Macroeconomics 6th Edition Olivier Jean Blanchard - Solutions

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Why is the Beveridge curve downward sloping and why is the WS = PS curve upward sloping in the vacancy-unemployment diagram?
Compare the role played by outsiders in the insider-outsider model with that played by the long-term unemployed in the unemployment persistence model.
Why is equilibrium employment lower when wages are set at industry rather than at firm level? How would you expect this relationship to be affected-if at all-if the economy in question is open to international trade?
Explain how the WS curves and the labour supply curve are derived in Fig. 4.5.
In section 2, the prisoners' dilemma game is explained. Construct an example to show how this game can be applied to a union wage accord.
How might the observation that the productivity trend since 1820 has been upwards in Europe and that the trend of the unemployment rate has not been downward be reconciled with the WS-PS model?
Make a scatter-plot using the data on trade union membership density and collective bargaining wage coverage in the appendix Table 4.1. What does the plot show? Is there any change in the relationship over time? Can you detect any regional patterns?
Explain what is meant by the tax wedge. Does a change in the tax wedge affect inflation?
How should the central bank respond to the collapse of a wage accord? Show the path of real wages, inflation, and unemployment over time as the economy adjusts to this shock.
What is a wage accord and why might it collapse?
Inflation is always and everywhere a monetary phenomenon.' 'Inflation flects supply-side behaviour.' 'An expansionary fiscal policy leads to inflation. Take ch statement separately and provide an evaluation of it. Would you conclude that to control inflation should be in the hands of a committee
In medium run equilibrium, the real rate of interest depends on fiscal cy but not on monetary policy.' Do you agree? Does your answer apply to the minal interest rate?
Would you attribute the disappearance of the original stable Phillips e to a change in the behaviour of workers or of the government?
What factors influence the change in the unemployment rate associated with a given fall in output below trend? If the economy is experiencing rapid structural ange, with employment shifting to different sectors (e.g. from 'old economy' to 'new onomy ones), how would you expect this to affect your
What are Fiscal and monetary policy conflicts
What factors affect the speed with which the economy returns to medium-run equilibrium following a negative aggregate demand shock in the IS/LM model?
If the central bank's monetary policy is an interest rate based rule, what determines the money supply? What happens to the economy if there is a sudden fall in the demand for money?
Explain what is meant by the sacrifice ratio in general and rank the alternative policies in question 5 in terms of the sacrifice ratio involved.
Make a case for the use of an interest rate based monetary policy rule by evaluating the pros and cons of two other monetary rules: (a) maintaining a constant nominal interest rate and (b) maintaining a constant growth rate of the money supply.
Following a temporary negative aggregate demand shock, why does unemployment go below the ERU before the economy returns to medium-run equilibrium?
Describe what happens in the economy following an inflation shock in the following cases: (a) the central bank cares only about avoiding increased unemployment; (b) the central bank cares only about its inflation larget; (c) the central bank cares about both increased unemployment and about
Explain the Lucas supply equation stating clearly the role that is played by imperfect information. Contrast Lucas's model with Friedman's model in the Appendix where imperfect information also plays a role.
Explain carefully all the assumptions that are being made in the claim that disinflation is costly'.
Give two examples of behaviour that are consistent with the hypothesis of rational. expectations but not with that of adaptive expectations and vice versa. How can one decide which hypothesis applies in a particular instance of behaviour?
Use a diagram with the labour market in the upper panel and the inflation-output diagram beneath and show Phillips's long-run trade-off between inflation and unemployment. Explain what happens if the government decides to choose a lower unemployment rate on the basis that it is prepared to accept a
Keynes emphasizes the weakness of the self-equilibrating forces in a capitalist economy and highlights the role of government in stabilization. Milton Friedman argues that Keynes's influence on public policy was enormous:
Real wages are mildly procyclical in most industrial economics. Explore which models of wage and price formation and which sources of fluctuations in economic activity are consistent with this observation.
