Elite Student Edition 5 Steps To A 5 AP Macroeconomics 2020 1st Edition Eric R. Dodge - Solutions

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What aretheconditions needed forafinancialmarket to beefficient?Arethey likely to bemet in practice?
Howdo asset marketsextend and refinethemodel of intertemporal of Robinson Crusoeintroduced in Chapter 6?
Consider theexample ofaspeculative bubblein thetext (Section 7.5.2). Now imaginethat while, as before, therearetwo assets, investors no longer have perfect foresight. The privateasset can be purchased at variablereal price qtand pays afixed real dividendd. Now, however, thereis a probability s that
It is often criticized that the price ofstocks, which are often owned by wealthy individuals, risein recessions. Can you givean explanation for this fact?
The yield curveis said to beinvertedwhen it is downward-sloping. Howcan you explain this occasional phenomenon?
Consider threeassets A, B,andCwith uncertain outcomes (payoffs) dependingon three possiblefuturestates of theworld.Payoffs in state 1:A: €100; B: €50; C: €150.Payoffs in state 2:A: €0; B: €150; C: €100.Payoffs in state 3:A: €200; B: €100; C: €50.Assume that each state has one
Why is the bid–ask spread thecommonway of organizingpricingof financialassets?Givetwo interpretations of the bid–ask spread.
Asset markets are considerably more volatile than goods markets. Asset markets balance stocks while goods markets balance flows. What is the link between these two observations?
Argentina defaulted in 2002 in themidst ofan economicand politicalcrisis. Initially, the government refused to negotiatewith its creditors. Eventually, in 2005 it reached an agreement withmost creditors, which included a debt reduction of 70%,and started to pay back theremaining. Yet, aminority
When acountry defaults on itsexternal debt,afrequent controversy concerns whether thecountry is unable or unwillingto honour its debt. Discuss this distinction andwhy it is difficult to resolvethecontroversy.
Somecontend that the‘pay as you go’systemof social security in many European countries, in which the pension contributions of thecurrently employed are used to pay the pension benefits of older workers already in retirement, is a pyramid scheme. Do you agree or disagree? Explain.
For the government to honour its budget constraint, it is sufficient but not necessary that its budget be balanced every year. Why?Why might a balanced budget lawnot bea good idea?What conclusions do you draw?
Why do you think theinterest rateis positive?What would betheconsequence ofa negative(real) interest rate?
Comparethetwomeasures of theItalian budget shown in Figure 6.8with that of Table 17.3 (in Chapter 17). Explain the difference.
Startingfromyouranswer to the previous problem, showhowataxcut in period 1 can increasewealth if rG = 0.05 and r = 0.10?What happens if rG = 0.15?If rG = 0.10?
Considera government in atwo-periodworld startingwith €1,000 in debt. G1 =G2 = 500 and T1 = 400. If theinterest raterG = 0.05, what do taxes in thesecond period need to beto guaranteethesolvency of this government?Howdoes youranswerchangewhen rG = 0.10?
Write down the value of thefirmwhen the production function is Y2 = F(K2, L) with L= 1,and thecapitalstock in thesecond period is given by K2 = I1 + (1 − δ)K1. How does theinitialand given stock of capital in thefirst period affect thefirm’s value? The depreciation rate? The rate of investment?
