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Principles Of Macroeconomics 4th Edition Robert Frank, Ben Bernanke - Solutions
4. How would each of the following be likely to affect the value of the dollar, all else being equal? Explain. LO2a. U.S. stocks are perceived as having become much riskier financial investments.b. European computer firms switch from U.S.-produced software to software produced in India, Israel, and
3. Consider an Apple iPod that costs $240. LO1, LO2a. If the euro–dollar exchange rate is 1 euro per dollar, so that it costs a European 1 euro to buy a dollar, how much will the iPod cost in France?b. If the euro–dollar exchange rate falls to 0.8 euro per dollar, how much will the iPod cost in
2. Suppose a French bottle of champagne costs 20 euros. LO1, LO2a. If the euro–dollar exchange rate is 0.8 euro per dollar, so that a dollar can buy 0.8 euro, how much will the champagne cost in the United States?b. If the euro–dollar exchange rate rises to 1 euro per dollar, how much will the
1. Using the data in Table 15.1, find the nominal exchange rate between the Mexican peso and the Japanese yen. Express in two ways. How do your answers change if the peso appreciates by 10 percent against the dollar while the value of the yen against the dollar remains unchanged? LO1
7. Would you expect the law of one price to apply to crude oil? To fresh milk? To taxi rides? To compact discs produced in different countries by local recording artists? Explain your answer in each case.
6. Define nominal exchange rate and real exchange rate.How are the two concepts related? LO1, LO4
5. Contrast fixed and flexible exchange rates in terms of how they affect (a) the ability of monetary policy to stabilize domestic output and (b) the predictability of future exchange rates. LO3
4. Define overvalued exchange rate. Discuss four ways in which government policymakers can respond to an overvaluation. What are the drawbacks of each approach? LO3
3. Under a flexible exchange rate, how does an easing of monetary policy (a lower real interest rate) affect the value of the exchange rate? Does this change in the exchange rate tend to weaken or strengthen the effect of the monetary ease on output and employment?Explain. LO3
2. Why do U.S. households and firms supply dollars to the foreign exchange market? Why do foreigners demand dollars in the foreign exchange market? LO2
1. Japanese yen trade at 110 yen per dollar and Mexican pesos trade at 10 pesos per dollar. What is the nominal exchange rate between the yen and the peso? Express in two ways. LO1
8. Explain how the recognition that macroeconomic policymaking is an inexact science affects your recommended policy response to the following situations:LO6a. Your estimate of the natural rate of unemployment is 5 percent, and the actual unemployment rate is 5.5 percent.b. Your estimate of the
7. What are the advantages of having an independent central bank? Describe the institutional features that make a central bank independent. LO4
6. Suppose there is a large increase in oil or food prices. LO4a. If the core rate of inflation remains unchanged, what might the Fed infer about inflationary expectations and the second-round effects of the inflation shock? How might it respond?b. If the core rate of inflation rises substantially,
5. Using the theory presented in this chapter, explain why the adoption of a tighter, more anti-inflationary monetary policy might be politically unpopular.LO1, LO5
4. Suppose the economy is initially in long-run equilibrium. Due to a decline in house prices, suppose that consumers reduce their consumption spending.LO2, LO3a. Explain how the decline in consumer spending affects the AD curve.b. If the Fed does not change its monetary policy rule, how will the
3. Suppose the economy is initially in long-run equilibrium and the government reduces the marginal tax rate. LO5a. Use a graph like Figure 14.7 to illustrate and explain what will happen to output and inflation in both the short run and the long run if the effects of the tax cuts are stronger on
2. Suppose the economy is initially in long-run equilibrium and experiences a favorable inflation shock. LO3a. Explain how the AS curve is affected in the short run.b. Use your result for part a along with an AD-AS diagram to illustrate and explain what will happen to output and inflation in both
1. Suppose the economy is initially in long-run equilibrium and the Fed adopts a looser monetary policy and raises its long-run target for the inflation rate. LO1a. Explain how this change in monetary policy will affect the AD curve.b. Use your result for part a along with an AD-AS diagram to
