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foundations macroeconomics
Macroeconomics 10th edition David C. Colander - Solutions
Your textbook points out that GDP fails to recognize much of the work done in the home, largely by women. Most estimates assign that work great economic value. For instance, one measure, developed by the UN’s International Training and Research Institute, calculates that counting unpaid household
Austrian economist Murray Rothbard has argued that government intervention during 1929 made what could have been a 1-year recession set off by the stock market crash into a 12-year depression. He believed that by creating confusing signals, government intervention kept investors from gaining
The Genuine Progress Indicator is an alternative measure to economic activity.a. Is the Genuine Progress Indicator a subjective measure of the economy? Explain your answer.b. Is GDP a subjective measure? Explain your answer.
When is the multiplier model more appropriate: for small or large changes in aggregate demand?
Traffic engineer Hans Monderman has shown that traffic flows can be made safer and flow better if the number of road signs is reduced and, in many types of intersections, eliminated altogether. What relevance do his insights about traffic flows have for macroeconomic policy? (Austrian)
According to Keynesians how could the economy’s output deviate from its potential?
In the 1950s, Michael Hubert King, an oil geologist, mathematically determined that when 50 percent of oil reserves have been extracted, annual oil output would inexorably decline. He looked at the rate of oil discovery in the United States and predicted that domestic oil production would peak in
What are induced and autonomous expenditures at point A in the accompanying graph? 4,000 3,000 AE 2,000 1,000 Real income Real expenditures 1,000 2,000 3,000 4,000
The president returns to you and tells you that instead of changing taxes, he wants to achieve the same result by increasing government expenditures. What policy would you recommend?
During the Great Depression, Norman Cousins made the following remark: "There are approximately 10,000,000 people out of work in the U.S. today. There are also 10,000,000 or more women married and single who are job holders. Simply fire the women, who should not be working anyway, and hire the men.
Why might deflation be a problem for an economy?
Post-Keynesian economist Hyman Minsky predicted many of the problems that have recently befallen the U.S. economy. Given that he was right and conventional macroeconomists were wrong, why do textbooks continue to present the conventional macro analysis, rather than present the Post-Keynesian macro
What happens to the aggregate expenditures curve when autonomous expenditures fall?
When the federal government uses expenditures to stimulate the economy, it changes not only the present but the future as well. Use the AS/AD model and the production possibility curve to explore the probable near-term and long-term consequences of three alternative stimulus options: medical care
Why does the paradox of thrift suggest that government needs to intervene in a recession?
Draw an AS/AD diagram from the Keynesian viewpoint. Assume the initial equilibrium in your diagram is just at the level of potential output. Then reduce the level of aggregate demand in your diagram. Now stare at this diagram.a. Can you identify the excess capacity or depression in the diagram and
One remarkable thing about U.S. households is how little they save. The U.S. personal savings rate through the first five months of 2007 was negative. This negative savings rate seems to be the product of increased borrowing by poorer households, reduced savings by richer households, and the
Are inventories building up at levels of output above or below equilibrium output? Explain your answer.
Coaxing spending out of the private sector, especially investment spending, has never been an easy matter. What persuades investors to part with their money? Economist Stephen Fazzari provided one answer to that question in his study of 5,000 U.S. manufacturing firms. Fazzari found that interest
What happens to equilibrium income when the marginal propensity to expend rises?
What is equilibrium income if the aggregate expenditures function is AE = 300 + .4Y?
What are two factors that cause the SAS curve to shift?
Congratulations yet again. You’ve just been appointed chairman of the Council of Economic Advisers in Textland. You must rely on your research assistant for the specific numbers. He says income is $50,000, mpe is .75, and the president wants to raise output by $2,000. a. Advise him.b. Your
If the multiplier model multiplies the effect of initial changes in autonomous expenditures, how can it also be a model of dampened fluctuations?
How does the permanent income hypothesis affect the multiplier model? Why?
Capitalism was a derogatory term coined by Karl Marx to deride the riches of those who accumulated capital. He said that the accumulation of capital helps the rich get richer while simultaneously making the poor get poorer.a. Have the poor become poorer under capitalism?b. Based on the growth model
Outline some of the benefits and costs to society when it experiences growth.
Ecological economists believe that economic possibilities are constrained by natural laws (for example, the laws of thermodynamics, biological assimilation, and the limiting factor). Unlimited material growth from a finite resource base—spaceship earth—is therefore impossible. How many
Many Keynesians believe the best way to deal with growth is to have government promote an industrial policy that focuses on the development of technological change using tax credits, government research funding, and the transfer of technological knowledge from the military to the civilian sector.a.
There is a furious debate among economists about the relationship between equality (or inequality) and economic growth. Based on the observation that developing countries often experience increasing inequality during their initial periods of rapid growth, some economists emphasize the role of
Who most likely worked longer to buy a dozen eggs: a person living in 2017 or a person living in 1910? Why?
