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Macroeconomics Global Edition 6th Edition Stephen D. Williamson - Solutions
2. The model in this chapter assumes that a temporary increase in government spending decreases current account surplus. If this were true in practice, it would mean that the data should not be significantly different for any country. Choose any country and plot its data for central government debt
1. Choose any country and plot its current account balance and exports of goods and services, both as percentages of GDP. What is the difference between the two time series? Comment on its significance.
7. LO 4 Suppose, in the second model in this chapter, with production and investment, there is a temporary increase in credit market shocks, as you studied in Chapter 11. What are the efects on government spending, investment, aggregate output, future total factor productivity, and the current
6. LO 4 In Chapter 13, we studied how persistent total factor productivity shocks in a closed economy can provide an explanation for business cycles.In the second model studied in this chapter, with production and investment, determine the efects of a persistent increase in total factor
5. LO 4 Use the second model in this chapter, with production and investment, to answer this question.The government in a small open economy is concerned that the current account deicit is too high. One group of economic advisers to the government argues that high government deicits cause the
4. LO 1, 2 Suppose, as in Chapter 9, that in the irst model in this chapter there is limited commitment in the credit relationships between the small open economy and the rest of the world.There is some portion of the nation’s capital stock, denoted by Kc, which is collateralizable on world
3. LO 3 Suppose in the irst model in this chapter that there is a limited commitment friction and the possibility the nation could default in the cur rent or future periods. Suppose that, if the nation does not default, then the limited commitment constraint does not bind. Could default still be
2. LO 1, 2 Use the irst model in this chapter to answer this question. Suppose that governments in the rest of the world impose a tax on lending to foreigners. Determine how this afects consumption plus government spending in the present and the future, and the current account surplus.Explain your
1. LO 1, 2 Assume a two-period model where national income is 100 in the current period, and 120 in the future period. The world real interest rate is assumed to be 10% per period. The representative consumer always wishes to set current consumption plus government spending equal to future
16.10 What happens to the real interest rate in a closed economy and a small open economy when current total factor productivity increases?
16.9 What are the effects of an increase in current and future total factor productivity on output, absorption, and the current account surplus?
16.8 What are the effects of a temporary increase in government expenditure on output, absorption, and the current account surplus?
16.7 What are the effects of an increase in the world real interest rate on output, absorption, and the current account surplus?
16.6 Is an economy more or less likely to default if the current value of its indebtedness is higher? What happens if the world real interest rate increases?
16.5 What can constrain borrowing in world markets by an individual country?
16.4 Why could it be a good thing for a country to run a current account deficit?
16.3 In the first model in this chapter, what are the determinants of the current account surplus, and how does each of these determinants affect it?
16.2 What are the two small open-economy models that are used to explain the domestic aggregate economic activity of trade?
16.1 Why are small open-economy models often used to explain events in large open economies?
3. Plot Canada’s inflation rate against its unemployment rate as scatter plots for six decade-long periods: 1950–1959, 1960–1969, 1970–1979, 1980–1989, 1990–1999, and 2000–2009.What do you observe? Explain.
2. Plot India’s real interest rate and inflation rate for the period between August 1979 and August 1987. Then plot the same data for the United States. Compare the two series to underline the “Volcker disinflation” and explain what you see.
1. Plot China’s real interest rate and inflation rate in the period 1975–2015 as time series and scatter plots. What do you notice?
6. LO 4, 5 Suppose, in the NKRE model, that from time 0 until time T-1, the natural rate of interest is r1 * , where r1 * 6 - i*, and from time T on the natural rate of interest is r2* 7 0. Also, suppose that the central bank can achieve its inlation target from period T onward, and that the
5. LO 4, 5 Now, suppose in the NKRE model that the central bank follows a Taylor rule as in Equation (15-8), and h 6 -d a. Show what this implies for steady state equilibria, and for the whole set of equilibria that can arise, and explain your results with the aid of a diagram.
4. LO 4, 5 In the NKRE model, suppose a Taylor rule as in Equation (15-8), with -d a6 h 6 1.What does this imply for: (i) steady state equilibria;(ii) the whole set of equilibria that we could see? Explain with the aid of a diagram.
3. LO 3 Suppose that the natural rate of interest decreases and that central bank is constrained by the zero lower bound, with inlation below the central bank’s target and a positive output gap. Further, suppose that if government spending goes up permanently, anticipated future inlation will
2. LO 2 Suppose initially that inlation is at the central bank’s target and the output gap is zero.Then, government spending goes down. Determine, with the aid of diagrams, how the degree of price stickiness afects the central bank’s optimal response, and explain your results.
