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foundations macroeconomics
Macroeconomics 8th Edition Andrew B. Abel, Ben Bernanke, Dean Croushore - Solutions
9. What is the relationship between the price level and the nominal money supply? What is the relationship between inflation and the growth rate of the nominal money supply?
8. Why is equilibrium in the asset market described by the condition that real money supply equal real money demand? What aggregation assumption is needed to allow ignoring the markets for other assets?
7. Define velocity. Discuss the role of velocity in the quantity theory of money.
6. List and discuss the macroeconomic variables that affect the aggregate demand for money.
5. Describe what is meant by the expectations theory of the term structure of interest rates. Why isn’t the expectations theory sufficient to describe the data on interest rates that we observe? What must be added to the expectations theory to form a more accurate theory?
4. What are the four characteristics of assets that are most important to holders of wealth? How does money compare with other assets for each characteristic?
3. Who determines the nation’s money supply? Explain how the money supply could be expanded or reduced in an economy in which all money is in the form of currency.
2. What are the three functions of money? How does each function contribute to a more smoothly operating economy?
1. Define money. How does the economist’s use of this term differ from its everyday meaning?
7.5 Discuss the relationship between money growth and inflation.
7.4 Discuss the fundamentals of asset market equilibrium.
7.3 Examine macroeconomic variables that affect the demand for money.
7.2 Discuss the factors that affect how people choose which assets they own.
7.1 Define money, discuss its functions, and describe how it is measured in the United States.
3. According to the Solow model, if countries differed primarily in terms of their capital–labor ratios, with rich countries having high capital–labor ratios and poor countries having low capital–labor ratios, then countries that have a lower real GDP per capita income should grow faster than
2. Graph the U.S. capital–labor ratio since 1948 (use private fixed assets from the Fixed Assets section of the BEA Web site, www.bea.gov, Table 6.2 as the measure of capital, and civilian employment as the measure of labor). Do you see evidence of convergence to a steady state during the
1. This problem asks you to do your own growth accounting exercise. Using data since 1948, make a table of annual growth rates of real GDP, the capital stock (private fixed assets from the Fixed Assets section of the BEA Web site, www.bea.gov, Table 6.2), and civilian employment. Assuming aK = 0.3
7. An economy has a per-capita production function y = Aka h1-a , where A and a are fixed parameters, y is per-worker output, k is the capital–labor ratio, and h is human capital per worker, a measure of the skills and training of the average worker. The production function implies that, for a
6. Suppose that total capital and labor both increase by the same percentage amount, so that the amount of capital per worker, k, doesn’t change. Writing the production function in per-worker terms, y = f(k), requires that this increase in capital and labor must not change the amount of output
5. Two countries are identical in every way except that one has a much higher capital–labor ratio than the other. According to the Solow model, which country’s total output will grow more quickly? Does your answer depend on whether one country or the other is in a steady state? In general
4. In a Solow-type economy, total national saving, St, is St = sYt - hKt. The extra term, -hKt, reflects the idea that when wealth (as measured by the capital stock) is higher, saving is lower. (Wealthier people have less need to save for the future.) Find the steady-state values of per-worker
3. This problem adds the government to the Solow model. Suppose that a government purchases goods in the amount of g per worker every year; with Nt workers in year t, total government purchases are gNt. The government has a balanced budget so that its tax revenue in year t, Tt, equals total
2. An economy is in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently.a. According to the Solow model, what are the effects on steady-state capital per worker, output per worker, consumption per worker, and the
1. According to the Solow model, how would each of the following affect consumption per worker in the long run (that is, in the steady state)? Explain.a. The destruction of a portion of the nation’s capital stock in a war.b. A permanent increase in the rate of immigration (which raises the
7. Both population and the work force grow at the rate of n = 1% per year in a closed economy. Consumption is C = 0.5(1 - t)Y, where t is the tax rate on income and Y is total output. The per-worker production function is y = 81k, where y is output per worker and k is the capital–labor ratio. The
6. Consider a closed economy in which the population grows at the rate of 1% per year. The per-worker production function is y = 61k, where y is output per worker and k is capital per worker. The depreciation rate of capital is 14% per year.a. Households consume 90% of income and save the
