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Macroeconomics Understanding The Wealth Of Nations 2nd Edition David Miles, Andrew Scott - Solutions
(17.6) Suppose stock prices are more variable than efficiency implies, in the sense that stock prices vary more than do rational expectations of discounted future dividends. What implications does this have about the efficiency of the takeover mechanism as a means to discipline the managers of
(17.5) How would you judge what the equity risk premium is today? How would you assess whether it was adequate?
(17.4) “Share price changes are volatile and unpredictable, therefore the stock market is unrelated to what happens in the rest of the economy; it’s just a casino.”“Share price changes are volatile and unpredictable; therefore the stock market is efficient and helps allocate resources
(17.3) Suppose a company cuts its dividend today to finance more investment from retained current profit. Under what circumstances would this increase, decrease, and leave unchanged the share price?
(Section 17.1) Firms tend to use retained earnings rather than issue new shares to finance a higher proportion of new investment. Does this mean the stock market is largely irrelevant for companies?
(15.11) The League of Big States (LBS) has inflation expectations of 5% and an estimated natural rate of unemployment of 5%. A 2% rise (fall) in unemployment leads to a 1% fall(increase) in inflation.(a) What is inflation when unemployment equals 5%?(b) What is inflation when unemployment falls to
(15.11) The Community of Pacific States (CPS) operates a Taylor rule of interest rates 5% A (output gap) B (inflation inflation target)Inflation is determined by a Phillips curve so that inflation inflation target 0.5 output gap last year And interest rates impact on the output gap so
(15.11) The Federal Reserve Bank of Albion operates a Taylor rule of interest rate inflation target equilibrium real interest rate 0.5 (output gap)1.5 (inflation inflation target)It has an inflation target of 2% and believes the equilibrium real rate to be 3%. Currently the output gap is zero
(15.2) Use the IS-LM framework to show that the level of interest rates needed to preserve demand at some given level might require negative interest rates.
(Section 15.2) Use the IS-LM apparatus to show how the change in the level of interest rates needed to bring about a given change in demand is greater the less responsive are investment and consumption to the cost of borrowing.
(15.12) In a world in which electronic transfer of funds is becoming easier and the value of more and more people’s assets is easier to ascertain, is the power of central banks doomed to decline? Is this worrisome?
(15.11) At Christmas and Easter the public withdraws large amounts of cash from their accounts. What should central banks do during these periods to stabilize interest rates?
(15.7/15.11) Should measures of inflation include asset prices (e.g., stock prices and house prices), so that inflation targeting would require the monetary authorities to act when asset prices rise dramatically?
(15.4–15.7) Why not specify a goal for the monetary authorities that included both a price level and an unemployment target?
(15.1) Central banks control short-term interest rates because they control the supply of base money, which is the ultimate, final form of settlement for transactions. Are central banks abusing this power by using it to determine interest rates?
(Section 15.1) Should something that has such a large impact on the economy as monetary policy be handed over to a central bank rather than decided by elected politicians?
(14.8) Use a supply and demand model to analyze the impact of an oil price shock on the economy. After an increase in oil prices, what is likely to happen to profits, unemployment, income, and consumer confidence? How will this further affect your analysis? How useful is the distinction between
(14.7) An economy is dominated by two industries, both of which are considering whether to initiate a major investment project. If both industries invest, then employment and productivity are high and each industry makes profits of $5 billion. However, if neither industry invests, the economy is
(14.7) Consider the Real Business Cycle model of Figure 14.11a. How does the labor supply curve need to shift for the model to explain business cycle fluctuations? What might cause such a shift?
(14.1/14.7) You will find a spreadsheet useful in answering this question. Let the output gap in Year 0 and Year 1 be 0. Further, let the output gap today equal 0.9 of yesterday’s output gap less 0.9 of the output gap two periods ago, e.g., Y(t) 0.9*Y(t 1) 0.9*Y(t 2).(a) Calculate the
(Section 14.1) Output in an economy is given by the following numbers Year 1 2 3 4 5 6 7 8 9 10 Output 1 1.2 2.8 4.3 5.2 6.1 6.7 7.4 8.9 10(a) Assume a simple straight line between Year 1 and Year 10 is a good estimate of trend GDP. Calculate the output gap.Analytical Questions 375(b) In Year 11
(14.8) Real Business Cycle theory implies that negative total factor productivity shocks cause recessions. What do you think such shocks might be?
(14.7) What are the impulses and propagation mechanisms of Real Business Cycle theory and Keynesian models?
(14.7) What role do you think consumer and firm psychology has in driving the business cycle through fluctuations in demand?
