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

1. It is sometimes said that a central bank is a necessary element for a balance-of-payments deficit. What is the explanation for this argument?
2. Figure 11-1 illustrates the Federal Reserve’s response to the 2001 recession in the United States. How do central banks in other countries respond to recessions? Let us take a look at growth rates in the EU in the last few years and the reaction of the European Central Bank(ECB). Go to the
1. Box 11-1 investigates the case of the liquidity trap in Japan, showing that interest rates have been virtually zero repeatedly in the late 1990s. Did these low interest rates manage to stimulate economic growth rates? Go to www.stat.go.jp/english . Click on “Statistics” and scroll down to
4. In Figure 11-10 the economy can move to full employment by an expansion in either money or the full-employment deficit. Which policy leads to E 1 and which to E 2 ? How would you expect the choice to be made? Who would most strongly favor moving to E 1 ? versus E 2 ?What policy would correspond
3. Consider two alternative programs for contraction. One is the removal of an investment subsidy;the other is a rise in income tax rates. Use the IS-LM model and the investment schedule, as shown in Figure 11-9 , to discuss the impact of these alternative policies on income, interest rates, and
2. Suppose the government cuts income taxes. Show in the IS-LM model the impact of the tax cut under two assumptions: ( a ) The government keeps interest rates constant through an accommodating monetary policy. ( b ) The money stock remains unchanged. Explain the difference in results.
1. The economy is at full employment. Now the government wants to change the composition of demand toward investment and away from consumption without, however, allowing aggregate demand to go beyond full employment. What is the required policy mix? Use an IS-LM diagram to show your policy proposal.
7. “We can have the GDP path we want equally well with a tight fiscal policy and an easier monetary policy, or the reverse, within fairly broad limits. The real basis for choice lies in many subsidiary targets, besides real GDP and inflation, that are differentially affected by fiscal and
6. What happens when the Fed monetizes a budget deficit? Is this something it should always try to do? ( Hint: Outline the benefits and costs of such a policy over time.)
5. What would the LM curve look like in a classical world? If this really were the LM curve that we thought best characterized the economy, would we lean toward the use of fiscal policy or monetary policy? (You may assume your goal is to affect output.)
4. What is crowding out, and when would you expect it to occur? In the face of substantial crowding out, which will be more successful—fiscal or monetary policy?
3. What is a liquidity trap? If the economy was stuck in one, would you advise the use of monetary or fiscal policy?
2. Discuss the circumstances under which the monetary and fiscal policy multipliers are each, in turn, equal to zero. Explain in words why this can happen and how likely you think this is.
1. In the text we describe the effect of an open market purchase by the Fed.a. Define an open market sale by the Fed.b. Show the impact of an open market sale on the interest rate and output. Show both the immediate- and the longer-term impacts.
1. By the end of this chapter you learned that increases in interest rates reduce aggregate demand.Is this true in practice? Let us take a look at how interest rates are related to the growth rate of the U.S. economy. Go to http://research.stlouisfed.org/fred2 . Download data for the following two
7. Suppose there is a decline in the demand for money. At each output level and interest rate the public now wants to hold lower real balances.a. In the Keynesian case, what happens to equilibrium output and to prices?b. In the classical case, what is the effect on output and on prices?Empirical
6. Show, using IS and LM curves, why money has no effect on output in the classical supply case.
5. Discuss, using the IS-LM model, what happens to interest rates as prices change along a given AD schedule.
4.*a. Show that a given change in the money stock has a larger effect on output the less interest-sensitive is the demand for money. Use the formal analysis of Section 10-5.b. How does the response of the interest rate to a change in the money stock depend on the interest sensitivity of money
3.a. How does an increase in the tax rate affect the IS curve?b. How does the increase affect the equilibrium level of income?c. How does the increase affect the equilibrium interest rate?
2. Continue with the same equations.a. What is the value of G which corresponds to the simple multiplier (with taxes) of Chapter 9?b. By how much does an increase in government spending of −−G increase the level of income in this model, which includes the money market?c. By how much does a
1. The following equations describe an economy. (Think of C , I , G , etc., as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5.)C 0.8(1 t ) Y (P1)t 0.25 (P2)I 900 50 i (P3)−−G 800 (P4)L 0.25 Y 62.5 i (P5)−−M −P 500 (P6)a. What
6. * Between January and December 1991, while the U.S. economy was falling deeper into its recession, the interest rate on Treasury bills fell from 6.3 percent to 4.1 percent. Use the IS-LM model to explain this pattern of declining output and interest rates. Which curve must have shifted? Can you
5. It is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the
4.a. Why does a horizontal LM curve imply that fiscal policy has the same effects on the economy as those derived in Chapter 9 ?b. What is happening in this case in terms of Figure 10-3 ?c. Under what circumstances might the LM curve be horizontal?
3. Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve.
2.a. Explain in words how and why the multiplier G and the interest sensitivity of aggregate demand affect the slope of the IS curve.b. Explain why the slope of the IS curve is a factor in determining the working of monetary policy.
1. How does the IS-LM model developed in this chapter relate to the model of aggregate demand developed in Chapter 9 ?
1. What is the implied slope? What does it mean? Is it statistically significant?
1. Section 9-2 analyses the consumption function, and Box 9-1 shows that the consumption function holds in practice for the United States. In this exercise you will derive a consumption function for Australia.a. Go to the Penn World Tables ( http://pwt.econ.upenn.edu ). Click on “Penn World
5. Suppose Congress decides to reduce transfer payments (such as welfare) but to increase government purchases of goods and services by an equal amount. That is, it undertakes a change in fiscal policy such that G − TR.a. Would you expect equilibrium income to rise or fall as a result of
4. Suppose the economy is operating at equilibrium, with Y 0 1,000. If the government undertakes a fiscal change whereby the tax rate, t , increases by .05 and government spending increases by 50, will the budget surplus go up or down? Why?
3. Now we look at the role taxes play in determining equilibrium income. Suppose we have an economy of the type in Sections 9-4 and 9-5, described by the following functions:C 50 .8YD−I 70−−G 200−−TR 100 t .20a. Calculate the equilibrium level of income and the multiplier in
2. Suppose the consumption behavior in problem 1 changes so that C 100 .9 Y , while I remains at 50.a. Is the equilibrium level of income higher or lower than it was in problem 1( a )? Calculate the new equilibrium level, Y , to verify this.b. Now suppose investment increases to I 100, just
1. Here we investigate a particular example of the model studied in Sections 9-2 and 9-3 with no government. Suppose the consumption function is given by C 100 .8 Y , while investment is given by I 50.a. What is the equilibrium level of income in this case?b. What is the level of saving in
5. What is the full-employment budget surplus, and why might it be a more useful measure than the actual, or unadjusted, budget surplus? The text provides other names for this measure, such as cyclically adjusted surplus and structural surplus. Why might we prefer to use these other terms?Technical
4. Why do we call mechanisms such as proportional income taxes and the welfare system automatic stabilizers ? Choose one of these mechanisms and explain carefully how and why it affects fluctuations in output.
3. Using your knowledge of the amount of time required for the many components of the federal government to agree upon and implement changes in policy (i.e., tax codes, the welfare system), can you think of any problems with using fiscal policy to stabilize the economy?
2. What is an autonomous variable? What components of aggregate demand have we specified, in this chapter, as being autonomous?
1. We call the model of income determination developed in this chapter a Keynesian one. What makes it Keynesian, as opposed to classical?
1. Suppose that in the Taylor rule the coefficient on inflation is negative. Explain why this can lead to runaway inflation.Empirical 1. Box 8-2 presents Taylor’s rule, specifically, it 2 t 0.5 (t*) 0.5 ( 100 YtYt*_ Yt*)The purpose of this exercise is to see whether this simple
3. Section 7-1 introduces Okun’s law—1 extra point of unemployment costs 2 percent of GDP—and illustrates the concept by the unemployment-output relation in the United States( Figure 7-1 ). After reading the chapter, you might ask yourself: But does this hold in other countries as well? In
2. Use the Economic Report of the President at www.gpoaccess.gov/eop/ to find data on the duration of unemployment in 2000 and 2009. Compare the distribution of unemployment by duration over these years. What relationship, if any, do you find?
1. Use the Economic Report of the President at www.gpoaccess.gov/eop to find unemployment data for the years 2000, 2005, and 2009. Use four labor force groups: males, and females, in each case 16 to 19 years of age, versus 20 years of age or over. Assuming that the labor force shares of these four
1. The following information is to be used for calculations of the unemployment rate: Suppose there are two major groups, adults and teenagers, with adults divided into men and women.Teenagers account for 10 percent of the labor force; adults account for 90 percent. Women make up 35 percent of the
10. Should the United States index its wages and prices? Detail the pros and cons of such a plan.How would your answer differ if you expected that the nation would face a period of extremely high inflation (say, 300 percent)?Technical
9. What costs are associated with imperfectly anticipated inflation? Discuss them carefully.Who loses, and who gains, when inflation is higher than we expect?
8. What costs are associated with perfectly anticipated inflation? Do these costs change as the rate of inflation changes?