5. An economy has the per-worker production function yt = 3k0.5 t where yt is output per worker and kt is the capital– labor ratio. The depreciation rate is 0.1, and the population growth rate is 0.05. Saving is St = 0.3Yt, where St is total national saving and Yt is total output.a. What are the
4. Use the data from Table 6.1 to calculate annual growth rates of GDP per capita for each country listed over the period 1950–2008. [Note: The annual growth rate z will satisfy the equation (1 + z) 58 = GDP2008/GDP1950. To solve this equation for z using a calculator, take logs of both sides of
3. For a particular economy, the following capital input K and labor input N were reported in four different years: Year K N 1 200 1000 2 250 1000 3 250 1250 4 300 1200 The production function in this economy is Y = K0.3 N0.7 , where Y is total output.a. Find total output, the capital–labor
2. Over the past twenty years an economy’s total output has grown from 1000 to 1300, its capital stock has risen from 2500 to 3250, and its labor force has increased from 500 to 575. All measurements are in real terms. Calculate the contributions to economic growth of growth in capital, labor,
1. Two economies, Hare and Tortoise, each start with a real GDP per person of $5000 in 1950. Real GDP per person grows 3% per year in Hare and 1% per year in Tortoise. In the year 2020, what will be real GDP per person in each economy? Make a guess first; then use a calculator to get the answer.
9. What types of policies are available to a government that wants to promote economic growth? For each type of policy you identify, explain briefly how the policy is supposed to work and list its costs or disadvantages. How does endogenous growth theory possibly change our thinking about the
8. What two explanations of productivity growth does endogenous growth theory offer? How does the production function in an endogenous growth model differ from the production function in the Solow mode
7. What effect should each of the following have on longrun living standards, according to the Solow model?a. An increase in the saving rate.b. An increase in the population growth rate.c. A one-time improvement in productivity.
5. According to the Solow model of economic growth, if there is no productivity growth, what will happen to output per worker, consumption per worker, and capital per worker in the long run?
2. Of the three sources of growth identified by growth accounting, which one is primarily responsible for the slowdown in U.S. economic growth after 1973? What explanations have been given for the decline in this source of growth?
1. According to the growth accounting approach, what are the three sources of economic growth? From what basic economic relationship is the growth accounting approach derived?
3. Using quarterly data since 1960, graph the following four series, expressing each as a percent of GDP: exports of goods (sometimes called merchandise), exports of services, imports of goods (sometimes called merchandise), and imports of services. What trends do you notice in U.S. exports and
2. Using quarterly data since 1961, graph output and absorption (both in real terms) in the same figure. In another figure, graph real investment, national saving, and the current account balance for the same period. (Use real GNP, which includes net factor payments, as the measure of output
1. A popular measure of a country’s “openness” to international trade is an index computed as the sum of the country’s exports and imports divided by its GDP. Calculate and graph the openness index for the United States using quarterly data since 1947. What has been the postwar trend? Can
8. The world is made up of only two large countries: Eastland and Westland. Westland is running a large current account deficit and often appeals to Eastland for help in reducing this current account deficit. Currently, the government of Eastland purchases $10 billion of goods and services, and all
7. The chief economic advisor of a small open economy makes the following announcement: “We have good news and bad news: The good news is that we have just had a temporary beneficial productivity shock that will increase output; the bad news is that the increase in output and income will lead
6. Analyze the effects on a large open economy of a temporary adverse supply shock that hits only the foreign economy. Discuss the impact on the home country’s national saving, investment, and current account balance—and on the world real interest rate. How does your answer differ if the
5. How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a large open economy?a. An increase in the domestic willingness to save (which raises desired national saving at any given real interest rate).b. An increase in the
4. The text showed, for a small open economy, that an increase in the government budget deficit raises the current account deficit only if it affects desired national saving in the home country. Show that this result is also true for a large open economy. Then assume that an increase in the
3. A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. Analyze the effects on the country’s current account balance, national saving, and investment, and on domestic and world real interest rates. Assume that, before the capital controls
2. For each transaction described in Analytical Problem 1 that by itself changes the sum of the U.S. current account balance, CA, and the U.S. capital and financial account balance, KFA, give an example of an offsetting transaction that would leave CA + KFA unchanged.