Supposethe production function has the Cobb–Douglas form:Y=AKαL 1−α,and assumelabour input is fixed at L= 1. Let α = 0.5 andA= 1.At an interest rate of 5%and no depreciation, what is thelevel of thecapitalstock Kfor which the project is just profitable? How does your answerchangewhen
Sometimes when afirmannounces a plan to take overanother firmusingits cash and not to distribute dividends to its shareholders, its share price decreases;and when the plans arecancelled, theshare pricerises again.At other times, the opposite pattern is observed. Can you explain why?Under what
Thereal interest rateis 5%. What is the value of a new firmwhich invests €200,000 initially and expects to have profits (sales minus costs) of €100,000 next year, €70,000 the year after, €40,000 thethird year, and then to close down with equipment valued at zero? How does your
In thetext, Robinson Crusoe does not want to leaveany wealth beyond tomorrowbecause hewill berescued. Thesituationwould be different if hewanted to leave his friend Friday a.pngt ofafixed amount B3 in thesecond period(B3 might also bethought ofasa bequest). Write down Crusoe’s budget constraint
Supposethat Crusoecannot tradeintertemporally with his native neighbours, but coconuts no longerspoilcompletely, so hecan storethemforconsumption tomorrow. Consider thecase Y1 = 200 andY2 = 100,and supposethat 10%of thestored coconutsarelost because of spoilage. Represent this budget constraint
Usetheexample given to consider thecase ofa higher interest rater = 10%. In terms of wealth, which version of Crusoe has moreto losefroman increasein theinterest rate?Compare youranswer to an individualwithY1 = 300 andY2 = 0. Explain.
Drawa budget linefor Crusoein atwo-periodworld,assumingan interest rater of 5%and an income of 100 in thefirst period (Y1)and 200 in thesecond (Y2). What is the value of totalwealthΩ?Why are youranswers different when insteadY1 = 200 andY2 = 100?
Useequations (5.5)—written for both the homeand foreign countries—and (5.8) to find an expression that describes thelong-run evolution of the nominalexchangeratesas driven by the domesticand foreignmoney and GDP growth rates. Denote domesticand foreignmoney supply as M andM*, respectively,and
Consideran economy wherethestock ofmoney is growingby 5%per year whileGDP expands by 2.5%annually. Assumethat inflation abroad is 3.5%. What will betherate ofchange of theexchangeratein thelongrun?
Money is neutral in thelongrun, but is it neutral in theshort run?Lookingat theCambridgeequation (5.2), howcouldmoney increasewithout the pricelevel increasingproportionately?
Thefollowingfigure displays theevolution of the nominaland realeffectiveexchangerates of Portugalsince 1970. What can you concludeabout therate of inflation in that country?
What happens to therealexchangerate between two countries if the pricelevelat home doubles,all other things given?What if the price of foreign goods doubles?What if the nominalexchangerate doubles?
Table 5.1 impliesarelationship betweenmoney growth and theinflation ratewhen theGDP trend growth rateis 3%perannum. Represent this relationship graphically. Showhowthis relationship would changeif theGDP trend growth ratewere 8%instead. What conclusionscan you draw?
Box5.2 tells thestory of Zimbabwe. It also notes that hyperinflations often occurafterawar. In your view, why do governmentsallowhyperinflation to occur?
TheLawof One Price does not hold. Can you imaginereasons why?
Astrongcurrency isacurrency that tends to appreciate. Inwhat senseis thisa desirable objective?
‘Money neutrality simply says that thereis noway to cheat withmoney.’ Comment.
Most governments regard a depreciation asasign of weakness. Does it makesenseto resist a depreciationwhen inflation is high?
Fromequation (4.4) it follows that all policies which reduce unemployment can be boiled down to two types of measures: reducing the inflow rates and increasing the outflowratef. Discuss policies which could affect thesetwo rates.Arethey necessarily good for theeconomy—in thesense of increasing
Discuss both sides of theminimumwage debate. What kind of hard facts might help resolvetheargument?
Severance regulations—government interference with the separation of workers from firms which frequently occurs in modern economies—are universally thought to influencelabour markets, but it is hotly disputed whether they increase or decrease unemployment. Discuss. Do you think thereare
Critically evaluatethestatement that labour unions should assumeresponsibility for theadministration, financing,and disbursement of unemployment benefits.
How would you determine whether unemployment is voluntary or involuntary? How do you respond to thecriticismthat it is virtually impossibleto distinguish between thetwo?