7. How does a reduction in the marginal tax rate affect both aggregate demand and aggregate supply?
6. What factors determine a central bank’s independence?What are the benefits of having an independent central bank? LO4
5. What is the core rate of inflation and what is its relevance for macroeconomic policymaking? LO4
4. What are anchored inflationary expectations and how do they reduce the cost of an adverse inflation shock? LO4
3. Suppose there is a sudden increase in oil prices.What will be the effect on output and inflation in the short run? What is the “dilemma” faced by the Fed as a result of the adverse inflation shock? LO3
2. Suppose there is an increase in taxes. What is the short-run effect on output, inflation, and the real interest rate, assuming any supply-side effects are minimal? What will be the effect in the long run if the Fed chooses to adjust its target real interest rate to the new long-run real interest
1. How does the adoption of a tighter monetary policy, like that conducted by the Volcker Fed in the early 1980s, affect output, inflation, and the real interest rate in the short run? In the long run? LO1
6.*This problem asks you to trace out the adjustment of inflation when the economy starts with an output gap. Suppose that the economy’s aggregate demand curve is Y 1,000 1,000 , where Y is output and is inflation (measured as a decimal). Potential output equals 950 and the initial inflation rate
5. An economy’s AD curve is described by the following equation:Y 13,000 20,000 , where Y is output and is inflation (measured as a decimal). Initially, the inflation rate is 0.04 (i.e., 4 percent) and potential output equals 12,000 LO3, L04, LO5a. Find inflation and output in short-run
4. An economy is initially in recession. Using an AD-AS diagram, show the process of adjustment under each of the following policies. Discuss the costs and benefits of each approach in terms of output loss and inflation. LO1, L02, L03, LO4a. The Fed responds by adopting a looser monetary policy.b.
3. Suppose that a permanent increase in oil prices both creates an inflationary shock and reduces potential output. Use an AD-AS diagram to show the effects of the oil price increase on output and inflation in the short run and the long run, assuming that there is no policy response. What happens
2. Suppose that the government cuts taxes in response to a recessionary gap, but because of legislative delays the tax cut is not put in place for 18 months. Assuming that the government’s objective is to stabilize output and inflation, use an AD-AS diagram to illustrate how this policy action
1. For each of the following events, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. LO1, L02, L03, LO4a. An increase in consumer confidence leads to higher consumption spending.b. The government reduces
8. Why does an adverse inflation shock pose a particularly difficult dilemma for policymakers?
7. What factors led to increased inflation in the United States in the 1960s and 1970s? LO5
6. True or false: The economy’s self-correcting tendency makes active use of stabilization policy unnecessary.Explain. LO4
5. Sketch an AD-AS diagram depicting an economy away from long-run equilibrium. Indicate the economy’s short-run equilibrium point. Discuss how the economy reaches long-run equilibrium over a period of time. Illustrate the process in your diagram. LO3
4. Discuss the relationship between output gaps and inflation. How is this relationship captured in the AS curve? LO2
3. Why does the overall rate of inflation tend to adjust more slowly than prices of commodities, such as oil or grain? LO2
2. State how each of the following affects the AD curve and explain: LO1a. An increase in government purchases.b. A cut in taxes.c. A decline in planned investment spending by firms.d. A decision by the Fed to increase its target rate of inflation.
1. What two variables are related by the aggregate demand(AD) curve? Explain how the behavior of the Fed helps to determine the slope of this curve. LO1
9. By law, the Federal Reserve must report twice each year to Congress about monetary policy and the state of the economy. When the Monetary Policy Report is presented, it is customary for the Fed chairman to testify before Congress, to update legislators on the economic situation. LO1, LO2, LO5a.
8. For each of the scenarios described in problem 7, answer the following questions:LO4, LO5a. What will happen to the nominal interest rate if the Fed does not change the money supply? Explain your reasoning using a supply-and-demand graph of the money market.b. What must the Fed do in order to
7. How would you expect each of the following to affect the economywide demand for money? Explain. LO4a. Competition among brokers forces down the commission charge for selling holdings of bonds or stocks.b. Grocery stores begin to accept credit cards in payment.c. Financial investors become
6. The following table shows Uma’s estimated annual benefits of holding different amounts of money: LO4 Average money holdings ($) Total benefit ($)500 35 600 47 700 57 800 65 900 71 1,000 75 1,100 77 1,200 77a. How much money will Uma hold on average if the nominal interest rate is 9 percent? 5
5. During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. LO4a. What would you expect to happen to the money demand curve during the Christmas season? Show graphically.b. If the Fed took no action, what would happen to nominal
4. Suppose that an economy is currently operating above potential output. This has led the inflation rate to rise above the Fed’s long-run target for the inflation rate. LO2, LO3a. Explain, in words, what the Fed’s reaction to this situation will be in terms of changes in the real interest
3.*Here is another set of equations describing an economy: LO2a. Find a numerical equation relating planned aggregate expenditure to output and to the real interest rate.b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint: Set output Y equal to the value of
2. For the economy described in problem 1 above: LO2a. Suppose that potential output Y* equals 12,000. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 5.b. Repeat part a for the case in which potential
1. An economy is described by the following equations:The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent). LO2a. Find a numerical equation relating planned aggregate expenditure to output.b. Using a table (or algebra if you have used the appendix to this chapter), solve
6. What effect does an open-market purchase of bonds by the Fed have on nominal interest rates?Discuss in terms of (a) the effect of the purchase on bond prices and (b) the effect of the purchase on the supply of money.