1. Explain how each of the following transactions would enter the U.S. balance of payments accounts. Discuss only the transactions described. Do not be concerned with possible offsetting transactions.a. The U.S. government sells F–16 fighter planes to a foreign government.b. A London bank sells
5. Consider a world with only two countries, which are designated the home country (H) and the foreign country (F). Output equals its full-employment level in each country. You are given the following information about each country: Home Country Consumption: CH = 100 + 0.5YH - 500rw Investment: IH
4. Consider two large open economies, the home economy and the foreign economy. In the home country the following relationships hold: desired consumption,Cd = 320 + 0.4(Y - T) - 200rw; desired investment, I d = 150 - 200r w; output, Y = 1000; taxes, T = 200; government purchases, G = 275. In the
3. In a small open economy, desired national saving, Sd = +10 billion + (+100 billion)rw; desired investment, I d = +15 billion - (+100 billion)rw; output, Y = +50 billion; government purchases, G = +10 billion; world real interest rate, rw = 0.03.a. Find the economy’s national saving,
2. In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6 billion, and net factor payments from abroad are zero. Desired consumption and desired investment are related to the world real interest rate in the following manner: World Real Interest Rate
1. Here are some balance of payments data (without pluses and minuses): Exports of goods, 100 Imports of goods, 125 Service exports, 90 Service imports, 80 Income receipts from abroad, 110 Income payments to foreigners, 150 Increase in home country’s ownership of assets abroad, 160 Increase in
9. Under what circumstances will an increase in the government budget deficit affect the current account balance in a small open economy? In the cases in which the current account balance changes, by how much does it change?
7. In a world with two large open economies, what determines the world real interest rate? What relationship between the current accounts of the two countries is satisfied when the world real interest rate is at its equilibrium value?
3. A U.S. publisher sells $200 worth of books to a resident of Brazil. By itself, this item is a credit item in the U.S. current account. Describe some offsetting transactions that could ensure that the U.S. current account and the capital and financial account balances would continue to sum to
1. List the categories of credit items and debit items that appear in a country’s current account. What is the current account balance? What is the relationship between the current account balance and net exports?
5.4 Describe the factors that affect saving and investment and determine the current account balance in a large open economy.
5.3 Describe the factors that affect saving and investment and determine the current account balance in a small open economy.
