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macroeconomic theory
Macroeconomics Global Edition 6th Edition Stephen D. Williamson - Solutions
12.12 What is a liquidity trap, and how does monetary policy work in a liquidity trap?
12.11 How can you differentiate between conventional and unconventional monetary policies?
12.10 Explain how money can be nonneutral in the short run.
12.9 What are three ways the government could bring about a change in the money supply?
12.8 What are the effects of an increase in the money supply in the monetary intertemporal model?
12.7 What determines the demand for money in the monetary intertemporal model?
12.6 What are the key economic differences between the various means of payment?
12.5 What is the real rate of interest on money?
12.4 How are real interest rate, nominal interest rate, and inflation rate related to one another?
12.3 What are the two most important frictions that make money useful as a medium of exchange?
12.2 Why are monetary aggregates important?
12.1 What are the three functions of money?
3. Plot the general government debt as a percent age of GDP for an economy of your choice.What do you observe? Is the theory of investment in this chapter consistent with your plots?
2. Calculate the ratio of total real government expenditure to GDP on a quarterly basis for an economy of your choice for the period 1950–2015. Also calculate the real interest rate on a quarterly basis as a six-month Treasury bill rate minus the inflation rate. Plot these two variables as time
1. Calculate the ratio of real investment expenditure to GDP for any economy of your choice for the period 1950–2015. Calculate the real interest rate as a six-month Treasury bill rate minus the inflation rate (calculate the inflation rate as an annualized rate), then plot both of these variables
14. LO 7 A macroeconomist suggests that, since aggregate output and employment have decreased, the government should increase expenditures on goods and services to increase both output and employment. Suppose that output and employment fell because of a sectoral shock.(a) Determine, using diagrams,
13. LO 7 Suppose a inancial crisis breaks out in an economy and is expected to last a couple of years.Show how the efect of this shock on aggregate output depends on the size of the intertemporal substitution efect of the real interest rate on current and future leisure, and explain your results.
12. LO 7 Suppose that a country experiences destruction of part of its capital stock. Suppose also that the capital stock plays a role as collateral in credit contracts, so that the destruction of capital increases credit market frictions.(a) Determine how the net effects on macroeconomic variables
11. LO 7 Suppose there is a temporary decrease in the relative price of solar panels. Determine how the response of current aggregate output to this shock depends on the marginal propensity to consume, and explain your result.
10. LO 7 Suppose that z’ and K decrease at the same time. Show that it is possible for the real interest rate to remain constant as a result. What does this say about the model’s ability to explain the lack of capital or investment in the economic status of an economy?
9. LO 7 Suppose that there is a permanent increase in total factor productivity. Determine the implications of this for current macroeconomic variables, and show how the impact difers from the case where total factor productivity is expected to increase only temporarily. Explain your results.
8. LO 7 Suppose there is a shift in the representative consumer’s preferences. Therefore, given the market real interest rate, the consumer prefers to consume more current leisure and less current consumption goods.(a) Determine the effects of this shift on current aggregate output, current
7. LO 4 Determine how the following afect the slope of the output supply curve and explain your results.(a) Government spending decreases at a slower rate than the rate at which lifetime wealth increases.(b) The intertemporal substitution effect of the real interest rate on employment in the labor
6. LO 7 The government decreases current taxes, while holding government spending in the present and the future constant.(a) Using diagrams, determine the equilibrium effects on consumption, investment, the real interest rate, aggregate output, employment, and the real wage. What is the multiplier,
5. LO 5 Determine how the following afects the slope of the output demand curve, and explain your results:(a) The marginal propensity to consume increases.(b) The intertemporal substitution effect of the real interest rate on current consumption increases.(c) The demand for investment goods becomes
4. LO 3 Suppose that we modify the model of the irm’s investment behavior by assuming that any capital the irm has remaining at the end of the period can be sold at the price pK = (in our model we assumed the capital could be sold at a price of one, in terms of consumption goods).(a) Determine
3. LO 3 The government wishes to bring about an increase in investment expenditures, and is considering two tax policies that policymakers think could bring this about. Under the irst tax policy, irms would receive a subsidy in the current period of t per unit of current output produced.
2. LO 3 Tom lives on an island and has 20 coconut trees in the current period, which currently produce 180 coconuts. Tom detests coconuts, but he can trade them with people on other neighboring islands for things that he wants. Further, Tom can borrow and lend coconuts with neighboring islands. In
1. LO 3 What is the efect of an increase in d, the depreciation rate, on the representative firm’s investment decision, and on its optimal investment schedule? Explain your results carefully.
11.18 Explain how a sectoral shock adds friction to the labor market.
11.17 How do credit market frictions affect aggregate economic activity? Explain how tax policy can mitigate credit market frictions.