5. Show graphically how the Fed controls the nominal interest rate. Can the Fed control the real interest rate? LO5
4. Sketch a policy rule relating the Fed’s setting of the real interest rate to inflation. Explain why it slopes upward. LO3
3. The Fed decides to take a contractionary policy action.Under what circumstances would this type of policy action be most appropriate? What would you expect to happen to the nominal interest rate, the real interest rate, and the money supply? LO2, LO4
2. The Fed faces a recessionary gap. How would you expect it to respond? Explain step by step how its policy change is likely to affect the economy. LO2
1. Why does the real interest rate affect planned aggregate expenditure? Give examples. LO2
10.*This problem illustrates the workings of automatic stabilizers. Suppose that the components of planned spending in an economy are as described in Appendix A:However, suppose that, realistically, taxes are not fixed but depend on income. Specifically, we assume where t is the fraction of income
9.*An economy has zero net exports. Otherwise, it is identical to the economy described in problem 7. LO3, LO4, LO5a. Find short-run equilibrium output.b. Economic recovery abroad increases the demand for the country’s exports;as a result, NX rises to 100. What happens to short-run equilibrium
8.*For the following economy, find autonomous expenditure, the multiplier, shortrun equilibrium output, and the output gap. By how much would autonomous expenditure have to change to eliminate the output gap?Illustrate this economy’s short-run equilibrium on a Keynesian cross diagram.LO3, LO4, LO5
7. An economy is described by the following equations:The multiplier in this economy is 5. LO4, LO5a. Find a numerical equation relating planned aggregate expenditure to output.b. Construct a table to find the value of short-run equilibrium output. (Hint:The economy is fairly close to full
6. An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the mpc of this economy is 0.75 and that the multiplier is 4. LO4a. How large is the recessionary gap after the fall in
5. For the economy described in problems 3 and 4, find the effect on short-run equilibrium output ofa. An increase in government purchases from 1,500 to 1,600.b. A decrease in tax collections from 1,500 to 1,400 (leaving government purchases at their original value).c. A decrease in planned
4. For the economy described in problem 3: LO3a. Construct a table like Table 11.1 to find short-run equilibrium output. Consider possible values for short-run equilibrium output ranging from 8,200 to 9,000.b. Show the determination of short-run equilibrium output for this economy using the
3. An economy is described by the following equations: LO2a. Find a numerical equation linking planned aggregate expenditure to output.b. Find autonomous expenditure and induced expenditure in this economy.
2. Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below.Before-tax Taxes Consumption income ($) paid ($) spending ($)25,000 3,000 20,000 27,000 3,500 21,350 28,000 3,700 22,070 30,000 4,000 23,600a. Graph the Simpsons’ consumption
1. Acme Manufacturing is producing $4,000,000 worth of goods this year and expects to sell its entire production. It also is planning to purchase $1,500,000 in new equipment during the year. At the beginning of the year, the company has $500,000 in inventory in its warehouse. Find actual investment
10. Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model.
