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foundations macroeconomics
Macroeconomics 10th edition David C. Colander - Solutions
What distinguishes operation twist from credit easing?
Demonstrate the different effects that quantitative easing and operation twist were expected to have on the yield curve. Explain your answer.
How was operation twist expected to avoid the criticisms of quantitative easing?
How would a precommitment policy address problems in the economy? What is the risk of such a policy?
Draw a short-run Phillips curve. What does it say about the relationship between inflation and unemployment?
If people’s expectations of inflation didn’t change, would the economy move from a short-run to a long-run Phillips curve?
If all currencies were on a gold standard, there would be no exchange rates between currencies and we would not face the difficulties presented by fluctuating exchange rates.a. What would be the benefit of having all currencies on a gold standard?b. What would be the cost? (Austrian)
According to economist Gary North in Priorities and Dominion: An Economic Commentary on Matthew, in the book of Matthew, Jesus teaches about the rate of exchange between earthly wealth and eternal wealth.a. Would Jesus argue for a high or low exchange rate for earthly riches? Explain your
During the 1995–96 Republican presidential primaries, Patrick Buchanan wrote an editorial in The Wall Street Journal beginning, “Since the Nixon era the dollar has fallen 75 percent against the yen, 60 percent against the mark.” What trade policies do you suppose he was promoting? He went on
Most traders in currencies are men.a. Why is this?b. Why has it remained even though there is supposed to be no discrimination in employment?c. The language of traders is often quite coarse; does this fact provide a possible answer to both a and b?
Nobel Prize-winning economist James Tobin has suggested that a method of decreasing unwanted sudden capital flows among countries would be to place a small tax on such flows. Post-Keynesian economist Paul Davidson argued against doing so because it won't solve the problem, suggesting that it is
Most economists favor lowering barriers to trade. But even among mainstream economists there is far less support for financial liberalization-the removal of government regulation of financial and capital markets-than for trade liberalization. "It is a seductive idea," says free-trader Jagdish
Dr. Dollar Bill believes price stability is the main goal of central bank policy. Is the doctor more likely to prefer fixed or flexible exchange rates? Why?
Draw the schematics to show the effect of expansionary monetary policy on the exchange rate.
If U.S. inflation is 4 percent, Japan’s inflation is 1 percent, and the nominal U.S. dollar exchange rate falls by 3 percent relative to the yen, what happens to the real exchange rate?
How is forcing governments to make adjustments to meet their international problems both an advantage and disadvantage of fixed exchange rates?
In the early 2000s, China was running a large current account surplus.a. What did this suggest about its financial and capital account?b. China's private balance of payments was in surplus. What does this suggest about its exchange rate regime?c. What actions was the Chinese central bank likely
What are four economic advantages of the euro for Europe?
What are three disadvantages of the euro for Europe?
Is it better to have a low or high exchange rate?
In developed countries, the usefulness of an activist monetary and fiscal policy is highly questionable. Why is it even more questionable in developing countries? (Austrian)
Is it better to have a trade deficit or a trade surplus?
The United States has been consuming more than it has been producing for more than 30 years, making it the largest debtor nation in the world. Deuteronomy 28:43–44 warns against such indebtedness to foreigners. “Aliens residing among you shall ascend above you higher and higher, while you shall
Why can’t a country target both its interest rate and exchange rate?
In 2015, the U.S. federal budget deficit (how much greater government spending was than taxes) was about 2.5 percent of GDP. That year the trade deficit (how much imports surpassed exports) was about 3 percent of GDP. Also in 2015, investment in the U.S. economy exceeded U.S. private savings by
What effect on the U.S. trade deficit would result if China and Japan ran an expansionary monetary policy?
The U.S. trade deficit was about $531 billion, or 3 percent of GDP, in 2015. Some economists argue that this gap is truly frightening because the current account deficit is the amount of money the United States must attract from abroad. If foreign investors stop buying U.S. bonds and stocks, then
What would be the effect on the U.S. trade deficit if China and Japan ran a contractionary fiscal policy?
What has happened to world income inequality is a matter of sharp dispute. Many analysts claim that world incomes converged in the second half of the 20th century, leading to a sharp reduction in world inequality. Many others report that the gap between the poorest and the richest people and
Draw the schematics to show the effect of expansionary monetary policy on the trade deficit.