Use the IS/LM model and compare the short-run implications of the use of two different monetary policies. Policy 1 is to keep the interest rate constant and Policy 2 is to keep the money supply constant. Choose a private sector 'IS' shock that depresses the level of equilibrium output. Compare the
Suppose that there is a large temporary fall in private sector investment. What would you expect the effect of this to be? What would you expect to determine how long the effect lasts?
In an IS/LM model of the economy, why does the slope of the IS curve matter for macroecononomic policy analysis? Choose a policy instrument that will change the slope of the IS and explain why. What can you conclude from this example about how fiscal and monetary policy may interact?
Define Monetary policy and time inconsistency
Explain why the long-run aggregate supply curve is vertical but the short-run one is not.
Does the aggregate demand curve for the whole economy slope down for the same reason as does the demand curve for DVDs?
In the context of tripartite negotiations between unions, employers' associations, and the government, union bosses strike a deal whereby they agree to make lower wage demands. Show the effect in the WS/PS diagram if they do so in return for: (a) a reduction in the length of the working week so
Show the likely effects on price- and/or wage setting behaviour as reflected in the WS/PS diagram of the following: (a) workers become more worried about losing their jobs at any given level of employment the government intervenes to protect domestic firms from foreign competition (c) higher social
What are the similarities and differences between the characteristics of labour market equilibrium under perfect as compared with imperfect competition?
Discuss the plausibility of the assumptions in the previous question. Discuss the implications of the timing assumptions for the way real wages move in response to fluctuations in aggregate demand.
What is being assumed about the timing of wage setting and price setting that enables us to say that the economy is always on the PS curve but only on the WS curve in a medium-run equilibrium? What timing assumptions would deliver the sult that the economy is always on the WS curve but only on the
Why is the WS curve upward sloping (r) when wages are set by unions and (b) when wages are set by firms?
Provide two different explanations for why the PS curve may be flat.
Briefly explain why it is the real interest rate that is relevant for the IS curve and the nominal interest rate for the LM curve.
What is the LM curve and why does it slope upward? What happens to the LM curve when (a) there is an increase in the demand for money (at a given level of income and interest rate); (b) the interest elasticity of the demand for money rises?
Assume that the interest rate is constant. Explain in words what happens when there is an increase in government spending. In so doing, explain the concept of the multiplier.
What is the IS curve? Why does it slope downward? Why does an increase in vemment spending shift it to the right? What happens to the IS curve when the marginal propensity to consume rises? [Explain using words and either diagrams or equations; see the Appendix for the equations.]
In the early 1990s, communist governments fell across Central and Eastern Europe and the Soviet Union. The state control over the economy ended and market mechanisms were introduced. A widely held view at the time was that the palence of inefficiency and lack of dynamism in the planned economies
Why might the words of macroeconomic policy-makers be as important as their deeds?
'A rise in savings reduces GDP.' 'A rise in savings raises living standards but not the long-run growth rate.' 'A rise in savings raises the growth rate permanently.' Explain in words the logic of each of these statements.
What is the connection between the concept of diminishing returns to capital and the hypothesis that poor countries grow faster than rich ones?
How would you explain to a non-economist the relationship between the rate of unemployment, the rate of inflation, and the central bank's monthly decision about whether to change the interest rate?
Comment on three aspects of the lower panels of Fig. 1.4.
Comment on three aspects of Table 1.1.
What is meant by the statement that in a competitive economy, unemployment is voluntary? Explain how the labour market can be in equilibrium although there is involuntary unemployment.
Provide a concise summary of the evolution of the unemployment rate in the United States as compared with that in one European economy from 1960 to 2000.
Comment on three aspects of Fig. 1.1.
Explain to a non-economist the difference between 'aggregate supply' and 'aggregate demand'.
Explain to a non-economist the difference between 'consumption' and 'investment'.
How and why does the economy tend to adjust from its current position towards the medium-run equilibrium and what factors influence the speed and smoothness of adjustment?