9. The government is considering two alternative policies, one involving increased government purchases of 50 units, the other involving a tax cut of 50 units. Which policy will stimulate planned aggregate expenditure by more? Why? LO4
8. Define the multiplier. In economic terms, why is the multiplier greater than one? LO4
7. Using the Keynesian cross diagram, illustrate the main cause of the 2001 recession discussed throughout the chapter. LO3, LO4
6. Sketch the Keynesian cross diagram. Explain in words the economic significance of the two lines graphed in the diagram. Given only this diagram, how could you determine autonomous expenditure, induced expenditure, the marginal propensity to consume, and short-run equilibrium output? LO3
5. Sketch a graph of the consumption function, labeling the axes of the graph. Discuss the economic meaning of (a) a movement from left to right along the graph of the consumption function and (b) a parallel upward shift of the consumption function. Give an example of a factor that could lead to a
4. Explain how planned spending and actual spending can differ. Illustrate with an example. LO2
3. Define planned aggregate expenditure and list its components. Why does planned spending change when output changes? LO2
2. Give an example of a good or service whose price changes very frequently and one whose price changes relatively infrequently. What accounts for the difference? LO1
1. What is the key assumption of the basic Keynesian model? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term economic fluctuations.LO1
5. Using Okun’s law, fill in the four pieces of missing data in the table below. The data are hypothetical. LO5
4. From the homepage of the Bureau of Labor Statistics (www.bls.gov/), obtain the most recent available data on the unemployment rate for workers aged 16–19 and workers aged 20 or over. How do they differ? What are some of the reasons for the difference? How does this difference relate to the
3. Given below are data on real GDP and potential GDP for the United States for the years 1999–2007, in billions of 2000 dollars. For each year, calculate the output gap as a percentage of potential GDP and state whether the gap is a recessionary gap or an expansionary gap. Also calculate the
2. From the homepage of the Bureau of Economic Analysis (www.bea.gov) obtain quarterly data for U.S. real GDP from the last three recessions: 1981–1982, 1990–1991, and 2001. LO1, LO2a. How many quarters of negative real GDP growth occurred in each recession?b. Which, if any, of the recessions
1. Using Table 10.1, find the average duration, the minimum duration, and the maximum duration of expansions in the United States since 1929. Are expansions getting longer or shorter on average over time? Is there any tendency for long expansions to be followed by long recessions? LO1, LO2
8. If the natural rate of unemployment is 5 percent, what is the total rate of unemployment if output is 2 percent below potential output? What if output is 2 percent above potential output?
7. True or false: When output equals potential output, the unemployment rate is zero. Explain. LO5
6. True or false: All recessions are the result of output gaps. Explain. LO2, LO3
5. Define potential output. Is it possible for an economy to produce an amount greater than potential output? Explain. LO3
4. How is each of the following likely to be affected by a recession: the natural unemployment rate, the cyclical unemployment rate, the inflation rate, the poll ratings of the president? LO2, LO4
3. Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service? Which is likely to see its profits reduced the least? Explain. LO2
2. Why is the traditional term business cycles a misnomer?How does your answer relate to the ease or difficulty of forecasting peaks and troughs? LO2
1. Define recession and expansion. What are the beginning and ending points of a recession called? In the postwar United States, which have been longer on average: recessions or expansions? LO1, LO2
10. You are given the following hypothetical data for 2007 and 2008: LO6a. Find the price level for 2007 and 2008. What is the rate of inflation between the two years?b. What is the rate of inflation between 2007 and 2008 if the money supply in 2008 is 1,100 instead of 1,050?c. What is the rate of
9. Consider a country in which real GDP is $8 trillion, nominal GDP is $10 trillion, M1 is $2 trillion, and M2 is $5 trillion. LO6a. Find velocity for M1 and for M2.b. Show that the quantity equation holds for both M1 and M2.
8. When a central bank increases bank reserves by $1, the money supply rises by more than $1. The amount of extra money created when the central bank increases bank reserves by $1 is called the money multiplier. LO6a. Explain why the money multiplier is generally greater than 1. In what special
7. Answer each of the following questions. LO5a. Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply.b. The money supply is 500 and currency held by the public equals bank reserves.The desired reserve-deposit
6. Redo the example of Gorgonzola in the text (see Tables 9.3 to 9.7), assuming that (a) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation and (b) commercial banks desire to hold reserves of 20 percent of deposits.As in the text, assume that the public holds no
5. During World War II, an Allied soldier named Robert Radford spent several years in a large German prisoner-of-war camp. At times more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound.Radford later wrote an account of his experiences. He described
4. You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats are elected, an event you believe to have a 40 percent probability; otherwise the shares pay a zero
3. Your financial investments consist of U.S. government bonds maturing in 10 years and shares in a start-up company doing research in pharmaceuticals.How would you expect each of the following news items to affect the value of your assets? Explain your reasoning. LO2a. Interest rates of newly
2. Shares in Brothers Grimm, Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5.00 in one year and to sell for $100 per share at that time. How much should you be willing to pay today per share of Grimm: LO2a. If the safe rate of interest is 5 percent and you believe
1. Simon purchases a bond, newly issued by the Amalgamated Corporation, for$1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end of the third year. LO2a. What are the principal amount, the term, the coupon rate, and the coupon
7. Use the quantity equation to explain why money growth and inflation tend to be closely linked.
6. The Fed wants to reduce the U.S. money supply.Describe what it would do, and explain how this action would accomplish the Fed’s objective. LO6
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