Macroeconomics 11th Edition Rudiger Dornbusch, Stanley Fisher, Richard Startz - Solutions

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5 What measure would best indicate if a country has experienced economic growth? A an increase in nominal GDP B an increase in price inflation C an increase in employment D an increase in real GDP 6 Labour force participation has risen in many countries. What is the most likely reason for this
4 Look at the labour market data below. Working population People employed People unemployed Millions 10 62 What is the unemployment rate and the participation rate? Unemployment Participation rate % rate % AB A 60% 40% 80% 20% C 20% 60% D 40% 60%
3 The table shows annual percentage changes in the consumer price index in a country.Year % change in CPI 2004 16.9% 2005 13.4% 2006 8.7% 2007 4.3% 2008 5.6% Which of the statements below about the price level is correct? A it increased over the period B it was stable over the period C it was at
2 What is most likely to cause demand-pull inflation? A an increase in saving B an increase in consumer spending C an increase in interest rates D an increase in taxes
1 What type of unemployment is associated with the economic cycle in an economy? A structural unemployment B frictional unemployment C seasonal unemployment D cyclical unemployment
6 Which of the following macro- economic policies involves the use of interest rates to control the level of demand in an economy? A fiscal policy B monetary policy C competition policy D trade policy
5 Which of the following is an indirect tax? A a tax on interest earned on B C S D savings a tax on company profits a tax on flight ticket sales a tax on gains from the sale of property
4 The table below compares income tax rates levied on different levels of income in 4 different countries. Which country has the most progressive income tax? Weekly income Tax rate % A B D $100 0% 35% 20% 25% $500 15% 30% 22% 25% $1000 25% 25% 25% 25%
3 Which of the following policy instruments would you advise a government to use to help lower and stabilise price inflation? A lower interest rates B increase taxes on goods and services C increase income taxes D increase public spending on welfare benefits
2 Which of the following taxes is an example of a direct tax? A a $10 tax on imported televisions B a 20% tax on the price of clothes C a 5 tax on a gallon of petrol D a 30% tax on the earnings of a taxi driver
1 A government decides to expand demand in the economy to boost output and employment. Which of the following policy measures should it use? A increase taxes and interest rates B cut public spending and raise taxes C reduce taxes and interest rates D reduce the national debt
7 At what level of output is profit maximized?
6 At what level of output is average revenue at a maximum?
5 At what level of output is average cost at a minimum?
4 A firm may substitute more capital for labour in production if A the cost of borrowing rises B wages rise C profits fall D labour productivity rises
3 Which of the following types of business organization is a public sector organization? A public corporation B public limited company C partnership D worker co-operative
2 Which of the following mergers between two firms is an example of vertical integration? A a dairy farm and an arable farm a restaurant chain and hotel chain C a bank and a supermarket a clothes manufacturer D and clothes retailer
1 Which of the following can be defined as a secondary industry? A banking B tin mining C glass making D retailing
3 The euro replaced the national currencies of many European countries in the European Union in 2002 to become the sole legal tender in the eurozone. a List four functions euro notes and coins should perform. b Explain how consumer price inflation in Europe may affect these functions. c Discuss the
2 In the last ten years many countries have introduced policies that increased the role of the market system. a Explain the most important features of 'the market system'. b Explain, with the use of a diagram, what will happen in a market system if a good becomes more popular and there is a fall in
1 In Japan persistent worries about job security, high unemployment and a steady fall in income have meant that consumers are buying less. This has caused the prices of some products to fall. a Explain how the price of a good is determined by market forces. b Use demand and supply analysis and
6 What information will you need to plot a market demand for a product? A the equilibrium market price of the product B the number of suppliers of the product at each price C the number of consumers who would like to buy the product at each price D the quantity each consumer would be willing and
5 The diagram shows the market for bananas. The market equilibrium is X. What will be the new market equilibrium if there is a bad harvest? D2 D1 S1 S2 S3 B D 0 Quantity of bananas per period
4 What is an external cost of building houses in a city centre? A the cost of compensating residents for mud on local roads B the cost of city centre traffic congestion caused by the building works C the cost of obtaining planning permission D the cost of building materials
3 A firm publishes and sells books. The diagram shows a shift in the supply curve from $1 to $2.What could have caused the shift in supply? A a fall in subsidies paid to book publishers a fall in the price of paper C a rise in the income of consumers D a rise in the wages of the firm's workers
2 During the 1990s many countries in Eastern Europe transformed from planned economies to more market oriented economies. Which of the following best describes this change? A more public sector control of resources B increased use of the price mechanism to allocate resources C less private sector