(14.7) Travel on a train between Paris and Madrid and the view from the window changes—fluctuating between green land and a heavy concentration of economic activity. What explains this bunching of activity over space? Could similar factors explain the bunching of activity over time (the business
(14.7) How much of your weekly shopping is on commodities with “sticky” prices—prices that firms cannot immediately change? Are these sticky prices relevant or can they be negotiated? How do you think the introduction of barcoding and computer pricing have influenced price behavior?
(14.7) If rising inflation after an oil price increase leads the Central Bank to dramatically increase interest rates, what is the impulse behind this business cycle and what is the propagation mechanism?
(14.6/14.7) In a recession, share prices tend to be low and companies can be bought at low prices and workers hired for low wages. Given that recessions are only temporary, what stops you from buying loads of stocks in a recession and then selling them during an expansion?
(14.6) If the economy goes into recession, how will it affect you? Consider not just your income but the prices of any assets you might own or commodities you purchase. How can you minimize this impact?
(14.6) Are recessions a good time for reorganizing and improving the efficiency of firms?
(Section 14.3/14.5) Why are recessions shorter than expansions?
(13.3/13.7) An all-equity company (which has no debt) has a stock market value of $540 million. Its tangible assets comprise land, buildings, and machines. The land is worth $100 million. The buildings are worth $120 million. The replacement value of the machines is $300 million. What is Tobin’s
(13.2) Suppose companies can deduct interest payments on their debt against their taxable income: they pay tax on profits, net of interest payments on debt. The revenue that a company generates from some new investment is taxed, but it can be offset by depreciation of the capital. Suppose the
(13.2) Suppose that the corporate sector in an economy aims to do enough investing to preserve a ratio of the capital stock to output of 3. If the capital stock is less than 3 times output, firms invest; if the capital stock is above 3 times output, firms do not scrap capital or sell it because the
(13.2) Consider again the delivery company in question 2. The company estimates how much extra pretax income a given number of new vans will bring in. Here is the schedule:Extra Vans Extra Income (pretax $)10 300,000 20 570,000 30 840,000 40 1,000,000 50 1,150,000 How many vans should the firm buy?
(13.2) A delivery company can buy a new van for $50,000. It can finance the purchase with a bank loan. The annual interest rate is 12%. Interest payments are tax deductible and the corporate tax rate is 30%. The company estimates that it will be able to sell the van a year later for $30,000. Any
(Section 13.1) The capital output ratio in an economy is 2.5. Capital depreciates at 6% a year. Output grows at 3% a year. What is the ratio of gross investment to output that keeps the capital–output ratio constant?
(13.7) How much production in your country is undertaken by foreign multinationals? Consider the reasons why those companies chose to locate investment and production in your country. Are they the same factors that have made companies that are based in your country invest abroad?
(13.7) Should governments give incentives to overseas firms to invest in the economy? Should incentives be the same for domestic firms? What if other governments offer incentives?
(13.3) Suppose an invention renders much of existing production techniques in a sector of the economy obsolete. What would happen to the stock prices of firms and to investment in the sector? What does this tell you about q theory?
(13.2) Suppose interest rates rise sharply but are expected to fall again in a year or so. How do you think this would affect the level of investment in machines with short lives and those with very long useful lives?
(13.2) Suppose firms extrapolate from recent growth in demand to future growth in demand.They invest when capital is insufficient to meet projected demand. If current capital exceeds what is required to meet expected demand, investment is cut to zero. How could an economy that worked like this
(Section 13.1) Can a country invest too much? How might you assess what is too much?
(12.7) Using the same simple model of the economy as in question 3, now allow for the impact of interest rates on consumption. The consumption function is:where r is the level of interest rates.Calculate the equilibrium level of income when interest rates are 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10% Draw
In response to 5% interest rates, the consumer defers savings and aims for her consumption to grow by 1 every period. If interest rates are 10%, then she wishes her consumption to increase by 2 every period.(a) Calculate consumption and savings in each period when interest rates are 5%.(b) Repeat
(12.6) Consider a consumer who expects to receive income in five periods of 4, 12, 23, 16 and
(12.6) Consider the same consumer as in question 1, but now the consumer is unable to borrow—wealth always has to be positive.(a) How does your answer to question 1a change?(b) How does your answer to question 1b change?(c) What difference is there in the way fiscal policy influences the economy
(12.3) Suppose C 100 0.7 Y, G 50, I 120 In a closed economy Y C I G(a) What is the equilibrium level of Y ?(b) What happens if the level of consumption becomes C 130 0.7 Y?(c) What happens if the level of consumption becomes C 120 0.85 Y?Illustrate your answers using the Keynesian cross
(12.2) Consider an individual who is planning his consumption over five periods during which he expects his income to be 4, 10, 16, 12, and 8.(a) What is his permanent income?(b) What is his marginal propensity to consume out of a temporary increase that boosts first period income to 6?(c) What is
As a result, the net of tax income the individual earns (including benefits)changes to 8 8 10 14 8 Recalculate consumption, savings, and assets for each decade. What impact does the benefit system have on consumption?