Christians believe that everything ultimately belongs to God. Is that belief consistent with economists' belief that property rights are necessary for growth? (Religious)
On what law of production did Thomas Malthus base his prediction that population growth would exceed growth in goods and services?
Classical growth theory and new growth theory both contribute to economists’ understanding of how the sources of growth lead to economic growth.a. How are they the same?b. How do they differ?
What are spillover effects and how do they affect growth?
What are network externalities and how do they lead to growth?
In the early 20th century worker productivity in the Horndal iron works plant in Sweden increased by 2 percent per year over a 15-year period even though the firm did not invest in new capital. What might be the cause for the increase in productivity?
England once offered a prize to the person who invented an accurate clock that could be used on a ship. England then made the technology freely available. Do such policies lead to greater growth than leaving innovation to the market? Defend your answer.
Money is to the economy as oil is to an engine. Explain.
If the government prints new $1,000 bills and gives them to all introductory students who are using the Colander text, who incurs a financial liability and who gains a financial asset?
If dollar bills (Federal Reserve notes) are backed by nothing but promises and are in real terms worthless, why do people accept them?
The U.S. government has a monopoly on U.S. dollars.a. Could money be supplied privately?b. Has money ever been supplied privately? If so, how do you suppose people knew its value? (Austrian)
About 30 U.S. localities circulate their own currency with names like “Ithaca Hours” and “Dillo Hours.” Doing so is perfectly legal (although by law they are subject to a 10 percent federal tax, which currently the government is not collecting). These currencies are used as payment for
The Federal Reserve’s Board of Governors is arguably the most powerful policy-making body in the United States.a. Since its inception, how many women have served on the Board of Governors?b. What do almost all of the current members of the Board of Governors have in common?
Economist Michael Bryan reports that on the island of Palau, the Yapese used stone disks as their currency. The number of stones in front of a person's house denoted how rich he or she was.a. Would you expect these stones to be used for small transactions?b. An Irish-American trader, David
Joe, your study partner, has just said that, in economic terminology, when he buys a bond he is investing. Is he correct? Why?
In Institutional economists’ view, money not only serves as a medium of exchange, a unit of account, and a store of wealth; it also operates as an idea that shapes human understanding and interaction. Construct a list of examples during a day’s interactions where money operates as an idea
For each of the following, state whether it is considered money in the United States. Explain why or why not.a. A check you write against deposits you have at Bank USA.b. Brazilian reals.c. The available credit you have on your MasterCard.d. Reserves held by banks at the Federal Reserve Bank.e.
U.S. paper currency is made with several features that are difficult to counterfeit, including a security thread, color shifting ink, micro printing, a portrait, a watermark, and a fine-line printing pattern. As duplication technology, however, continually improves and more and more counterfeits
The chapter talks about the role that depositors and banks play in the "creation" of money.a. Do you think this role is consistent with the view that the money supply is only determined exogenously by the central bank?b. How could depositors and banks endogenously determine the money supply?
What function is money serving when people compare the price of chicken to the price of beef?
How does inflation affect money’s function as a store of wealth?
While sharia (interest) is banned in Islam, profit sharing is not. An Islamically sound banking practice could be a system in which depositors deposited money under a principle of profit sharing and the bank provided funds on the same principle with a markup as payment for their financial
What are two components of M2 that are not components of M1?
Categorize the following as components of M1, M2, both, or neither.a. State and local government bonds.b. Checking accounts.c. Money market accounts.d. Currency.e. Stocks.f. Corporate bonds.
State the immediate effect of each of the following actions on M1 and M2:a. Barry writes his plumber a check for $200. The plumber takes the check to the bank, keeps $50 in cash, and deposits the remainder in his savings account.b. Maureen deposits the $1,000 from her CD in a money market mutual
Explain in words why the present value of $100 to be received in 10 years would decline as the interest rate rises.
A 6 percent bond will pay you $1,060 one year from now. The interest rate in the economy is 10 percent. How much is that bond worth now?
Assuming individuals hold no currency, calculate the money multiplier for each of the following reserve ratios: 5 percent, 10 percent, 20 percent, 25 percent, 50 percent, 75 percent, 100 percent.
If the U.S. government were to raise the reserve requirement to 100 percent, what would likely happen to the interest rate banks pay on deposits? Why?
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. If the bank keeps 5 percent of its money in reserves:a. How much money can the bank initially lend out?b. After this initial
True or false? Policy makers in practice use the money multiplier to determine the amount of reserves needed to achieve the desired money supply. Explain.
If financial institutions don’t produce any tangible real assets, why are they considered a vital part of the U.S. economy?
The financial sector channels saving into spending.a. What is the risk of the financial sector expanding the spending flow too much?b. What kept this from happening in the United States in from 2000 to 2007?