7. State Okun’s law. How does it help us evaluate the cost (to society) of unemployment?
6. Define the sacrifice ratio. At what horizons is it not zero? Explain.
5. Some people say that since inflation can be reduced in the long run without an increase in unemployment, we should reduce inflation to zero. Others believe that a steady rate of inflation at, say, 3 percent, should be our goal. What are the pros and cons of these two arguments?What, in your
4. A reduction in minimum wages during the summer months would reduce the cost of labor to firms, but it would also reduce the wage that minimum-wage earners receive.a. Who would benefit from this measure?b. Who would lose?b. Would you support this program?
3. Discuss the differences in the unemployment patterns of adults and teenagers. What does this imply about the types of jobs (on average) that the groups are seeking?
2. Discuss how the following changes would affect the natural (or frictional) rate of unemployment:a. Elimination of unions.b. Increased participation of teenagers in the labor market.c. Larger fluctuations in the level of aggregate demand.d. Increase in unemployment benefits.e. Elimination of
1. Discuss strategies whereby the government (federal, state, or local) could reduce unemployment in or among ( a ) depressed industries, ( b ) unskilled workers, ( c ) depressed geographical regions, ( d ) teenagers. Include comments on the type of unemployment you would expect to see in these
2. Section 6-2 investigates whether the expectations-augmented Phillips curve fits the data better. In doing this it assumes that next period’s expected inflation rate is given by the inflation rate observed today ( e t +1 = t ). In this exercise you are asked to investigate whether the fit
1. Section 6-2 emphasized how the Phillips curve (sans inflationary expectations) broke down in the United States. You might ask yourselves, But does it hold in other countries? The goal of this exercise is to give you the chance to experiment with the data and try to find a country for which the
3.a. Show, in an aggregate supply and demand framework, the long- and short-run effects of a decline in the real price of materials (a favorable supply shock).b. Describe the adjustment process, assuming that output began at its natural (fullemployment)level.Empirical
2. Suppose the Federal Reserve adopts a policy of complete transparency; that is, suppose it announces beforehand how it will change the money supply. According to rational expectations theory, how will this policy affect the Fed’s ability to move the real economy(e.g., the unemployment rate)?
1. Analyze the effects of a reduction in the nominal money stock on the price level, on output, and on the real money stock when the aggregate supply curve is positively sloped and wages adjust slowly over time.
6. Discuss the main differences between the original expectations-augmented Phillips curve discussed in Section 6-2 and the one built on rational expectations discussed in Section 6-3.Technical
5. Explain how the ability of inflation expectations to shift the Phillips curve helps the economy to adjust, automatically, to aggregate supply and demand shocks.
4.a. What is stagflation?b. Describe a situation that could produce it. Could the situation you’ve described be avoided? Should it be avoided?
3. This chapter has discussed a number of different models that can be used to justify the existence of sticky wages, and hence the ability of aggregate demand to affect output. What are they? What are their similarities and differences? Which of these models do you find the most plausible?
2. How do short- and long-term Phillips curves differ? ( Hint: In the long run, we return to a classical world.)
1. Explain how the aggregate supply and Phillips curves are related to each other. Can any information be derived from one that cannot be derived from the other?
3. What do you find? Is the coefficient on the inflation rate statistically significant? Interpret your results.
2. In Section 5.1 of this chapter we stated that changes in potential GDP do not depend on the price level, or in other words, “potential GDP is exogenous with respect to the price level.”The goal of this exercise is to give you a chance to convince yourself that this is the case.a. Go to
1. The textbook identified the 1973 OPEC oil embargo as a classical example of an adverse supply shock. Go to http://research.stlouisfed.org/fred2 and click on “Consumer Price Indexes (CPI).” Then find the series “CPIENGNS” titled “Consumer Price Index for All Urban Consumers: Energy.”
2. Suppose that the government increases spending from G to G while simultaneously raising taxes in such a way that, at the initial level of output, the budget remains balanced.a. Show the effect of this change on the aggregate demand schedule.b. How does this affect output and the price level in
1.a. If the government were to reduce income taxes, how would the reduction affect output and the price level in the short run? In the long run? Show how the aggregate supply and demand curves would be affected, in both cases.b. What is supply-side economics? Is it likely to be effective, given
5. The aggregate supply and demand model looks, and sounds, very similar to the standard supply and demand model of microeconomics. How, if at all, are these models related?Technical
4. How does the Keynesian aggregate supply curve differ from the classical one? Is one of these specifications more appropriate than the other? Explain, being careful to state the time horizon to which your answer applies.
3. What relationship is captured by the aggregate supply curve? Can you provide an intuitive justification for it?
2. Explain why the classical supply curve is vertical. What are the mechanisms that ensure continued full employment of labor in the classical case?