1. LO 1 In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital.(a) Suppose that the central bank keeps the nominal interest rate at its initial value.What will be the efect on current inlation and on output?(b) Suppose that the economy
15.11 Explain how the neo-Fisherian monetary policy rule acts to achieve good economic results.
15.10 What is the Taylor principle, and how does the Taylor principle go awry?
15.9 If the nominal interest rate increases permanently, what effect does this have in the NKRE model in the long run?
15.8 Explain the concept of rational expectations.
15.7 What is the basic neo-Fisherian idea?
15.6 What are the determinants of the natural real rate of interest on the output demand and supply side?
15.5 How can a central bank respond to deviations from its targets?
15.4 What three factors have been suggested for the decline in real interest rates in the world?
15.3 How can you define Calvo pricing in the basic New Keynesian model?
15.2 Why is inflation considered to be costly in the context of the New Keynesian model?
15.1 Explain why the Phillips curve relationship in the basic New Keynesian model takes the form it does.
3. Choose two countries and plot the difference between their unemployment rate and the employment rate in agriculture for males and females. What do you observe and how do you explain it?
2. Choose two countries and plot the difference between their general government final consumption expenditure and central government debt. What could this difference measure for both countries? Explain what you see in the charts.
1. Choose two countries and plot yearly percentage changes in the consumer price index and the stock price index in the period 2000–2015. How does the behavior of the index of the prices of goods and services differ from that of the index of asset prices for both countries?Discuss.
9. LO 5 If there is a liquidity trap, what will happen in the long run as prices adjust? Use a diagram, and discuss.
8. LO 5 Suppose that the central bank could convince the public to expect more inlation in the future. If the economy is currently in a liquidity trap, what efects would this have? Use a diagram, and explain your results.
7. LO 1 Suppose that the central bank needs to act in response to a temporary shock that hit the economy. Would the data that it produces replicate the real business cycle model? Explain your results.
6. LO 3 In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy.However, the central bank would like to come as close as possible to economic eiciency. That is, ideally the central bank would like the output gap
5. LO 3 In the New Keynesian model, how should the central bank change its target interest rate in response to each of the following shocks? Use diagrams and explain your results.(a) There is a shift in money demand.(b) Total factor productivity is expected to decrease in the future.(c) Total
4. LO 3 Some macroeconomists have argued that it would be beneicial for the government to run a deicit when the economy is in a recession, and a surplus during a boom. Does this make sense?Carefully explain why or why not, using the New Keynesian model.
3. LO 3 Suppose that the goal of the iscal authority is to set government spending so as to achieve economic eiciency, while the goal of the monetary authority is to achieve stability of the price level over the long run. Assume that the economy is initially in equilibrium and that there is then a
2. LO 3 In the New Keynesian model, suppose that supply is initially equal to demand in the goods market and there is a negative shock on the demand for investment goods because irms anticipate lower total factor productivity in the future.(a) Determine the efects on real output, real interest
1. LO 1 Suppose that real output decreases temporarily in the New Keynesian model.(a) What are the efects on government spending, consumption, investment, price level, employment, and real wage?(b) Are these efects consistent with the key business cycle facts from Chapter 11? What does this say
14.12 How can you evaluate the importance of Keynesian sticky price models?
14.11 In the New Keynesian model, does a liquidity trap imply that no economic policy can close a positive output gap?
14.10 When will the monetary policy be ineffective in a liquidity trap?
14.9 What is the difference between short-run and long-run actions of the central bank in monetary policy stabilization?
14.8 How do Keynesians justify intervention in the economy through monetary and fiscal policy?
14.7 Define the Keynesian transmission mechanism for monetary policy.
14.6 How does the New Keynesian model fit the key business cycle facts from Chapter 3?
14.5 Why is monetary policy not neutral in the New Keynesian model? What are the effects of a change in the central bank’s target interest rate?
14.4 How is monetary policy determined in the New Keynesian model? What is the central bank’s target, and what does the central bank control directly?
14.3 Which markets clear in the New Keynesian model, and which do not?
14.2 What is the key difference between the New Keynesian model and the models studied in Chapter 12?
3. Choose a country among Mexico, China, and Brazil. Plot a measure of real interest rate, employment, and real GDP for the period 2000–2015. Are your observations consistent with the business cycle models developed in this chapter? Discuss.
2. Plot the monetary base and real GDP for Brazil and China. Do you see any connection between the two variables? Discuss.
1. Plot the percentage changes in yearly GDP and M2 for Mexico and China. Is there a tendency for changes in GDP to precede changes in the same direction for M2? Comment on your observations.
9. LO 4 Suppose a liquidity trap, as studied in Chapter 12. We know that conventional monetary policy does not matter in a liquidity trap.However, show that, in the coordination failure model, monetary policy could act as a signal that coordinates private actions on a good equliibrium.Use a
8. LO 1 Suppose there is a liquidity trap, as studied in Chapter 12. In the real business cycle model, what does this imply about the comovements we should observe between money, the price level, and output? Discuss, with the aid of a diagram.
