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business
foundations macroeconomics
Macroeconomics 8th Edition Andrew B. Abel, Ben Bernanke, Dean Croushore - Solutions
3. What is price stickiness? Why do Keynesians believe that allowing for price stickiness in macroeconomic analysis is important?
2. How is full-employment output, Y, determined in the Keynesian model with efficiency wages? In this model, how is full-employment output affected by changes in productivity (supply shocks)? How is it affected by changes in labor supply?
1. Define efficiency wage. What assumption about worker behavior underlies the efficiency wage theory? Why does it predict that the real wage will remain rigid even if there is an excess supply of labor?
11.4 Explain Keynesian theories about business cycles and macroeconomic stabilization.
11.3 Analyze the effects of monetary and fiscal policy in the Keynesian model.
11.2 Describe the causes and effects of price stickiness according to the Keynesian model.
11.1 Summarize the Keynesian explanations for real-wage rigidity.
3. Are people’s inflation forecasts rational? To investigate this question, go to the Web site of the Federal Reserve Bank of Philadelphia at www.philadelphiafed.org. Find the Web pages for Research and Data and look for data from the Survey of Professional Forecasters on forecasts of CPI
2. This question asks you to study whether unanticipated declines in the money stock tend to raise interest rates and lead to recessions, as implied by the misperceptions theory.a. Using quarterly data from 1960 to the present, define unanticipated money growth in each quarter to be the rate of
1. According to the real business cycle theory, productivity shocks are an important source of business cycles. Using the Cobb–Douglas production function (for example, Eq. 3.2, p. 62) and annual data since 1961, calculate and graph U.S. total factor productivity. Use real GDP for Y, the capital
5. Starting from a situation with no government spending and no taxes, the government introduces a foreign aid program (in which domestically produced goods are shipped abroad) and pays for it with a temporary 10% tax on current wages. Future wages are untaxed. What effects will the temporary
4. This problem asks you to work out in more detail the example of reverse causation described in the text. Suppose that firms that expect to increase production in the future have to increase their current transactions (for example, they may need to purchase more raw materials). For this reason,
2. Use the classical IS–LM model to analyze the effects of a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent increase in lump-sum taxes of 100 per year.a. Begin by finding the effects of the fiscal change on the
1. The discovery of a new technology increases the expected future marginal product of capital.a. Use the classical IS–LM model to determine the effect of the increase in the expected future MPK on current output, the real interest rate, employment, real wages, consumption, investment, and the
8. (Appendix 10.B) Consider the following economy. IS curve r = 2.47 - 0.0004Y. Real money demand L = 0.5Y - 500(r + pe ). Short-run aggregate supply Y = Y + 100(P - Pe ). Here, r is the real interest rate, Y is output, and P is the price level. Assume that expected inflation, pe , is 0, nominal
7. In a particular economy the labor force (the sum of employed and unemployed workers) is fixed at 100 million. In this economy, each month 1% of the workers who were employed at the beginning of the month lose their jobs, and 19% of the workers who were unemployed at the beginning of the month
6. Try the following experiment: Flip a coin fifty times, keeping track of the results. Think of each “heads” as a small positive shock that increases output by one unit; similarly, think of each “tails” as a small negative shock that reduces output by one unit. Let the initial value of
5. Output in an economy is given by the production function Y = AK0.3 N0.7 , where Y is output, A measures productivity, the capital stock, K, is fixed at 30, and employment N is fixed at 100. Output equals 100 in the year 2012 and equals 105 in 2013.a. Find the Solow residual in the years 2012
4. An economy has the following AD and AS curves. AD curve Y = 300 + 30(M/P). AS curve Y = Y + 10(P - Pe ). Here, Y = 500 and M = 400.a. Suppose that Pe = 60. What are the equilibrium values of the price level, P, and output, Y? (Hint: The solutions for P in this Part and in Part (b) are multiples
3. Consider the following economy. Desired consumption Cd = 250 + 0.5(Y - T) - 500r. Desired investment I d = 250 - 500r. Real money demand L = 0.5Y - 500i. Full-employment output Y = 1000. Expected inflation pe = 0.a. Suppose that T = G = 200 and that M = 7650. Find an equation describing the IS
2. An economy is described as follows. Desired consumption Cd = 600 + 0.5(Y - T) - 50r. Desired investment I d = 450 - 50r. Real money demand L = 0.5Y - 100i. Full-employment output Y = 2210. Expected inflation pe = 0.05. In this economy the government always has a balanced budget, so T = G, where
1. In a certain economy the production function is Y = A(100N - 0.5N2 ), where Y is output, A is productivity, and N is total hours worked. The marginal product of labor associated with this production function is MPN = A(100 - N). Initially, A = 1.0, but a beneficial productivity shock raises A
10. Define rational expectations. According to the classical model, what implications do rational expectations have for the ability of the central bank to use monetary policy to smooth business cycles?