State whether the following is an example of the transactions, precautionary, or speculative motive for holding money:a. I like to have the flexibility of buying a few things for myself, such as a latte or a snack, every day, so I generally carry $10 in my pocket.b. I never know when my car will
If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer.
In what market are short-term interest rates determined?
Fisher Black, an economist who designed a famous options pricing model, argued that because of developments in financial markets, central banks would soon have no ability to control the economy with monetary policy, and that the price level would be indeterminant rather than determined by the money
The quotation at the beginning of this chapter, and those for almost all the chapters, is from a man not a woman.a. Does this suggest anything about the author's viewpoint or about the economics profession?b. Should we be concerned about the lack of quotations from women? (Feminist)
Monetary policy is difficult when interest rates are low. For example, in the early 2000s the Bank of Japan lowered the interest rate to 0.01 percent with little effect on investment.a. Why is it difficult for monetary policy to be effective when interest rates are very low?b. How might
Monetarists believe that money is neutral in that it has no real effect on interest rates, output, or employment. Keynes, alternatively, believed that money is not neutral in both the short and long runs. For Keynesians, money supply can affect real decision making, providing liquidity when firms
Why would a bank hold Treasury bills as secondary reserves when it could simply hold primary reserves—cash?
If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves?
What is meant by the Federal funds rate?
If the Federal Reserve announces a change in the direction of monetary policy, is it describing an offensive or defensive action? Explain your answer.
Some individuals have suggested raising the required reserve ratio for banks to 100 percent.a. What would the money multiplier be if this change were made? Assume people hold no cash.b. What effect would such a change have on the money supply?c. How could that effect be offset?
Congratulations! You have been appointed adviser to the Federal Reserve Bank.a. The Federal Open Market Committee decides that it must increase the money supply by $60. Committee members tell you the reserve ratio is 0.1. They ask you what directive they should give to the open market desk. You
The table below gives the Fed funds rate target at the end of each year shown.YearFederal Funds Target Rate15.00%25.2534.2540.25Using these figures, describe how the monetary policy directions changed from Year 1 through Year 4.
What is an inverted yield curve?
Are you more likely to see an inverted yield curve when the Fed is implementing contractionary or expansionary monetary policy?
Fill in the blanks in the following table: Expected Real Nominal Interest Rate Interest Rate Inflation 2 a. b. 3 4 3 C. d. ? 5 1
Why is the Fed’s role as lender of last resort an important function of the Fed?
Ron Paul, a 2012 and 2016 presidential candidate, believes that the Federal Reserve should be abolished and our monetary system should be replaced by a gold standard. How does the experience of the past decade reflect on that idea? (Austrian)
If a country goes bankrupt and cannot pay its debts, which of its responsibilities should take precedence: paying bondholders or paying the pensions of its employees?
What role did liquidity play in the financial crisis in 2008? What caused this lack of liquidity?
Hyman Minsky's theory of fluctuations in output in a capitalist economy was ignored by mainstream economics but has proven to be much closer to reality than are theories suggested by mainstream macroeconomists. What are some reasons why his theory was ignored? (Post-Keynesian)
If the U.S. economy were to go into another financial crisis and additional monetary stimulus were needed to prevent a financial collapse, what measures would you suggest the government take?
What is the role of extrapolative expectations in increasing the price level and creating an asset price bubble?
Post-Keynesian macroeconomist Paul Davidson has argued that the central characteristic of the Keynesian view of markets is nonergodicity, which in simple terms implies the lack of an ability to know or forecast the future. How does nonergodicity undermine the efficient market hypothesis?
If asset markets aren't efficient, then it should be possible for investors to consistently make money by betting that the price of an asset will return to its "correct" value. That doesn't seem to be the case. Does that suggest that the efficient market hypothesis is correct?
If you invest $100 in a stock, borrowing 90 percent of the $100 at 10 percent interest, and the stock price rises by 20 percent, what is the return on your investment?
If Greece makes its bonds legal payment for taxes, it will be able to sell all the bonds it wants to without worrying about discounts. What prevents the Greek government from following this solution? (Post-Keynesian)
Why did the Fed follow far more expansionary policy than the Taylor rule suggested?
Many of the regulators and overseers of the government bailout came from the same firms that brought about the crisis in the first place. Can we expect reasonable regulation when that is the case? (Radical)
If you had a son whom you had forbidden to drink and drive, threatening to throw him out of the house if he does drink and drive, do you throw him out of the house if he does so?
In the standard AS/AD model, what role does a financial bubble play in determining whether an economy exceeds potential output? Explain your answer.
What is the efficient market hypothesis and how does it relate to government regulation?
What is the moral hazard problem and how does deposit insurance lead to it?
What are three reasons why the Glass-Steagall Act became less and less effective?
What distinguishes credit easing from quantitative easing? What problem was each designed to address?
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