6. Graph real equipment and software investment and real structures investment since 1948. How has the relative emphasis on the two types of investment changed in the past three decades or so? Can you think of an explanation? (Hint: What is the most important new technology to be introduced in the
5. The chapter claims that interest rates tend to move together. Using monthly data since 1975, graph the interest rate on three-month Treasury bills, the yield on high-grade corporate bonds, the 30-year conventional mortgage rate, the prime rate charged by banks, and the yield on ten-year Treasury
4. Using quarterly data from 1947 to the present, graph residential fixed investment relative to GDP.a. Compare the graph of residential investment relative to GDP to a graph of the civilian unemployment rate. What happens to residential investment during recessions? In this respect, is
3. This problem asks you to calculate the actual (as opposed to the expected) after-tax real interest rate using annual data from 1961 to the present. The formula for the actual after-tax real interest rate is (1 - t)i - p, where i is the nominal interest rate, t is the tax rate, and p is the
2. The S&P 500 stock market index measures the total dollar value of a large set of stocks traded on the stock market. The real value of the S&P index, which measures the real value of the wealth represented by that set of stocks, is obtained by dividing the index by a measure of the price level,
1. Graph the index of consumer sentiment, using data since 1965. Can you pick out the recessions of 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007–2009? Construct scatter plots relating the consumer sentiment index to the growth rates of real consumption expenditures
7. (Appendix 4.A) Consumers typically pay a higher real interest rate to borrow than they receive when they lend (by making bank deposits, for example). Draw a consumer’s budget line under the assumption that the real interest rate earned on funds lent, rl , is lower than the real interest rate
6. (Appendix 4.A) Draw a budget line and indifference curves for a consumer who initially is a borrower. Be sure to indicate the no-borrowing, no-lending point and the optimal consumption point. Then show the effect on the budget line and the consumer’s optimal consumption of an increase in the
5. “A permanent increase in government purchases has a larger effect than a temporary increase of the same amount.” Use the saving–investment diagram to evaluate this statement, focusing on effects on consumption, investment, and the real interest rate for a fixed level of output. (Hint: The
4. Economists often argue that a temporary increase in government purchases—say, for military purposes— will crowd out private investment. Use the saving– investment diagram to illustrate this point, explaining why the curve(s) shift. Does it matter whether the temporary increase in military
3.a. Analyze the effects of a temporary increase in the price of oil (a temporary adverse supply shock) on current output, employment, the real wage, national saving, investment, and the real interest rate. Because the supply shock is temporary, you should assume that the expected future MPK and
2. A country loses much of its capital stock to a war.a. What effects should this event have on the country’s current employment, output, and real wage?b. What effect will the loss of capital have on desired investment?c. The effects on desired national saving of the wartime losses are
1. Use the saving–investment diagram to analyze the effects of the following on national saving, investment, and the real interest rate. Explain your reasoning.a. Consumers become more future-oriented and thus decide to save more.b. The government announces a large, one-time bonus payment to
9. (Appendix 4.A) A consumer lives three periods, called the learning period, the working period, and the retirement period. Her income is 200 during the learning period, 800 during the working period, and 200 again during the retirement period. The consumer’s initial assets are 300. The real
8. (Appendix 4.A) A consumer has initial real wealth of 20, current real income of 90, and future real income of 110. The real interest rate is 10% per period.a. Find the consumer’s PVLR.b. Write the equation for the consumer’s budget constraint (using the given numerical values) and graph the
7. Suppose that the economywide expected future marginal product of capital is MPKf = 20 - 0.02K, where K is the future capital stock. The depreciation rate of capital,d, is 20% per period. The current capital stock is 900 units of capital. The price of a unit of capital is 1 unit of output. Firms
6. An economy has full-employment output of 6000. Government purchases, G, are 1200. Desired consumption and desired investment are Cd = 3600 - 2000r + 0.10Y, and I d = 1200 - 4000r, where Y is output and r is the real interest rate.a. Find an equation relating desired national saving, Sd , to r
5. An economy has full-employment output of 9000, and government purchases are 2000. Desired consumption and desired investment are as follows: Real Interest Rate (%) Desired Consumption Desired Investment 2 6100 1500 3 6000 1400 4 5900 1300 5 5800 1200 6 5700 1100a. Why do desired consumption and
4. The Missing Link Chain-Link Fence Company is trying to determine how many chain-link fabricating machines to buy for its factory. If we define a chain-link fence of some specified length to be equal to one unit of output, the price of a new fabricating machine is 60 units of output, and the
3. You have just taken a job that requires you to move to a new city. In relocating, you face the decision of whether to buy or rent a house. A suitable house costs $300,000 and you have saved enough for the down payment. The (nominal) mortgage interest rate is 10% per year, and you can also earn
2. Hula hoop fabricators cost $100 each. The Hi-Ho Hula Hoop Company is trying to decide how many of these machines to buy. HHHHC expects to produce the following number of hoops each year for each level of capital stock shown.Number of Fabricators Number of Hoops Produced per Year 0 0 1 100 2 150
1. A consumer is making saving plans for this year and next. She knows her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10% between this year and next year. Currently, the consumer has no wealth (no money in the bank
10. Explain why the saving curve slopes upward and the investment curve slopes downward in the saving– investment diagram. Give two examples of changes that would shift the saving curve to the right, and two examples of changes that would shift the investment curve to the right.