Congratulations! You’ve been hired as an economic adviser to the government of a country that has perfectly flexible exchange rates. State what monetary and fiscal policy you might suggest in each of the following situations, and explain why you would suggest those policies.a. You want to lower
Is the United States justified in complaining about Japan’s and China’s use of an export-led growth policy? Why or why not?
Countries must choose an exchange rate policy.a. Why is currency stabilization limited through direct purchases?b. What are a country’s other options?
Why are there strong political forces to manage exchange rates?
Why don’t foreign countries want the U.S. dollar to fall precipitously?
International issues aside, what limits government’s ability to undertake monetary or fiscal policy? (Austrian)
"Budget deficits should be avoided, even if the economy is below potential, because they reduce saving and lead to lower growth." Does this policy directive follow from the short-run or the long-run framework? Explain your answer.
To help understand the distributional consequences of the tax cuts advocated by many conservative politicians, answer the following:a. What income groups have the largest marginal propensity to consume: high or low income?b. If your goal were to minimize the deficit cost of a tax stimulus, who
After President George W. Bush’s election in 2000, he proposed cutting taxes.a. Would you consider that proposal to follow the short-run or long-run framework, or a combination of the two?b. From your response, how should President Bush have dealt with the U.S. deficit to be consistent with the
Suppose a country's debt is $630 billion before Year 1. Using the information below (in billions of dollars), fill in the blanks for its budget balance and debt for the following years: Revenues Expenditures Debt $203 $202 $. Year 1 Year 2 215 626 Year 3 227 221 230 Year 4 619 Year 5 258 243
Over 40 countries in the world now report what has been called a “women’s budget,” analyzing public expenditures and revenue from a gender perspective.a. What might be an example of a gender effect on the expenditure side of the budget?b. On the revenue side?c. Why are these effects important
What are the two ways government can finance a budget deficit?
If the structural budget deficit is $100 billion and the actual deficit is $300 billion, what is the size of the cyclical deficit?
If the actual budget deficit is $100 billion, the economy is operating $250 billion above its potential, and the marginal tax rate is 20 percent, what are the structural deficit and the cyclical deficit?
How would your answer to question 9 differ if you knew that expected inflation was 15 percent?
If all of the government’s debt were internal, would financing that debt make the nation poorer?
Why is who holds the debt an important factor when comparing debt-to-GDP ratios among countries?
How can a debt that is too high lead to an even higher debt?
What might keep the Fed from buying up more bonds if the debt gets too high?
According to the Ricardian equivalence theorem, what is the effect of each of the following on output in the economy? Explain your answers.a. Government pays for an increase in spending by raising taxes.b. Government pays for an increase in spending by issuing bonds.c. What is the implication of
During the Depression, unemployment rose to 25 percent. The AS/AD model presented in the book suggests that a fall in the price level would have solved the problem. Keynesians are not so convinced and believe that a fall in the price level would have lowered income, which would have shifted
In this chapter you learned the importance of automatic stabilizers. At the state level, “rainy-day” funds play a crucial role in maintaining services when state revenues decrease during a recession. While this may appear to be a rational institution, institutions are social constructs and what
The economy has often been far from full employment.a. What would it take to run a regime of continuous full employment?b. How would the establishment of a full-employment regime alter the relations between workers and capitalists?c. Is such a regime politically feasible? (Radical)
President Bill Clinton's policies were designed to reduce the deficit but increase employment.a. Why would such a policy not fit well in the multiplier model?b. Explain in words how such a policy might achieve the desired effect.c. Graphically demonstrate your answer in b.d. What data would you
It is often argued that saving should be encouraged. If one believes in the free market, does encouraging saving make sense? Why or why not? (Austrian)
If productivity growth is 3 percent and wage increases are 5 percent, what would you predict inflation would be?
Any policy has both advantages and disadvantages, implying that policy makers must weigh both the advantages and disadvantages when deciding what policy to follow.a. Does society share absolute, objective values that guide the weighing of the alternatives?b. What role should religious beliefs play
Demonstrate the effect of the following on output and the price level in the AS/AD model:a. Full crowding out.b. Partial crowding out.c. Full crowding out and private investment is more productive than government investment.
Suppose one economist believes the target rate of unemployment is 4.5 percent while another believes it is 5.5 percent. By how much would you expect their estimates of potential GDP to differ in a $10 trillion economy?
Why has the assumption that the size of the debt doesn’t matter been called into question even more fervently than ever?
How can automatic stabilizers slow an economic recovery?
If you had no income and no one to help you, could you create a job for yourself? How would you go about doing it?