1 A mixed economy has: A an agricultural and an industrial sector B consumer goods and capital goods C a financial sector and an industrial sector D a private sector and a public sector
6 In the diagram below what is the opportunity cost of increasing the output of meat from 640 tonnes to 700 tonnes per month?A 120 tonnes of cereal crops B 380 tonnes of cereal crops C 500 tonnes of cereal crops D 1000 tonnes of cereal crops Cereals 1000 500 380 640 700 800 Meat
5 The total amount of goods and services that can be produced in the world economy will be A determined by the amount of natural B resources unlimited C just enough to satisfy all consumer wants D less than what consumers want
4 Which of the following is an example of a capital good? A a shopping complex B a pair of fashionable shoes C a DVD player D money
3 Which of the following statements best describes the process of production? A an activity that uses scarce resources to provide any good or service B an activity that uses scarce natural resources to make goods and services C an activity that uses up scarce resources to make a profit D an
2 Which of the following resources used in the production of timber would an economist refer to as land? A a saw for cutting wood B a forest used to produce timber C a truck used to transport timber D a computer used in a timber merchant's office
1 A new dam is built in India to provide hydroelectric power. What is the opportunity cost to the Indian economy of the dam? A the construction and running costs of the hydroelectric dam B the cost to consumers of using the electricity C other goods and services the resources used for the dam could
1.** The subsection “The Rational Expectations Equilibrium Approach: Empirical Evidence”investigates the rational expectations hypothesis for the United States. Do the same analysis for Australia.a. Go to www.rba.gov.au/statistics/index.html and click on “Search for Statistics.” Find and
6.* This question relates to expectations formation in the Lucas imperfect-information model of aggregate supply.a. If 1 and .75, what is the expected change in the overall price level when local prices, p i , rise to 4 times their original level? [ Hint: Use equation (19).]b. If(the slope of
5.*a. What does empirical evidence suggest regarding the extent to which people substitute leisure over time?b. What does this suggest regarding the role of intertemporal substitution in propagating shocks throughout the economy and regarding the ability of small technology shocks to generate large
4.**a. Suppose, in the simple RBC model developed in Section 21-5, that .35 and .05.How much of an output increase will result from a 10 percent increase in the marginal product of labor, given these parameter values? [ Hint: Use equation (37).]b. Would there be strong intertemporal substitution
3. Does empirical evidence support the rational expectations result that anticipated monetary policy should have no effect on output? Explain.
2.* Use equations (11) and (12) to check the effects of anticipated and unanticipated supply shocks on the level of output. Show that they behave as they would in a perfect-foresight model when anticipated and as they would in the standard AS–AD model when unanticipated.
1.*a. Use equations (3) and (4) to forecast both the price level and the level of output that result from the simple AS – AD model of Section 21-2. You may assume that the slope of the aggregate supply curve is 2⁄3; that the values of the money supply, velocity, and potential GDP are 9, 8, and
8.*a. What is the difference between trend-stationary and difference-stationary processes?b. Why is this an important distinction, and how does our belief regarding which of these best characterizes output affect our forecasting strategy?c. Perron suggested that output might best be characterized
7.* In Lucas’s imperfect-information model of aggregate supply, when will aggregate shocks(shocks to the economy at large, rather than to particular regions or markets) have the strongest effect on output? Explain.
6.* What are deep parameters, in the sense used by proponents of real business cycle theory?
5.* What is the key assumption in Mankiw’s menu-cost model of aggregate supply?
4.* What are the similarities and differences between Mankiw’s menu-cost model of aggregate supply and Lucas’s imperfect-information one? Classify each as New Keynesian or New Classical.
3. Describe a propagation mechanism used in real business cycle theory. Explain, briefly, how it works.
2.* What are rational expectations? How do rational expectations differ from perfect foresight?Is monetary policy neutral under both assumptions?
1. This chapter covers four broad classes of research—rational expectations theory, random walk in output, real business cycle theory, and models that endeavor to explain why output can diverge, in the short run, from its full-employment level. To what extent do these models complement or
1. Figure 20-8 presents the evolution of real and nominal exchange rates for Canada and the United States. Obtain a similar graph for real and nominal exchange rates in Germany and the United States.a. Go to www.bls.gov and download monthly data over the period 1982–1997 for Consumer price index
7. * Consult The Wall Street Journal or some other newspaper that lists foreign exchange rates on its financial pages. For some countries, such as Britain and Japan, you should find futures prices listed. A futures price is the price to be paid today to receive one unit of the foreign currency in
6. Show, graphically, the short- and long-run effects of a monetary expansion when both exchange rates and prices are flexible and capital is perfectly mobile. What happens during the period of adjustment from the short to the long run?