What determines the level of employment in the economy at which inflation is stable? We call this the medium-run equilibrium level of employment.
How is the actual or current level of output and employment in the cconomy determined?
How do institutions like unions or an independent central bank affect inflation or unemployment?
If the internet and globalization affect product market competition, what would we expect to be the macroeconomic impact?
What is the impact on output and inflation of changes in government policy such as changes in taxation or government expenditure or a change in monetary policy or in employment regulation?
How does a change in consumer confidence due to a collapse in the stock market affect the economy?
Why are some countries catching up with the leaders and others not?
Why are some countries rich and others poor?
How do trade, international financial markets, and exchange rates affect employment and inflation?
Why is unemployment higher for lengthy periods of time in some countries than in others?
How does government policy affect inflation and unemployment?
Why does inflation occur and when should we worry about it?
How are the levels of output and employment determined and why do they fluctuate?
In the neoclassical synthesis model (AS–AD), disinflationary demand management policiesa) Achieve a lower rate of inflation without causing a decrease in outputb) Reduce output but have no initial effect on the inflation ratec) Require an increase in government spendingd) Require an increase in
The Philips curve showsa) An inverse relationship between the real and nominal wageb) An inverse relationship between the rate of inflation and the rate of unemploymentc) A positive relationship between the nominal wage and the rate of unemploymentd) A positive relationship between the rate of
When the AS curve is positively sloped, continuous increases in the money supply will result ina) No change in the price level and proportional increases in real outputb) No change in real output and proportional increases in the price levelc) An increase in the price level and real outputd) An
The ‘Keynesian’ version of the AS curve differs from the Neoclassical AS curve up to the point of full employment becausea) Keynes assumed sticky wages to be the main cause of a vertical AS curveb) The AS curve is vertical because money wages are rigid downwardsc) The AS curve is upward sloping
The AD curvea) Slopes downwards because as prices fall, the real money supply expands thus causing the interest rate to fall which in turn stimulates investment and hence outputb) Slopes downwards because of the Keynes effectc) Consists combinations of output and the general price level for which
In a closed-economy Keynesian IS–LM model, under which set of assumptions will fiscal policy be more effective at increasing the level of output if the economy is in recession?a) An elastic IS curve and an elastic LM curveb) An elastic IS curve and an inelastic LM curvec) An inelastic IS curve
Which if the following is true in the neoclassical IS–LM model?a) Monetary policy and fiscal policy only have a lasting impact on the interest rateb) The share of government is always the lowest component of aggregate demandc) Increased demand will result in higher prices and the interest rated)
An increase in taxation in a Keynesian model will, for any given level of incomea) Reduce consumption by an equivalent amountb) Reduce savings by more than the tax increasec) Reduce the marginal propensity to consumed) Result in all of the abovee) Result in none of the above
The interest rate in the IS–LM modela) Is the profit a bank makes from lending moneyb) Is a reflection of expectations of future profitability of investment projectsc) Is determined by the supply and demand for loanable fundsd) Will be reflected in the coupon rate of new bonds issuede) All the
Keynesians believea) Supply creates its own demandb) The transaction demand for money is inversely related to incomec) An expansionary fiscal policy leads to some crowding out of private investmentd) All the abovee) None of the above
Which of the following is true?a) The Easterlin paradox means that as people become richer they become happier but that richer countries are less happy than poorer countriesb) Green accounting means that the output from firms using solar energy counts for more than firms using coalc) If the GDP
One difference between GDP and GNP is that:a) GDP eliminates net exports because it is measuring only domestic productionb) GDP eliminates imports because it is measuring only domestic productionc) GDP is production only by firms located within India’s boundaries even if they are foreign ownedd)
Imports are subtracted when summing the expenditure components of GDP:a) Because they constitute net foreign income earned abroadb) Because they are intermediate goods, not final goodsc) To avoid double countingd) To correct for the fact that the other components include purchases not produced in
