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business
foundations macroeconomics

Macroeconomics 6th Edition Andrew B. Abel, Ben S. Bernanke, Dean Croushore - Solutions

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.
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 GOP for the United Sta tes, Canada, and Germany (data can be found at www. oeed.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 GOP deflator). [Note that data on the S&P 500 index may be found atfi,wnce.yahoo.com.]
2. How does each of the following variables respond to the business cycle? Develop graphs to show your results and give economic explanations.a. Index of help-wanted advertising in newspapersb. Real importse. Federal government receiptsd. Housing startse. Capacity utilization rate, manufacturing f
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 (in
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.
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?Output, total hours worked, and average labor productivity all are
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 differ- ences in beliefs have for Keynesian and classical views about the usefulness of antirecessionary policies? About the types of shocks
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 fore- casting?
5 If you knew that the economy was falling into a reces- sion, what would you expect to happen to production during the next few quarters? To investment? To aver- age labor productivity? To the real wage? To the unem- ployment 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.
3. Graph the three-month Treasury bill interest rate, the ten-year government bond interest rate, and the CPI inflation rate on the same figure, using data since 1961. Make sure that the units are comparable.a. In general, how are changes in interest rates related to changes in inflation? Why?b. Is
2. Graph the CPI inflation rate, Ml 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 Ml growth and M2 growth, starting with
1. Graph the current yield curve (see the section, "Time to Maturity," p. 255 and the graph of the yield curve on p. 122), 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 (Box 7.1) 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 terms of cigarettes) in the POW camp?b. (More difficult) On some occasions
2 Figure 7.1 shows that, before the 1980s, Ml 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 Ml? 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. If
6 Suppose that the real money demand function is L( Y ) 0 _..::..:: 0 Y ,r+ne = - , r+ ne where Y is real output, r is the real interest rate, and It' 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
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 tha t the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment 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 = 500 + 0.2 Y - 1000i. Pa. 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
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 risk 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?
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 thatwe 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 econ- omy?
1 Define money. How does the economist's use of this term differ from its everyday meaning?
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 GOP per capita income should grow faster than
2. Graph the U.s. capital-labor ratio since 1948 (use private fixed assets from the BEA Web site, www.bea.gov, Table 6.1 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 postwar period? Now graph real output
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 GOP, the capital stock (private fixed assets from the BEA Web site, www.bea.gov, Table 6.1), and civilian employment. Assuming aK � 0.3 and aN � 0.7, find the
7. An economy has a per-capita production function y � Ak'hl-a, where A and a are fixed parameters, y is perworker 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 prod uction 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 terms, how
4 In a Solow-type economy, total national saving, S" is 5, � sY, - hK,. The extra term, -hK" 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 N, workers in year t, total government purchases are gN, . The government has a balanced budget so that its tax revenue in year t, T" 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. h. A permanent increase in the rate of immigration (which raises the overall
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 = S£ , 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 = 6£ , 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 prod uction function Y � 3k o .5 , , where y, is output per worker and k, is the capital-labor ratio. The depreciation rate is 0.1, and the population growth rate is 0.05. Saving is s, � O.3Y" where S, is total national saving and Y, is total output.a. What are
4 Use the data from Table 6.1 to calculate annual growth rates of GDP per capita for each country listed over the period 1950-2005. [Note: The annual growth rate z will satisfy the equation (1 + Z)55 � GDP200S /GDP,9 5 0' 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 1 2 3 4 K 200 250 250 300 N 1000 1000 1250 1200 The prod uction function in this economy is where Y is total output.a. Find total output, the capital-labor ratio, and output per
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. Calcula te the contributions to economic growth of growth in capital, labor, and
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 2000, 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 prod uction function in an endogenous growth model differ from the production function in the Solow model?
7 What effect should each of the following have on long-run 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.
6 True or false? The higher the steady-state capital-labor ratio is, the more consumption each worker can enjoy in the long run. Explain your answer.
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?
4 Explain what is meant by a steady state. In the Solow model, which variables are constant in a steady state?
3 How did technology increase U.S. economic growth in the 1990s?
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 GOP: 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 GOP. Calculate and graph the openness index for the United States using quarterly data since 1947. What has been the postwar trend? Can you
8. The world is made up of only two large countries: Eastland and Westland. Westland is running a large current account defici t 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
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 adverse
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?
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 t.he 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 yen
6 A small island nation is endowed with indestructible coconut trees. These trees live forever and no new trees can be planted. Every year $1 million worth of coconuts fall off the trees and can be eaten locally or exported to other countries. In past years the island nation ran current account
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 + 0.5Y H - 500y" 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 + O.4(Y - T) - 200y"; desired investment, Id = 150 - 200y"; 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)y"; desired investment, Id = $15 billion - ($100 billion)y"; output, Y = $50 billion; government purchases, G = $10 billion; world real interest rate, y"= 0.03.a. Find the economy's national saving, investment,
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 Desired Desired
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
10 What are the twin deficits? What is the connection between them?
9. Under what circumstances will an increase in the gov- ernment budget deficit affect the current account bal- ance in a small open economy? In the cases in which the current account balance changes, by how much does it change?
8. How does an increase in desired national saving in a large open economy affect the world real interest rate? How does an increase in desired investment affect it? Why do changes in desired saving or investment in large open economies affect the world real interest rate but changes in desired
7. In a world with two large open economies, what determines the world real interest rate? What rela- tionship between the current accounts of the two countries is satisfied when the world real interest rate is at its equilibrium value?
6. Generally, what types of changes in desired saving and desired investment lead to large current account deficits in a small open economy? What factors lead to these changes in desired saving and desired investment?
5. Explain why, in a small open economy, (a) national saving does not have to equal investment, and (b) output does not have to equal absorption.
4. How do a country's current account and capital and finan- cial account balances affect its net foreign assets? If country A has greater net foreign assets per citizen than does coun- try B, is country A necessarily better off than country B?
3 An American 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
2 What is the key difference that determines whether an international transaction appears in the current account or the capital and financial account?
1 List the categories of credit items and debit items that appear in a country's current account. What is the cur- rent account balance? What is the relationship between the current account balance and net exports?
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 yield on municipal bonds, the interest rate on FHA mortgages, the prime rate charged by banks, and the
4. Using quarterly data from 1947 to the present, graph residential fixed investment relative to GOP.a. Compare the graph of residential investment relative to GOP 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 after-tax real interest rate (as opposed to the expected rate) using annual data from 1961 to the present. The formula for the actual after-tax real interest rate is (1 - t)i - It, where i is the nominal interest rate, t is the tax rate, and It is
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,

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