11.16 Determine the equilibrium effects of an anticipated increase in future total factor productivity in the real intertemporal model. Explain why these effects are different from the effects of an increase in current total factor productivity.
11.15 What are the effects of an increase in the total factor productivity on key business cycle facts? Why are temporary shocks a cause of business cycles?
11.14 What are the effects of a decrease in the current capital stock on the real interest rate, aggregate output, employment, the real wage, consumption, and investment?
11.13 What are the effects of a temporary increase in government purchases on the total government expenditure multiplier?
11.12 How are aggregate output and the real interest rate determined in competitive equilibrium?
11.11 What are the factors that shift the output demand curve?
11.10 What are the factors that shift the output supply curve?
11.9 What is the government’s budget constraint in the real intertemporal model? Can the government run a deficit or run a surplus in the current period?
11.8 What is the role of default premium in a firm’s optimal investment schedule?
11.7 What happens when the optimal investment schedule shifts to the left?
11.6 What happens when the optimal investment schedule shifts to the right?
11.5 When does the optimal investment schedule shift?
11.4 What is the goal of the representative firm in the real intertemporal model?
11.3 What happens to current demand of consumption goods when real interest rate decreases?
11.2 What are three factors that determine current labor supply?
11.1 Explain how intertemporal substitution is important for current labor supply and for the current demand for consumption goods.
3. Plot the housing price-to-income ratio and housing price-to-rent ratio around the world.What do you think accounts for the difference between the two ratios?
2. Analyze the housing price-to-income ratio in China and Mexico. How is a consumer’s lifetime wealth affected in these countries and why are there differences between them?
1. There are several assessments why the real prices of houses around the world are almost back to the levels that they were at before the financial crisis. Choose at least three of these and compare and contrast what they tell us about the boom and the bust in the housing market that occurred in
8. LO 4 Use the social security model developed in this chapter to answer this question. Suppose that a government pay-as-you-go social security system has been in place for a long time, providing a social security payment to each old person of b units of consumption. Now, in period T, suppose that
7. LO 4 Consider a pay-as-you-go social security system where social security is funded by a proportional tax on the age of the young (less before the age of 40, more after 40). In other words, the tax collected by the government is sc, where s is the tax rate and c is the consumption of the young.
6. LO 4 Use the social security model developed in this chapter to answer this question. Suppose that the government establishes a social security program in period T, which provides a social security beneit of b (in terms of consumption goods) for each old person forever. In period T the
5. LO 3 Suppose there are two groups of consumers in a population, constrained and unconstrained, with equal number of each. The constrained consumers look like the ones in Figure 10.5, while the unconstrained consumers do not have suicient collaterizable wealth to support the amount of borrowing
4. LO 2, 3 Suppose a credit market with a good borrowers and 1 - a bad borrowers. The good borrowers are all identical, and always repay their loans. Bad borrowers never repay their loans.Banks issue deposits that pay a real interest rate r1, and make loans to borrowers. Banks cannot tell the
3. LO 2, 3 Suppose that there is limited commitment in the credit market, but lenders are uncertain about the value of collateral. Each consumer has a quantity of collateral H, but from the point of view of the lender, there is a probability a that the collateral will be worth p in the future
2. LO 3 Suppose there is a credit market imperfection due to limited commitment. As in the setup with collateralizable wealth we examined in this chapter, each consumer has a component of wealth that has value pH in the future period, cannot be sold in the current period, and can be pledged as
1. LO 2 Suppose that there is a credit market imperfection due to asymmetric information. In the economy, a fraction b of consumers consists of lenders, who each receive an endowment of y units of the consumption good in the current period, and 0 units in the future period. A fraction(1 - b)a of
10.10 In a perfect world, is there any rationale for establishing a social security system to force consumers to save for their retirement?
10.9 Why is a pay-as-you-go social security system preferred to a fully funded one?
10.8 In the case of a pay-as-you-go social security system, how would the tax burden matter?
10.7 For a borrower who is collateral-constrained, what happens when the value of collateralizable wealth falls? How does this matter for the financial crisis?