Taxes, inflation, and home ownership In this chapter, we discussed the effect of inflation on the effective capital-gains tax rate on the sale of a home. In this question, we explore the effect of inflation on another feature of the tax code—the deductibility of mortgage interest.Suppose you have
Taxes, inflation, and home ownership In this chapter, we discussed the effect of inflation on the effective capital-gains tax rate on the sale of a home. In this question, we explore the effect of inflation on another feature of the tax code—the deductibility of mortgage interest.Suppose you have
6. Inflation targeting and the Taylor rule in the IS–LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y = C1Y - T2 + I1Y,r2 + G where r is the real interest rate.The central bank sets the nominal interest rate according to the
5. Suppose you have been elected to Congress. One day, one of your colleagues makes the following statement:The Fed chair is the most powerful economic policy maker in the United States. We should not turn over the keys to the economy to someone who was not elected and therefore has no
4. Inflation targets Consider a central bank that has an inflation target, *. The Phillips curve is given by pt - pt-1 = - a1ut - un2a. If the central bank is able to keep the inflation rate equal to the target inflation rate every period, will there be dramatic fluctuations in unemployment?b. Is
3. Taxes, inflation, and home ownership In this chapter, we discussed the effect of inflation on the effective capital-gains tax rate on the sale of a home. In this question, we explore the effect of inflation on another feature of the tax code—the deductibility of mortgage interest.Suppose you
2. Explain how each of the developments listed in (a) through(d) would affect the demand for M1 and M2.a. Banks reduce penalties on early withdrawal from time deposits.b. The government forbids the use of money market funds for check-writing purposes.c. The government legislates a tax on all ATM
1. Using the information in this chapter, label each of the following statements true, false, or uncertain.Explain briefly.a. The most important argument in favor of a positive rate of inflation in OECD countries is seignorage.b. The Fed should target M2 growth because it moves quite closely with
7. Consider an economy characterized by the following facts:i. The debt-to-GDP ratio is 40%.ii. The primary deficit is 4% of GDP.iii. The normal growth rate is 3%.iv. The real interest rate is 3%.
6. Ricardian equivalence and fiscal policy First consider an economy in which Ricardian equivalence does not hold.a. Suppose the government starts with a balanced budget.Then, there is an increase in government spending, but there is no change in taxes. Show in an IS–LM diagram the effect of this
5. Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, E. Suppose that financial investors worry that the level of debt is too high and that the government may devalue to stimulate output (and therefore tax revenues)to help pay down the debt. Financial
4. Assume that money demand takes the form MP= Y [1 - 1r + pe2]where Y = 1,000 and r = 0.1.a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, M>M, listed below.i. 25%ii. 50%iii. 75%b. In the medium run, pe = p
3. Consider an economy characterized by the following facts:i. The official budget deficit is 4% of GDP.ii. The debt-to-GDP ratio is 100%.iii. The nominal interest rate is 10%.iv. The inflation rate is 7%.a. What is the primary deficit/surplus ratio to GDP?b. What is the inflation-adjusted
2. Consider the following statement:“A deficit during a war can be a good thing. First, the deficit is temporary, so after the war is over, the government can go right back to its old level of spending and taxes. Second, given that the evidence supports the Ricardian equivalence proposition, the
1. Using information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Tax smoothing and deficit finance help spread the burden of war across generations.b. The government should always take immediate action to eliminate a cyclically adjusted
7. Games, precommitment, and time inconsistency in the news Current events offer abundant examples of disputes in which the parties are involved in a game, try to commit themselves to lines of action in advance, and face issues of time inconsistency. Examples arise in the domestic political
6. Deficit reduction as a prisoner’s dilemma game Suppose there is a budget deficit. It can be reduced by cutting military spending, by cutting welfare programs, or by cutting both. The Democrats have to decide whether to support cuts in welfare programs. The Republicans have to decide whether to

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Macroeconomics 6th Edition Olivier Jean Blanchard - Solutions

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