What happened to the duration of unemployment during the 2008/2009 recession and what is the likely reason?
Some economists believe the target rate of unemployment is about 6 to 7 percent. William Vickrey, a Nobel Prize- winning economist, argued that the target unemployment rate should be seen as being between 1 percent and 2 percent. Only an unemployment rate that low, he argued, would produce genuine
Does government owe everyone a job who wants one?
During the past few recessions, government ran expansionary policies, but the duration of unemployment has risen. What does this suggest about the change in structural unemployment over this time period?
The text treats the unemployed as if both sexes are equally considered full persons within a capitalist market economy. The historic public/private split of employment for women, however, denies women full rights in the marketplace. Evidence of this is that women earn about 85 percent of what men
What could government do to reduce structural unemployment?
If unemployment rises by 2 percentage points, what will likely happen to output in the United States relative to its growth trend? (Use Okun's rule of thumb.)
The type of employment available to different workers is inherently tied to income distribution. With globalization, the market favors those with access to higher education, which tends to be those people with accumulated family assets as well as inherent ability.a. Is the income distribution
What changes in the guaranteed program might be made to fit your moral sensibilities about governmental responsibilities?
Categorize each of the following as cyclical or structural unemployment:a. An autoworker is laid off during a recession until car sales pick up.b. A steelworker loses his job because steel is now produced in foreign countries with lower wages.c. A compositor loses her job because the work is now
Economists such as Frédéric Bastiat believed in natural liberty, which is based on a belief that a God has naturally ordered the world for the benefit of all. According to these economists, saving was a virtue because it potentially led to increased consumption in the future, a belief that Keynes
What changes in the guaranteed program might be made to make it more politically acceptable?
What is a reservation wage and how is it related to structural unemployment?
Name four reasons why the target rate of unemployment has increased over the past 40 years.
Why does the concept of unemployment involve normative judgments?
Will someone who believes that unemployment is an individual’s responsibility believe that the current measure of unemployment over-or underestimates the level of unemployment? Explain.
College degrees are usually associated with higher wages. Does that association mean that what one learns in college increases college students’ productivity?
Since a jobs program puts people to work, would it impose costs on society?
How does the safety net in the proposed guaranteed jobs program differ from the current safety net?
In what ways would the guaranteed jobs program outlined in the text be more expensive if it provided useful jobs for society?
Why does the author suggest that students be ineligible for the guaranteed jobs program even though many students are in need?
According to the quantity theory of money, the government controls inflation through the supply of money.a. Does that mean that the government can stop inflation if it wants to do so?b. What reasons might government have not to stop inflation? (Austrian)
What is asset price inflation? Why does it matter?
The book of Leviticus in the Bible states, "You shall do no injustice in judgment, in measurement of length, weight, or volume. You shall have just balances, just weights, a just ephah, a just hin. I am the Lord your God, who brought you out of the land of Egypt." When the Israelites began using
When it comes to understanding inflation, and even other aspects of the business cycle, ecological economists will often emphasize the role of energy, and especially oil, in shaping macroeconomic outcomes. To decide how important oil prices are in shaping macroeconomic outcomes such as inflation,
What are three costs of inflation that economists focus on?
True or false? The short-run Phillips curve is just a figment of economists’ imagination.
This chapter discusses causes of inflation.a. Do you believe the cause of inflation is to be found in the institutional structure of wage- and price-setting institutions or in excess demand for goods and services?b. If you believe inflation is caused by wage- and pricesetting institutions, what
When would policy makers change from an inflation target being an upper bound to a target to aim for? When would this policy fail to produce the expected result?
Wayne Angell, a former Fed governor, stated in an editorial, "The Federal Reserve should get back on track getting inflation rates so low that inflation would no longer be a determining factor in household and business investment decisions." Mr. Angell believes inflation lowers long-term growth.a.
Radicals see the trade-off between inflation and unemployment as one that pits inflation-phobic investors-out to protect the value of their assets and the corporate profits in which they invest-against workers who are out for employment and wage growth. Lower unemployment rates and more jobs
How does inflation allow central banks to run more expansionary monetary policy?
What is meant by a placebo effect and how is it related to unconventional monetary policy?
Why do lenders tend to lose out in an unexpected inflation?
What are the benefits of a small amount of inflation?
What are the distributional effects of asset inflation caused by an increase in the money supply?
Why have policy makers changed their focus from keeping inflation from getting too high to keeping inflation from getting too low?
Why is a zero interest rate lower bound important to policy making?
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