9. What conclusion does the basic classical model (with no misperceptions of the price level) allow about the neutrality or nonneutrality of money? In what ways is this conclusion modified by the extended classical model based on the misperceptions theory?
8. According to the misperceptions theory, what effect does an increase in the price level have on the amount of output supplied by producers? Explain. Does it matter whether the increase in the price level was expected?
7. In the context of the relationship between the money supply and real economic activity, what is meant by reverse causation? Explain how reverse causation could occur. What business cycle fact is it intended to explain?
6. What effects does a temporary increase in government purchases have on the labor market, according to the classical theory? What effects does it have on output, the real interest rate, and the price level? According to classical economists, should fiscal policy be used to smooth out the business
5. What is the Solow residual and how does it behave over the business cycle? What factors cause the Solow residual to change?
4. What major business cycle facts does the RBC theory explain successfully? Does it explain any business cycle facts less well?
3. Define real shock and nominal shock. Give an example of each. What type of real shock do real business cycle economists consider the most important source of cyclical fluctuations?
2. What are the two main components of any theory of the business cycle? Describe these two components for the real business cycle theory.
1. What main feature of the classical IS–LM model distinguishes it from the Keynesian IS–LM model? Why is the distinction of practical importance?
10.5 Summarize the fundamentals and implications of the misperceptions theory.
10.4 Explain the roles of money and monetary policy in the classical model.
10.3 Discuss unemployment in the classical model.
10.2 Discuss the effects of fiscal policy shocks in the classical model.
10.1 Summarize the real business cycle theory and describe how well it accounts for the business cycle facts.
5. (Appendix 9.B) Recall from Chapter 7 that an increase in i m, the nominal interest rate on money, increases the demand for money. To capture that effect, let’s replace Eq. (9.B.17) with Md P = /0 + /YY - /r(r + pe - i m). How does this modification change the solutions for the general
4. (Appendix 9.B) In some macroeconomic models, desired investment depends on both the current level of output and the real interest rate. One possible reason that desired investment may depend on output is that, when current production and sales are high, firms may expect continued strong demand
3. Suppose that the price level is fixed in the short run so that the economy doesn’t reach general equilibrium immediately after a change in the economy. For each of the following changes, what are the short-run effects on the real interest rate and output? Assume that, when the economy is in
2. Use the IS–LM model to analyze the general equilibrium effects of a permanent increase in the price of oil (a permanent adverse supply shock) on current output, employment, the real wage, national saving, consumption, investment, the real interest rate, and the price level. Assume that,
1. Use the IS–LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and price level.a. A reduction in the effective tax rate on capital increases desired investment.b. The
6. (Appendix 9.B) This question asks you to use the formulas in Appendix 9.B to find the general equilibrium values of variables for the economy described in Numerical Problem 4. Assume that G = 50.a. Use the data from Numerical Problem 4 to find the numerical values of the parameters A, f1, f2,
5. Consider the following economy: Desired consumption Cd = 1275 + 0.5(Y - T) - 200r. Desired investment I d = 900 - 200r. Real money demand L = 0.5Y - 200i. Full@employment output Y = 4600. Expected inflation pe = 0.a. Suppose that T = G = 450 and that M = 9000. Find an equation describing the IS
4. The production function in an economy is Y = A(5N - 0.0025N2 ), where A is productivity. With this production function, the marginal product of labor is MPN = 5A - 0.005AN.Suppose that A = 2. The labor supply curve is NS = 55 + 10(1 - t)w, where NS is the amount of labor supplied, w is the real
2. In a particular economy the real money demand function is Md P = 3000 + 0.1Y - 10,000i. Assume that M = 6000, P = 2.0, and pe = 0.02.a. What is the real interest rate, r, that clears the asset market when Y = 8000? When Y = 9000? Graph the LM curve.b. Repeat Part (a) for M = 6600. How does the
1. Desired consumption and investment are Cd = 4000 - 4000r + 0.20Y; I d = 2400 - 4000r. As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.a. Find an equation relating desired national saving, Sd , to r and Y.b. What value of the real interest rate clears the
9. Use the AD–AS framework to analyze whether money is neutral in the short run and whether it is neutral in the long run.