10.6 If the default premium increases, what is the effect on the consumption and savings of an individual consumer?
10.5 Explain how a default premium can arise, and what would cause it to increase.
10.4 What are two sources of credit market imperfections?
10.3 Why is tax policy considered to be a blunt instrument?
10.2 What is a typical incentive device used by lenders to prevent default?
10.1 What effects do credit market imperfections have on the interest rates faced by lenders and borrowers?
3. Plot the trend of Japan’s elderly population rates (the ratio of elderly population aged 65 and above to total population) using data from https://data.oecd.org/pop/elderly- population.htm for the period 2000 to 2014. Does the elderly population trend answer the preceding questions? Why or why
2. Plot the trend of Japan’s general government deficit (https://data.oecd.org/gga/general-government-deficit.htm) from 2000 to 2014, and determine whether it bears any relationship with the household saving rates in your answer to (1). Does this relationship conform to the Ricardian Equivalence
1. Plot Japan’s household saving rate (https://data.oecd.org/natincome/saving-rate.htm) from 2000 to 2014. Saving, in this case, is defined as the difference between disposable income plus the change in net equity of households in pension funds and the final consumption expenditure. Describe and
12. LO 5 Suppose in our two-period model of the economy that the government, instead of borrowing in the current period, runs a government loan program. That is, loans are made to consumers at the market real interest rate r, with the aggregate quantity of loans made in the current period denoted
11. LO 5 Suppose that a consumer has income y in the current period, income y′ in the future period, and faces proportional taxes on consumption in the current and future periods. There are no lump-sum taxes. That is, if consumption is c in the current period and c′ in the future period, the
10. LO 2 Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that is a constant, b.(a) Determine how this consumer’s choice of current consumption, future consumption, and savings depends on the market real interest rate r, and taxes and income
9. LO 2, 5 A consumer’s current income (y) is 2,500 and the future income (yʹ) is 1,500. A current lump-sum tax (t) of 500 is paid and the tax in the next period (tʹ) is 600. The real interest rate is 10% for each period. Assume that current and future consumptions are perfect complements,
8. LO 2, 5 Assume that there are 1,000 identical consumers and the equilibrium real interest rate is 20%. Each consumer receives a current income of 100 units and a future income of 120 units and consumes 80 units and 92 units in the current and future periods, respectively. Each consumer pays a
7. LO 2, 5 Suppose that all consumers are identical, and also assume that the real interest rate r is ixed.Suppose that the government wants to collect a given amount of tax revenue R, in present-value terms.Assume that the government has two options: (i)a proportional tax of s per unit of savings,
6. LO 2, 5 A consumer receives income y in the current period, income y′ in the future period, and pays taxes of t and t′ in the current and future periods, respectively. The consumer can lend at the real interest rate r. The consumer is given two options.First, he or she can borrow at the
5. LO 2, 5 A consumer receives income y in the current period, income y′ in the future period, and pays taxes of t and t′ in the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can
4. LO 2 Suppose that the government introduces a tax on interest earnings. That is, borrowers face a real interest rate of r before and after the tax is introduced, but lenders receive an interest rate of(1 - x)r on their savings, where x is the tax rate.Therefore, we are looking at the efects of
3. LO 2 Consider the following efects of an increase in taxes for a consumer.(a) The consumer’s taxes increase by Δt in the current period. How does this afect current consumption, future consumption, and current saving?(b) The consumer’s taxes increase permanently, increasing by Δt in the
2. LO 2 An employer ofers his or her employee the option of shifting x units of income from next year to this year. That is, the option is to reduce income next year by x units and increase income this year by x units.(a) Would the employee take this option (use a diagram)?(b) Determine, using a
1. LO 2 A consumer’s current income (y) is 200 and the future income (yʹ) is 240. A current lumpsum tax (t) of 10 is paid and the tax in the next period (tʹ) is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements, and the consumer
9.19 Give four reasons that the burden of the government debt is not shared equally in practice.
9.18 State the Ricardian equivalence theorem.
9.17 How does the government finance its purchases in the two-period model?
9.16 What are the intertemporal substitution effects of an increase in the real interest rate? What are the aggregate effects of an increase in the real interest rate on current and future consumption, and current savings?
9.15 What does theory tell us about how the value of stocks held by consumers should be related to consumption behavior? Does the data support this?
9.14 What produces a larger increase in a consumer’s current consumption, a permanent increase in the consumer’s income or a temporary increase?
9.13 How does a decrease in future income affect lifetime wealth, current and future consumption, and saving?
9.12 Give two reasons why consumption is more variable in the data than theory seems to predict.
9.11 How does an increase in current income affect intertemporal decisions? How do these decisions reflect on consumption smoothing?
9.10 How is the consumer’s motive to smooth consumption captured by the shape of an indifference curve?
9.9 What are the three properties of a consumer’s preferences?
9.8 What does the endowment point signify? What is the interest rate at this point? Does the endowment point satisfy the budget constraint?
9.7 What are the horizontal and vertical intercepts of a consumer’s lifetime budget constraint?
9.6 What is the effect of a change in interest rate on the slope of the consumer’s lifetime budget constraint?
9.5 Show how to derive the consumer’s lifetime budget constraint from the consumer’s current-period and future-period budget constraints.
9.4 What is the price of future consumption in terms of current consumption?
9.3 In the two-period model, what are the assumptions that govern bonds issued in the credit market?
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