1. What do the aggregate supply and aggregate demand curves describe?
1. On the Bureau of Labor Statistics website ( www.bls.gov ) mouse over “International” under“Subject Areas.” Click on “International Labor Comparisons.” Scroll down the page to find“More Tools” and click on “Series Report.” Enter the following four data series numbers, one on
4. * Consider an economy whose production function is Y K ( AN ) 1− , with A 4 K N . Suppose that it has a saving rate of .1, a population growth rate of .02, and an average depreciation rate of .03 and that .5.a. Reduce the production function to the form y ak . What is a ?b. What
3. ** Suppose you add a variable rate of population growth to a two-sector model of growth. ( Hint:Combine Figures 4-2 and 4-3 .)a. What do the production function, investment requirement line, and saving line look like?b. Characterize the set of equilibria for this model. Does output in any of the
2. Now suppose we have a one-sector model with a variable rate of population growth. ( Hint:See Figure 4-3 .)a. What does the investment requirement line look like for this model?b. Characterize the set of equilibria, being sure to discuss their stability or lack thereof.Does output in any of these
1. Consider a two-sector model of growth, with two kinds of investment opportunities—one with a diminishing marginal product and one with a constant marginal product. ( Hint: See Figure 4-2 .)a. What does the production function for this problem look like?b. Characterize the set of equilibria for
10. Does growth in per capita output, among both more and less industrialized countries, have the potential to increase indefinitely? Explain.Technical(All optional)
9. What elements of neoclassical and endogenous growth models can help us explain the remarkable growth of the group of countries known as the Asian Tigers?
8.a. Consider once more the neoclassical model with a steady-state level of per capita output. Suppose a society can choose its rate of population growth. How can this choice affect the steady-state per capita output? Could such a policy help the country avoid falling into a poverty trap?b. Now
7. Suppose a society can invest in two types of capital—physical and human. How can its choice regarding the distribution of investment affect its long-term growth potential?
6. Can endogenous growth theory help explain international differences in growth rates? If so, how? If not, what can it help explain?
5. What is the difference between absolute and conditional convergence, as predicted by the neoclassical growth model? Which seems to be occurring, empirically?
4. (Optional)a. What sorts of capital investment does this chapter suggest are most useful for explaining long-run equilibrium growth?b. Discuss the long-run growth potential of each of the following government programs:i. Investment tax credits ii. R&D subsidies and grants iii. Policies intended
3. How do the implications of an increase in saving with regard to both the level and the growth rate of output differ between the neoclassical growth model outlined in Chapter 3 and the basic endogenous growth model outlined in this chapter?
2. Why doesn’t the constant marginal product of capital assumed in this chapter’s simple model of endogenous growth create a situation in which a single large firm dominates the economy, as traditional microeconomic reasoning would suggest?
1. What is endogenous growth? How do endogenous growth models differ from the neoclassical models of growth presented in Chapter 3 ?
2. Go to http://research.stlouisfed.org/fred2 and click on “Employment & Population,” then select“Establishment Survey Data.” Choose “USINFO,” title “All Employees: Information Services.”Using the provided graphing possibilities, take a look at the evolution of the number of
1. Go to http://research.stlouisfed.org/fred2 and download the data for the U.S. population and total employment in educational and health services over the last decade (2000–2010). To do so, click on “Employment & Population,” select the categories “Population” for population data
10. Consider an economy in which production is characterized by the neoclassical function Y K .5 N .5 . Suppose, again, that it has a saving rate of .1, a population growth rate of .02, and an average depreciation rate of .03.a. Write this production function in per capita form, and find the
9 . * For a Cobb-Douglas production function Y AK N (1 ) , verify that 1 is labor’s share of income. [ Hint: Labor’s share of income is the piece of income which results from that labor ( MPL N ) divided by total income.]
8. Suppose the level of technology is constant. Then it jumps to a new, higher constant level.a. How does this technological jump affect output per head, holding the capital-labor ratio constant?b. Show the new steady-state equilibrium. What has happened to per capita saving and the capital-labor
7. Consider the following production function: Y K .5 ( AN ) .5 , where both the population and the pool of labor are growing at a rate n .07, the capital stock is depreciating at a rate d .03, and A is normalized to 1.a. What are capital’s and labor’s shares of income?b. What is the form
6. Consider a production function of the form Y AF ( K, N, Z ), where Z is a measure of natural resources used in production. Assume this production function has constant returns to scale and diminishing returns in each factor.a. What will happen to output per head if capital and labor both grow
5. Suppose there is an increase in the population growth rate.a. Show graphically how this affects the growth rate of both output per capita and total output in the short and the long run. ( Hint: Use a diagram like Figure 3-5 .)b. Chart the time paths of per capita income and the per capita
4. Suppose an earthquake destroys one-quarter of the capital stock. Discuss the adjustment process of the economy, and using Figure 3-5 , show what happens to growth in the short run and in the long run.

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

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