9. Give two equivalent ways of describing equilibrium in the goods market. Use a diagram to show how goods market equilibrium is attained.
7. What is the desired capital stock? How does it depend on the expected future marginal product of capital, the user cost of capital, and the effective tax rate?
6. What are the two components of the user cost of capital? Explain why each is a cost of using a capital good.
5. What effect does a temporary increase in government purchases—for example, to fight a war—have on desired consumption and desired national saving, for a constant level of output? What is the effect on desired national saving of a lump-sum tax increase? Why is the effect of a lump-sum tax
3. Use the concepts of income effect and substitution effect to explain why the effect on desired saving of an increase in the expected real interest rate is potentially ambiguous.
4.1 Describe the factors that affect consumption and saving decisions.
3. Plot a graph of quarterly data for real GDP and fullemployment GDP from 1970 to the present. (In the FRED database, full-employment GDP is called Real Potential GDP.) Which variable is “smoother”? Can you pick out the dates of recessions (1973–1975, 1980, 1981–1982, 1990–1991, 2001,
2. Using monthly data from 1960 to the present, calculate and graph the total working-age population (called the civilian noninstitutional population), the number of employed workers, the number of unemployed workers, and the number of workers in the labor force. At the Web site of the Bureau of
1. Using the production function in Equation (3.2) and annual data for real GDP, the capital stock, and civilian employment from the sources in Table 3.1, calculate and graph U.S. total factor productivity for the period since 1960. Calculate and graph the growth rate of total factor
7. Self-employed workers in the United States must pay Social Security taxes equal to 10.4% of any income up to $110,100 in 2012. This income level of $110,100 is known as the “cap.” Income in excess of the cap is not subject to Social Security tax, so selfemployed workers with incomes
5. Suppose that under a new law all businesses must pay a tax equal to 6% of their sales revenue. Assume that this tax is not passed on to consumers. Instead, consumers pay the same prices after the tax is imposed as they did before. What is the effect of this tax on labor demand? If the labor
4. How would each of the following affect Helena Handbasket’s supply of labor?a. The value of Helena’s home triples in an unexpectedly hot real estate market.b. Originally an unskilled worker, Helena acquires skills that give her access to a higher-paying job. Assume that her preferences about
3. During the 1980s and 1990s the average rate of unemployment in Europe was high. Some economists claimed that this rate was in part the result of “real-wage rigidity,” a situation in which unions kept real wages above their market-clearing levels.a. Accepting for the sake of argument that
1.a. A technological breakthrough raises a country’s total factor productivity A by 10%. Show how this change affects the graphs of both the production function relating output to capital and the production function relating output to labor.b. Show that a 10% increase in A also increases the MPK
10. Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1900 are employed and each works 40 hours per week. Ten units of output are produced by each hour of labor.a. What is the total number of hours worked per week in the economy? What is the total output per
9. You are given the following data on the unemployment rate and output. Year 1 2 3 4 Unemployment rate 8% 6% 7% 5% Output 950 1030 1033.5 1127.5Fa. Assume that the natural rate of unemployment is 6% and that (Y - Y)/Y = 2(u - u‾). Find the fullemployment level of output in each year.b.
8. Use the data in Fig. 3.12 to calculate how many people become unemployed during a typical month. How many become employed? How many leave the labor force?
7. Consider an economy with 500 people in the labor force. At the beginning of every month, 5 people lose their jobs and remain unemployed for exactly one month; one month later, they find new jobs and become employed. In addition, on January 1 of each year, 20 people lose their jobs and remain
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