategy of increasing national saving rates in order to accelerate economic growth. In Harrod’s theory, which growth rate is increased by raising a country’s propensity to save, and is that a good policy to pursue? Why or why not?
How do the two Harrod problems interact? What is the likely dynamic outcome if the war ranted rate of growth exceeds the natural rate? What are the likely dynamics in the opposite case?
Explain Harrod’s three growth rate concepts and the distinction between the first and second‘Harrod problems’. Which problems relate to which growth rates, and what dilemmas does each problem suggest?
In the 1960s, Nicholas Kaldor proposed a set of ‘stylized facts’ describing the capitalist growth process, which included (among other things) long-run constancy of the profit share and the capital–output ratio. Which versions of a classical-Marxian model, in terms of assumptions about income
What are the theoretical consequences of the classical tendency to conflate saving with invest ment as equivalent forms of ‘capital accumulation’? Specifically, how would the effects of an increase in the capitalists’ propensity to save be different if such an increase was not automati cally
How is it possible that technological change can be the cause of a falling tendency of the rate of profit in Marx’s theory, and the solution for avoiding such a tendency (and preventing a ‘sta tionary state’) in Ricardo’s theory? Discuss with reference to the different assumptions about
Under what circumstances does more rapid economic growth require a reduction in wages(either the real wage or wage share) and under what circumstances can more rapid growth be accompanied by a rise in wages (in either respect), within the classical-Marxian approach?
What assumptions give rise to the idea of an inevitable inverse relationship or trade-off between wages and profits in classical-Marxian theory? What does this relationship imply for the rela tionship between income distribution and long-run growth, and why?
In what ways can NGT (especially NEGT) be seen to have incorporated themes traditionally associated with HGT? Why is study of HGT nevertheless warranted?
Discuss the relationship between the actual and natural rates of growth in HGT. Is there reason for heterodox theorists to seek to resolve any inequality between the actual and natural rates?
Compare and contrast neoclassical and heterodox theories of production and technical change.
How do overarching visions of the growth process differ between NGT and HGT, and between the classical-Marxian and post-Keynesian variants of HGT?
Correlation between regional and aggregate GDP growth In this problem you are asked to compute the correlation between regional and aggregate EA12 GDP growth for your country (or for another country of your choice), as in Table 26.1 (which reports only a few European countries).a. Go to the
Monetary union vs exchange rate peg Compare the pros and cons of a monetary union with those of an exchange rate peg.EXPLORE FURTHER
Monetary policy coordination Among the benefits of a monetary union, the need for member countries to have monetary policy coordination prevents each member country from using monetary policy in an arbitrary manner. Illustrate in a graph the advantage, with respect to aggregate welfare, of member
Describe which are the main benefits and costs of a monetary union.DIG DEEPER
Using the information in this chapter, label each of the following statements true, false or uncertain. Explain briefly.a. A group of countries is said to form an ‘optimal currency area’ only if the macroeconomic benefits from having just one currency outweigh the costs.b. Since the
The Taylor rule In this chapter you learned that the way monetary authorities set interest rates can be described by the following formula, which is know as Taylor rule (from the name of an economist, John Taylor, who was observing the US economy in the 1980s):Rt = a0 + a1(pe t+1 − p*) + a2( yt +
Import propensity and exchange rate changes In Chapter 7 you learned that the higher the share of exports or imports in total income, the greater the effect, on the same income, of a change in the exchange rate. In this problem you will compare two economies with different propensities to
The ECB open market operations Describe the main open market operations carried out by the European Central Bank and their objectives. Visit the website of the European Central Bank and find the section on ‘Open Market Operations’. Read the most recent ‘Weekly Financial Statement’ (the
Describe why the European Monetary System was not an efficient mechanism to limit exchange rate volatility among European countries.DIG DEEPER

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Macroeconomics: A European Perspective 1st Edition Olivier Blanchard, Alessia Amighini, Francesco Giavazzi - Solutions

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