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

1.** The subsection “The Rational Expectations Equilibrium Approach: Empirical Evidence”investigates the rational expectations hypothesis for the United States. Do the same analysis for
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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 )
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
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
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
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
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
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.
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
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
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
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
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
2. What is arbitrage? What makes the concept of arbitrage so central to our understanding of financial markets?
1. What role do financial markets play in the economy? Why do we, as macroeconomists, study them?
1. Check the Federal Reserve Board’s semiannual monetary policy reports to the Congress(www.federalreserve.gov/boarddocs/hh). In these reports, which are published every year in February and July,
5.* Suppose that, as the chairman of the Fed, you decided to “put policy on automatic pilot” and require that monetary policy follow an established rule. When might each of the following two
4. Suppose that you knew that the multiplier for government spending was between 1 and 2.5 but that its effects ended in the period in which spending was increased. How would you run fiscal policy if
3. Life has become yet more complicated. Government spending works with a distributed lag.Now when $1 billion is spent today, GDP increases by $1 billion this period and $1.5 billion next period.a.
2. The basic facts about the path of GDP are as in problem 1. But there is now a one-period outside lag for government spending. Decisions to spend today are translated into actual spending only
1. Suppose that GDP is $40 billion below its potential level. It is expected that next-period GDP will be $20 billion below potential and that two periods from now it will be back at its potential
9. How does nominal GDP targeting differ from real GDP targeting? Why is real GDP targeting the riskier of the two strategies?Technical
8. What is dynamic inconsistency? Explain intuitively how it might arise in the case of the short-run tradeoff between inflation and unemployment.
7. Evaluate the arguments for a constant-growth-rate rule for money.
6. Evaluate the argument that monetary policy should be determined by a rule rather than discretion.How about fiscal policy?
5.a. What is an econometric model?b. How might one be used?c. There is always some uncertainty with respect to predictions based on such models.Why? What is the source of this uncertainty?
4. Which would you recommend be used to offset the effect of a temporary shock to output—fiscal or monetary policy? Why?
3.a. What is an outside lag?b. Why does it generally take the form of a distributed lag?c. Which has the smaller outside lag—fiscal or monetary policy?
2.a. What is an inside lag?b. We can divide inside lags into three smaller, sequential lags. What are these, and in what order do they occur?c. Which has the smaller inside lag—fiscal or monetary
1. * Suppose there was a small, negative shock to demand. You—a policymaker—have a stack of papers in front of you detailing the magnitude of the shock and its devastating effects on the people
2. Box 16-5 and Table 1 investigate U.S. monetary policy during the 1990–1991 recession. In this exercise you will take a look at the monetary policy conducted by the Federal Reserve during the
1. Go to www.federalreserve.gov/FOMC/default.htm, the official website of the Federal Open Market Committee (FOMC) of the Federal Reserve Board. Click on the “Meeting Calendars, Statements, and
4. You, as chairman of the Fed (congratulations), are considering whether the monetary base or the interest rate should be used as a target. What information do you need to have to make an informed
3. A proposal for “100 percent banking” involves a reserve ratio of unity. Such a scheme has been proposed for the United States in order to enhance the Fed’s control over the money supply.a.
2. When the Fed buys or sells gold or foreign exchange, it automatically offsets, or sterilizes, the impact of these operations on the monetary base by compensating open market operations.What it
1. Show how an open market sale affects the Fed’s balance sheet and also the balance sheet of the commercial bank of the purchaser of the bond sold by the Fed.
8. Why might the Fed choose intermediate targets for its monetary policy, as opposed to directly pursuing its ultimate targets? What are the benefits and the dangers of using these intermediate
7. What might be the danger in using interest rates as targets for monetary policy when credit rationing is taking place?
6. Categorize each of the following as either an ultimate or intermediate target or an instrument of monetary policy:a. Nominal GDPb. The discount ratec. The monetary based. M 1e. The Treasury bill
5.a. Why does the Fed not stick more closely to its target paths for money?b. What are the dangers of targeting nominal interest rates?
4.a. What is a bank run?b. Why might one occur?c. If the Fed took no action in the face of a bank run, what would be the effects on the money supply and on the money multiplier?d. How does the
3. Under what circumstances should the Fed conduct monetary policy by targeting mainly (a)interest rates or (b) the money stock?
2. Can the Fed affect the currency-deposit ratio?
1. The Fed wants to increase the money supply. What are the main instruments available to it, and how can each, specifically, increase the money supply? ( Hint: There are three.)
2. Is there today in real terms more U.S. currency outstanding per capita than 30 years ago? To answer this question, go to http://research.stlouisfed.org/fred2 and get the data in order to fill in
1. The chapter reviewed the different measures of money stock ( M 1 and M 2). You can use any of these money stock measures in order to determine the velocity of money. What is the relationship
4. *a. Determine the optimal strategy for cash management for a person who earns $1,600 per month, can earn .5 percent interest per month in a savings account, and has a transaction cost of $1. (

Showing 1 - 100 of 1074

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

Step by Step Answers