5. What are the short- and long-term volume effects of an exchange depreciation? Does empirical evidence suggest that they are of sufficient size to outweigh price effects and therefore improve the trade balance?
4. Suppose your country’s exports were to permanently increase. Explain how income, price adjustments, and adjustments to the real money supply would interact to lead it back to full employment and external balance.
3. Consider a world with some capital mobility; the home country’s capital account improves as domestic interest rates rise relative to the world rate of interest. Initially, the home country is in internal and external balance. (Draw the IS , LM , and BB schedules.) Assume now that the rate of
2. Use the central bank balance sheet to show how a balance-of-payments deficit affects the stock of high-powered money under fixed exchange rates. Show, too, how sterilization operations are reflected in the central bank’s balance sheet.
1. Assume that there is perfect mobility of capital. How does the imposition of a tariff affect the exchange rate, output, and the current account? ( Hint: Given the exchange rate, the tariff reduces our demand for imports.)
9. Is the importance of spillover effects larger or smaller under flexible exchange rates, as opposed to fixed ones? Is macroeconomic management easier under one regime than the other?Technical
8. Discuss the lures and dangers in exchange market intervention when exchange rates are flexible.Do you think such intervention is a good idea?
7. In the early 1970s, the United States moved from a system of fixed exchange rates to a system of floating ones. Is the current flexible system less crisis-prone, or does it provide a better framework for macroeconomic stability? Discuss.
6. Equation (7) in Section 20-5 tells us that inflation differentials, interest differentials, and depreciation rates are all approximately equal . Why are they only approximately, as opposed to exactly, equal?
5. It is a consequence of our model of (flexible) exchange rate determination that, when capital markets are sufficiently integrated, interest rates across countries must be equated. Clearly however, there are differences across countries. How can we reconcile this fact with our theory?
4. What is a target-zone arrangement? What are the benefits and costs of participating in one?
3. What is a wage-price spiral, and how can a devaluation start one? Is it something undesirable?Explain. How can a wage-price spiral be avoided?
2. Should countries intervene to stabilize the exchange rate?
1. In relation to external imbalance, a distinction is frequently made between imbalances that should be “adjusted” and those that should be “financed.” Give examples of disturbances that give rise, respectively, to imbalances that require adjustment and those that should more appropriately
2. Go to the Reserve Bank of Australia’s website and take a look at the Australian Commonwealth Government’s expenditures for Social Security and Welfare. To do this, follow the same steps as in exercise 1. Did Australian GDP grow faster than expenditures on social security and welfare? You can
1. Tables 19-8 and 19-9 investigate the distribution of outlays and the sources of revenue for the U.S. federal government. One of the main trends one can notice is a considerable reduction in national defense expenditures. While national defense constituted about 45 percent of federal outlays in
9. If the growth rate of output averaged roughly 4 percent a year and the growth rate of the national debt averaged 5 percent, what would happen to the ratio of debt to GDP over time? Why?
8. Use the data in Tables 19-8 and 19-9 to find an estimate of the U.S. budget deficit as a percentage of GDP during each of the decades represented. How much has it increased since the 1960s?
7. Table 19-9 shows how the U.S. government’s income has changed over the last several decades.a. Calculate how much total revenues have increased since the 1960s.b. The individual income tax was the largest component of federal revenue in the 1960s and remains the largest today. The
6. Table 19-8 shows how the U.S. government’s spending has changed over the last several decades.a. Calculate how much total spending as a percentage of GDP has increased since the 1960s.b. In the 1960s (due largely to spending for the war in Vietnam) defense spending was the single largest
5. Table 19-11 shows the growth rate of M 2, the rate of inflation, and the rate of growth in output for the United States in decade averages, starting with the 1870s. Discuss the extent to which money growth, adjusted for output growth, helps explain inflation in recent U.S. history.
4. Calculate the inflation-adjusted deficit when the national debt is 30 percent of GDP, the inflation rate is 7 percent per annum, and the total budget deficit is 4 percent of GDP.
3. Suppose the money base is 10 percent of GDP. Suppose also that the government is considering raising the inflation rate from 0 to 10 percent per annum and believes that doing so will increase government revenue by 1 percent of GDP. Explain why the government must be overestimating the revenue it
2. Using Table 19-2 , explain why concentration on the actual budget deficit might have given a misleading impression of fiscal policy at some stages between 1929 and 1933.