(Section 12.2) A consumer expects to earn the following sequence of income over the next five decades 4 7 10 19 0(a) Using the forward-looking consumption smoothing model, calculate consumption, savings, and wealth for the consumer in each decade (assuming interest rates are zero).(b) The
(12.9) How would an increase in the popularity of annuities affect levels of inheritances in a country? (Annuities are contracts where in exchange for handing over a lump sum of money today, a person receives a certain [known] amount of money each year until death.)
(12.9) In the two-period model the consumer aimed to die with zero assets. What would be the planning horizon of parents who wished their children to enjoy the same standard of living they experienced? What is the planning horizon if every generation feels this way?
(12.5) What would be the impact on savings if the government introduced an unemployment insurance scheme?
(12.5) In practice, the m.p.c. out of current income is very high—is this necessarily inconsistent with the forward-looking model?
(12.4) The permanent income model assumes that you treat your current financial wealth and the present value of your discounted future income in the same way. Discuss the plausibility of this result.
(12.4) When inflation increased sharply in the 1970s, the savings rate increased. Evaluate the role of interest rates and current and future income in explaining this phenomenon.
(12.4) What would the budget constraint look like if it were only possible to borrow at an interest rate higher than the deposit rate?
(12.4) Draw indifference curves for a patient consumer compared to an individual with a need for instant gratification.
(12.3) Use the Keynesian cross diagram to show how a fall in government spending can affect consumption.
(Section 12.1) Is there a useful distinction to be made between consumers’ expenditure and consumption for (a) services, (b) nondurable goods, (c) durable goods? Might spending on these different components react very differently to changes in income and to interest rates?
(11.9) The Central Bank of Arcadia has an inflation target of 2%, and forecasts real GDP growth of 2.5% with no change in the velocity of money.(a) What money supply growth should it target?(b) If the Central Bank revises its velocity forecast to 3% growth, what does this do to its money supply
(11.7) Let the demand for money in the economy be given by 150,000 [Inflation (%)]3 Calculate the amount of revenue raised through the inflation tax for inflation rates up to 50% (a spreadsheet would help!). What inflation rate maximizes revenue?
(11.6) Main Street Bank sets its loans on the basis of a 5% reserve requirement and has $100 million cash in its vaults.(a) What is the maximum amount of loans the bank can make?(b) If the bank has made loans of $50 million to real estate firms and is required to keep a 50% reserve requirement
(11.3) In the United States of Albion, expected inflation is 5% and the real interest rate is 2%.(a) What is the nominal interest rate?(b) If inflation turns out to be 10% instead, what is the ex post real interest rate? Who gains and who loses from this error in forecasting inflation?(c)
(Section 11.2) The U.K. price index in Figure 11.1 has the value 109 in 1661, 83 in 1691, 81 in 1891, 231 in 1919, 208 in 1946, 1103 in 1975, and 5350 in 2000. Imagine a one pound note which is accidentally left in the attic of a stately home when it is built in 1661. Calculate the real value of
(11.9) Suppose thieves hijack a truckload of old paper currency on the way to the incinerator. The old currency is worth $1 billion. Who, if anyone, loses if the thieves get away with the cash?
(11.7) Rich people tend to hold more money than poor people; so is the inflation tax fair?
(11.4) Suppose people could walk around with electronic charge cards that they could use to buy anything; they never need to carry currency. People would have accounts that were invested in bonds, equities, and other financial assets into which their salaries, dividends, and interest were paid. The
(11.4) Which of these is money: a credit card; lunch vouchers; a portfolio of blue-chip equities; a $100,000 revolving credit line; a $100 dollar bill in Moscow; one million Russian rubles in New York; one million Russian rubles in Des Moines, Iowa?
(11.3/11.9) Most economists—and nearly all central bankers—seem to think that inflation is costly. But the quantity theory asserts that there is no long-run link between money and output nor between inflation and output. Can inflation be costly if the quantity theory is true?