7. LO 1, 4 Suppose that the central bank of an economy observes an increase in real GDP but does not know what caused it.(a) How would the central bank respond if it believes that GDP increased because of an increase in total factor productivity and that real business cycle theory is correct?(b)
6. LO 1 Suppose that an unexpected investment increases the nation’s capital stock. Given its goal to stabilize the price level, how should the central bank respond? Explain.
5. LO 4 In the coordination failure model, suppose that consumers’ preferences shift so that they want to consume more leisure and less consumption goods. Determine its efects on aggregate variables in the good and bad equilibria and explain your results.
4. LO 4 Suppose that money plays the role of a sunspot variable in the coordination failure model, so that the economy is in the bad equilibrium when the money supply is low and in the good equilibrium when the money supply is high. Explain what the monetary authority could do to make consumers
3. LO 1 In the real business cycle model, suppose that irms become infected with optimism and they expect that total factor productivity will be much higher in the future.(a) Determine the equilibrium efects of this.(b) If waves of optimism and pessimism of this sort cause GDP to luctuate, does the
2. LO 1 Suppose that temporary increases in government spending lead to permanent increases in total factor productivity, perhaps because some government spending improves infrastructure and makes private irms more productive. Show that temporary shocks to government spending of this type could
1. LO 1 In the real business cycle model, suppose that government spending decreases temporarily.Determine the equilibrium efects of this decrease. Could business cycles be explained by luctuations in G? In other words, does the model replicate the key business cycle facts from Chapter 11 when
13.15 What can you tell about the effects of aggregate uncertainty in the private and public sectors during a financial crisis?
13.14 Name two of the most important critiques of the coordination failure model.
13.13 Which is the better macro model, the real business cycle model or the coordination failure model? Explain.
13.12 How can an economy be bumped from the bad equilibrium to the good equilibrium through government policies?
13.11 Why is money neutral in the coordination failure model?
13.10 What causes business cycles in the coordination failure model?
13.9 Give an example of a sunspot and explain how it affects the coordination failure model.
13.8 What are the important shortcomings of the real business cycle model?
13.7 List at least three positive features of the real business cycle model.
13.6 Should the government act to stabilize output in the real business cycle model?
13.5 How can the real business cycle model explain the behavior of the money supply over the business cycle?
13.4 Why is money neutral in the real business cycle model?
13.3 What causes output to fluctuate in the real business cycle model?
13.2 Why were Keynesians resistant to following the two key principles of the rational expectations revolution?
13.1 What were the two main principles introduced in the rational expectations revolution?
9. LO 7 Suppose that the central bank can inluence expectations about inlation, by promising to increase the money supply in the future. In a liquidity trap, what efect does this have? Use a diagram to illustrate your results, and explain.
8. LO 7 Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market purchase of government debt, what will be the efect on the price level? Use a diagram, explain your results, and discuss.
7. LO 4, 6 Suppose that we allow for the fact that cash can be stolen, but assume that a stolen credit card cannot be used, as it is instantly cancelled, so no one steals credit cards. Determine the effects this has on the quantity and price of credit card balances, the demand for money, and the
6. LO 4, 6 Suppose that, in an economy, every shop allows electronic payment by making more pointof-sales (POS) terminals available. What are the efects of this facility on the demand for money and on the price level?
5. LO 4, 6 Suppose a company invests in technological innovation and, therefore, has lower capital stocks in the current period. What are the effects on current aggregate output, consumption, investment, employment, real wage, real interest rate, nominal interest rate, and price level?Explain your
4. LO 4 In the monetary intertemporal model, suppose that the money supply is ixed for all time. Determine the efects of an increase in real wage caused by an increase in world trade prices on total factor productivity, current equilibrium output, employment, real interest rate, nominal interest
3. LO 4 Suppose that the nominal interest rate is zero; that is, R = 0.(a) What is the equilibrium quantity of credit card balances?(b) In what sense does the economy run more eiciently with R = 0 than with R 7 0?(d) Explain your results in parts (a) and (b).Discuss the realism of these predictions.
2. LO 4 The government decides that the use of credit cards is bad, and introduces a tax on credit card balances. That is, if a consumer or irm holds a credit card balance of X (in real terms), he or she is taxed tX, where t is the tax rate. Determine the efects on the equilibrium price and
1. LO 4 In the monetary intertemporal model, show that it is possible to have an equilibrium where money is not held and only credit cards are used in transactions. Is there such a thing as a price level in this equilibrium? Does monetary policy work? If so, how? Explain your results and what they
12.14 Why might the effective lower bound not be zero?
12.13 Do you think quantitative easing was among the best choices of unconventional monetary policy during the recent financial crisis? Explain.
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