1. It is sometimes said that the Great Depression would have been a severe recession if it had stopped in 1931 but would not have been the calamity it was.a. From Table 19-1 calculate the rate at which GNP was falling from 1929 to 1931.b. How does that rate compare with the rate at which real GDP
13.a. Why might a pay-as-you-go social security system transfer resources from the young to the old?b. What are the consequences of such a system on economic efficiency?*c. Are there other ways to structure a social security system that might alleviate some of the problems associated with this one?
12. German unification involved massive expenditures for infrastructure in the east, as well as transfer payments to many former East Germans. Should such expenditures have been financed by ( a ) money creation because of their transitory, exceptional nature, ( b ) debt, or( c ) taxes? Justify your
11. Why is it more useful to look at the ratio of debt to GDP than at the absolute value of the debt?
10. Should we require that the budget be balanced? Discuss.
9.a. To what extent do we need to worry about the component of our total deficit that consists of interest payments on the public debt? ( Hint: Ask yourself how much of this component is a real cost to the government.)b. To what extent do we need to worry about the national debt? In what way or
8. * The classic hyperinflations have occurred in the aftermath of wars or major social upheavals.What factors lay behind the high rates of Russian inflation in the early 1990s?
7. At the height of the German hyperinflation, the government was covering only 1 percent of its spending with taxes.a. How could the German government have financed the remaining 99 percent of its spending?b. Explain how, after the end of hyperinflation, it was possible for the nominal money stock
6. How can inflation create government revenue?
5. When should, and shouldn’t, the Fed monetize deficits?
4. Are budget deficits a problem? Why or why not?
3.a. Evaluate the strengths and weaknesses of gradual versus cold-turkey strategies of inflation reduction.b. Why is the credibility of anti-inflationary policy important?
2. Is inflation a monetary phenomenon? Be sure to distinguish, in your answer, between the long run and the short run.
1.a. What do “Keynesians” believe caused the Great Depression?b. What do “monetarists” believe caused the Great Depression?c. Are these explanations mutually exclusive?d. Why are macroeconomists so interested in explaining the causes of the Great Depression?
2. Figures 18-4 and 18-5 present the relationship of Canadian and U.S. stock prices to their past values, illustrating the random walk of stock prices. Does this relationship hold for Australian stock prices? Go to the Reserve Bank of Australia’s “Search for Statistics” page (see above).Find
1. Figure 18-1 presents the evolution of long- and short-term interest rates on U.S. Treasury bills and bonds. The graph illustrates that long-term interest rates are usually higher than shortterm rates. See if the same thing is true for interest rates on Australian Treasury bonds. You can find
4. From 1992 through 2001, the average return to holding U.S. common stocks was about 11 percent, which is much higher than the average return experienced from the end of World War II through 1991. Given the model of stock price determination discussed in this chapter, what do such high returns
3. * Suppose that Mexican interest rates increase 5 percentage points and those in the United States remain fixed. What will happen to the relative value of this period’s versus next period’s dollar-peso exchange rate? [ Hint: Use equation (7).]
2.a. Suppose a 10-year bond is to be issued at par, so its price is equal to its $100 face value.Suppose also that the prevailing rate of interest on the bond is 10 percent. How big would the bond’s coupon have to be to induce people to hold it?b. Now suppose that, just after this bond has been
1.a. What is the relationship between the rates of interest on a 10-year bond and on the series of 1-year bonds covering the same period? Assume, for the moment, that all interest rates are known in advance, so there is no uncertainty.b. Suppose the interest rate on the 10-year bond is 12 percent
6. Explain why an increase in U.S. interest rates relative to Canadian interest rates would affect the U.S.-Canadian dollar exchange rate.Technical
5. We saw in Section 18-2 that stock prices reflect expectations regarding the future dividend payments of firms and the future direction of interest rates. Given this, why might stock prices be a good predictor of recessions?
4. Why is the fact that stock prices follow a random walk a signal of stock market efficiency?What would have to be true if stock prices did not follow a random walk?
3. * Suppose you observe that short-term interest rates are higher than long-term interest rates.a. What expectations must people have regarding future interest rates?b. Why might the above relationship signal a recession? Why might it not?c. What will the yield curve for this problem look like?
2. What is arbitrage? What makes the concept of arbitrage so central to our understanding of financial markets?

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Macroeconomics 11th Edition Rudiger Dornbusch, Stanley Fisher, Richard Startz - Solutions

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