8. Describe the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve. Why is one of these curves horizontal and the other vertical?
7. What two variables are related by the aggregate demand (AD) curve? Why does the AD curve slope downward? Give two examples of changes in the economy that shift the AD curve up and to the right and explain why the shifts occur.
6. Define monetary neutrality. Show that, after prices adjust completely, money is neutral in the IS–LM model. What are the classical and Keynesian views about whether money is neutral in the short run? In the long run?
5. Define general equilibrium and show the general equilibrium point in the IS–LM diagram. If the economy isn’t in general equilibrium, what determines output and the real interest rate? What economic forces act to bring the economy back to general equilibrium?
asset and the interest rate that it pays.
4. For constant output, if the real money supply exceeds the real quantity of money demanded, what will happen to the real interest rate that clears the asset market? In describing the adjustment of the real interest rate, use the relationship that exists between the price of a nonmonetary
3. What relationship does the LM curve capture? Derive the LM curve graphically and show why it slopes as it does. Give two examples of changes in the economy that would cause the LM curve to shift down and to the right.
2. What relationship does the IS curve capture? Derive the IS curve graphically and show why it slopes as it does. Give two examples of changes in the economy that would cause the IS curve to shift down and to the left.
1. What determines the position of the FE line? Give two examples of changes in the economy that would shift the FE line to the right.
9.6 Explain the fundamentals and implications of the AD–AS model.
9.5 Discuss the role of price adjustment in achieving general equilibrium.
9.4 Describe the conditions necessary for general equilibrium using the IS–LM model.
9.3 Discuss factors that affect the LM curve, which represents equilibrium in the asset market.
9.2 Discuss factors that affect the IS curve, which represents equilibrium in the goods market.
9.1 Discuss factors that affect the fullemployment (FE ) line.
5. In the FRED database, find a variable that is available in both a seasonally adjusted form and a not seasonally adjusted form. Plot both over time and describe how large the seasonal variation in the variable is.
4. Graph the levels of real GDP for the United States, Canada, and Germany (data can be found at www. oecd.org under Statistics and then under National Accounts). Are U.S. and Canadian business cycles closely related? U.S. and German business cycles?
3. It has been argued that the stock market predicts recessions. Using quarterly data since 1961, plot the real value of the stock market index (the S&P 500 index in the last month of the quarter divided by the GDP deflator). [Note that to convert daily FRED data into quarterly data, (1) go to the
2. How does each of the following variables behave over the business cycle? Develop graphs to show your results and give economic explanations.a. Real importsb. Federal government receiptsc. Housing startsd. Capacity utilization rate, manufacturinge. Average weekly hours, manufacturing
1. An economic variable is persistent if declines in the variable tend to be followed by more declines, and increases by more increases. This question asks you to study the persistence of the civilian unemployment rate. Using data since 1961, identify all quarters in which the unemployment rate
5. It is sometimes argued that economic growth that is “too rapid” will be associated with inflation. Use AD–AS analysis to show how this statement might be true. When this claim is made, what type of shock is implicitly assumed to be hitting the economy?
4. During the period 1973–1975, the United States experienced a deep recession with a simultaneous sharp rise in the price level. Would you conclude that the recession was the result of a supply shock or a demand shock? Illustrate, using AD–AS analysis
3. Output, total hours worked, and average labor productivity all are procyclical.a. Which variable, output or total hours worked, increases by a larger percentage in expansions and falls by a larger percentage in recessions? (Hint: Average labor productivity = output , total hours worked, so
2. Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is?