(Section 11.2) Suppose a new drug can cure cancer. It costs a few cents to make the pill, and one pill can stop a malignant growth with zero side effects. The drug goes on sale for a few cents a pill, and although the manufacturer makes millions, the money value of the production is tiny. Is it
(10.6) Consider the initial situation shown for the two economies in Table 10.5. Using a spreadsheet, calculate the evolution of the stock of debt, debt interest payments, and the overall deficit if interest rates are 4% rather than 3%. How much lower would the initial stock of debt need to be for
(10.5) Suppose that the real interest rate in an economy is 6%. Real GDP grows by 2.75% a year. The new chief economic adviser to the government argues that a tax increase of $20 billion will generate huge benefits because the real interest rate is much larger than the Analytical Questions 255
(10.4) A government is running a balanced budget. An election is approaching and the government decides on a one-time, temporary massive tax cut that will cut tax revenue by $50 billion in one year; after the year is over, tax rates and tax revenue return to normal. The government decides to issue
(10.3) Suppose you had information on the impact of spending on public education on the productivity of the labor force. You also have information on how education spending reduces crime. Finally, you have estimates of how raising extra taxes creates distortions to labor supply. Explain precisely
(10.2) Suppose that income is distributed within a country so that one-third of the population earns exactly one-third the average wage, one-third earn exactly two-thirds of the average-wage, and the richest one-third earn exactly twice the average wage. Initially there are no taxes and no
(Section 10.2) Suppose the average value that a person in a certain city places on having 1000 extra police officers out on the streets for a year is $10. Some people have a higher value and some a lower value. The population is 7 million. The city government decides to ask people how much they
(10.7) Does it make sense for there to be any limits on the ability of a democratically elected government to run fiscal deficits? Does the fact that future generations cannot vote have any bearing on this issue?
(10.5) Because future generations are likely to enjoy higher real incomes than the current generation, shouldn’t we aim to run up the stock of debt so that those most able to pay face the higher taxes?
(10.3) Resource allocation will be less distorted if taxes are levied on goods and services (including types of labor) that are in inelastic supply—that is, where changes in the price sellers receive does not change supply much. But would this generate a fair system of taxes? What conflicts might
(10.2) Should governments force people to be in school? Why or why not?
(10.1) Some of the things that governments spend money on are luxury goods (goods for which the proportion of people’s—or governments’—income that is spent on them is likely to rise as income grows). Health care and education may be such goods. If most goods that a government provides are
(Section 10.1) Figure 10.3 shows that the level of social benefits (e.g., unemployment benefits, retirement benefits, and income support) varies hugely across countries. Why might this be so? Consider whether differences in the degree of inequality of pre-tax incomes might be a factor.
(9.4) Does the world economy need stronger or fewer international financial institutions?Why?
(9.3) As an alternative to globalization, many critics are advocating a “buy local” campaign.Assess the merits and disadvantages of this policy.
(9.3) What policies would governments need to focus on to make sure that trade liberalization did not adversely affect poverty?
(9.3) To what extent does the focus by economists on the economic gains from globalization fail to recognize the concerns of noneconomists?
(9.3) What are the limits and constraints to establishing global institutions and regulations?What does this imply about the process of globalization?
(9.2) Imagine that But that If an econometrician ran a regression of GDP on the capital stock and openness, what effect would they find from openness? Explain your answer.
(9.2) Trade liberalization shows that it is a mistake for policymakers to think that “exports are good and imports are bad.” Discuss.
(Section 9.1) What do you think the term “globalization” means? Is it just an economic phenomena?
(8.7) How would the situation shown in Table 8.10 change if the EU increased its subsidy from $100 to $300? If you were the CEO of Airbus, how would you use this subsidy to improve your market position? How might Boeing respond?
(8.5) A small industrialized country initially has no trading links with a large, but closed, centrally-planned economy that shares a border. Wages per hour for skilled and unskilled workers are $25 and $12, respectively, in the industrialized economy. The centrally-planned economy suddenly
Country A has a per capita GDP 10 times country B. The government of country B decides that concentrating on producing toy cars is harmful because it sees few countries in the rich, developed world that use more resources on building toys than on manufacturing automobiles. It places a 50% tariff on
(8.2) Consider again the two countries in Question
(Section 8.2) In country A, it is possible to produce a car with the same resources that would produce 1000 toy cars. In country B, producing a car uses resources that could produce 3000 toy cars. Show with a diagram how both countries can be better off if the international terms of trade between
(8.8) Does popular resentment against free trade simply reflect economic illiteracy or more deep-seated political issues?
(8.6) Imagine a reunion in 10 years time with your classmates. Under one scenario, you find that although your income rose 50%, everyone else’s income rose 100%. Under another scenario, your income fell by 25%, but everyone else’s fell by 50%. Which of these scenarios do you prefer? What does
(8.5) Figure 8.10 suggests that trade makes wages reflect productivity within a country. Is this fair?
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