1. Figure 8.1 shows that business cycle peaks and troughs are identified with peaks and troughs in the level of aggregate economic activity, which is consistent with current NBER methodology. However, for business cycles before 1927, the NBER identified business cycle peaks and troughs with peaks
8. How do Keynesians and classicals differ in their beliefs about how long it takes the economy to reach long-run equilibrium? What implications do these differences in beliefs have for Keynesian and classical views about the usefulness of antirecessionary policies? About the types of shocks that
7. What are the two components of a theory of business cycles?
6. How is the fact that some economic variables are known to lead the cycle used in macroeconomic forecasting?
5. If you knew that the economy was falling into a recession, what would you expect to happen to production during the next few quarters? To investment? To average labor productivity? To the real wage? To the unemployment rate?
4. What terms are used to describe the way a variable moves when economic activity is rising or falling? What terms are used to describe the timing of cyclical changes in economic variables?
3. What is the evidence for the view that the U.S. business cycle has become less severe over time? Why is the question of whether the cycle has moderated over time an important one?
2. What is comovement? How is comovement related to the business cycle facts presented in this chapter?
1. Draw a diagram showing the phases and turning points of a business cycle. Using the diagram, illustrate the concepts of recurrence and persistence.
8.4 Use aggregate demand and aggregate supply to describe the impact on business cycles of various shocks.
8.3 Describe the behavior of various variables over the course of business cycles.
8.2 Summarize the history of the American business cycle.
8.1 Define and describe the business cycle. '
3. Graph the three-month Treasury bill interest rate, the ten-year government bond interest rate, and the CPI inflation rate (based on the percentage change in the CPI from one year earlier) on the same figure, using data since 1961. Make sure that the units are comparable.a. In general, how are
2. Graph the CPI inflation rate, M1 money growth, and M2 money growth for the United States, using annual data since 1959. (Find annual growth rates for December to December.) Also graph the three-year average rate of inflation and the three-year averages of M1 growth and M2 growth, starting with
1. Graph the current yield curve (see the section, “Time to Maturity,” p. 250 and the graph of the yield curve on p. 117), plotting the interest rate on bonds with different maturities against their time to maturity, using data from the Federal Reserve’s H.15 release
4. Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium. What are the effects of each of the following on output, the real interest rate, and the current price level?a. A temporary increase in government purchases.b. A reduction in
3. The prisoner-of-war camp described by Radford (“In Touch with Data and Research: Money in a Prisonerof-War Camp,” p. 243) periodically received large shipments of cigarettes from the Red Cross or other sources.a. How did cigarette shipments affect the price level (the prices of goods in
2. Figure 7.2 shows that, before the 1980s, M1 velocity generally rose over time. Suggest some explanations for this upward trend.
1. All else being equal, how would each of the following affect the demand for M1? The demand for M2? Explain.a. The maximum number of checks per month that can be written on money market mutual funds and money market deposit accounts is raised from three to thirty.b. Home equity lines of credit
7. The income elasticity of money demand is 2/3 and the interest elasticity of money demand is −0.1. Real income is expected to grow by 4.5% over the next year, and the real interest rate is expected to remain constant over the next year. The rate of inflation has been zero for several years.a.
6. Suppose that the real money demand function is L(Y, r + pe ) = 0.01Y r + pe , where Y is real output, r is the real interest rate, and pe is the expected rate of inflation. Real output is constant over time at Y = 150. The real interest rate is fixed in the goods market at r = 0.05 per year.a.
5. Consider an economy with a constant nominal money supply, a constant level of real output Y = 100, and a constant real interest rate r = 0.10. Suppose that the income elasticity of money demand is 0.5 and the interest elasticity of money demand is -0.1.a. By what percentage does the equilibrium
4. Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its fullemployment value of 10,000, and the price level is 2.a. Determine the real demand for money and the nominal demand for money.b. In this same economy the government fixes the nominal
3. Mr. Midas has wealth of $100,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs his broker to invest $50,000 in bonds, plus $5000 more in bonds for every percentage point that the interest rate on bonds exceeds the interest rate on his checking
2. Money demand in an economy in which no interest is paid on money is Md P = 500 + 0.2Y - 1000i.a. Suppose that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and velocity.b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money
1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year
10. Give an example of a factor that would increase the public’s expected rate of inflation. All else being equal, how would this increase in the expected inflation rate affect interest rates?
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