Show theeffect ofatechnological innovation which raises the MPLin amarket with an upward-slopingsupply curvefor labour when: (a) wages areflexible; (b) wages are rigid. Now show theeffect of technicalchangewhich reduces the MPL. Given these differences,evaluate how unions might regard
It is sometimesclaimed that theinfluxof foreignmigrants into thelabour forceisacause of unemployment. Show theeffect of immigration on thelabour market as described by Figure 4.12. What does it mean for realwagesand employment?
In Japan the bonus systemis widespread. Workers receiveas much as 30%of their pay in theformofa profit-contingent payment, which can go up or down dependingon thefortunes of theenterpriseinwhich they work. What aretheimplications ofsuch asystemfor realwagerigidity and equilibriumemployment?
It is well-known in Europethat the unemployment rateamongwell-educated workers is considerably lower than for those who left school early or without training. Why might this bethecase?Howmight an ‘education offensive’ help solvethe unemployment problem,even if wages for thelow-skilled arerigid?
In the 1980s, many European countries tried to tackle the unemployment problem by encouraging early retirement, with arguments that only a fixed amount of jobs are availablefor job-seekers. Usethesupply and demand framework to showhowtheadvocates of such a policy might haveargued. Why do you think
Derivethecollectivelabour supply curve graphically. Show how different union preferences can interact with thesameshift of labour demand and lead to: (a) rigid wages around some‘target level’ with flexibleemployment; (b) flexiblewagesaround sometarget level ofemployment; (c) flexiblewages when
It is frequently claimed that Europe’s unemployment problemis dueto high labour taxes in theformof employer and employeecontributions to social security, which are usually proportional towages. Assumethat individualscareabout after-taxwages.(a) Usingthemachinery of Figure 4.3, show theeffect ofa
Suppose Crusoemust pay for his work tools (coconut husks?) and must spend an hour a day climbing thetrees to get to thecoconuts. Think of theseas fixed costs which must be paid as longas heis workingat all in thelabourmarket.(a) Drawhis budget constraint in thiscase.(b) Show Crusoe’s optimal
SupposeRobinson Crusoeis paid a higher wage(‘overtime pay’) if heworks morethan 8 hoursa day, but only has 16 hoursat his disposal.(a) Drawhis budget line in this case.(b) Does the existence of overtime necessarily make himbetter off?(c) ShowCrusoe’s optimal behaviour for ‘normal’
Supposethat the household in Figure 4.2 receivesan inheritance. Show theeffect on its decision to work and to consume.Accordingto this result, do rich peopleworkmore or less than poor people?Explain youranswer.
Why is theacquisition of human capital called an investment, liketheacquisition of physical capital? Explain why knowledgeand human capital depreciate, like physical capital. What is thelink between property rightsand investment in both physicaland human capital?
Are you atechno-optimist oratechno-pessimist?Justify your position.
It is often claimed that the defeated nationsafter the Second World War grewfaster than the victor nations. Is this hypothesisconsistent with the Solowgrowthmodel?
Examining the panels of Figure 3.7, oneimmediately notices that African countries are bunched in thelower left-hand part of the diagram, whilethe European countries are clustered in the upper right-hand region. What explanation of this fact is offered by the Solowgrowthmodel?Do you think this
‘Globalization is bad for growth sinceit means that countries invest abroad and expand thecapital stocks of other countries instead of their own. The Solow model would consider thisa decreasein thesavings rate, thus leadingto lower GDP percapita.’ Comment.
In earliercenturies,colonialexpeditions werelaunched to increaseacountry’s land and population. Howmight such activities makeacountry richer?
Japan in the 1960s, Koreain the 1980s, Chinain the 1990s,and Indiain thecurrent decade haveexperienced periods of rapid growth, in effect catchingup with thericherand more developed countries. Howcan you explain this phenomenon,andwhy did it not happen earlier?
Suppose output Yis produced with physical capital K, human capital H, and labour L using the production functionY =KαHβL 1−α−β. Assume that households save a fraction sHof their incomein human capitaland sKin physicalcapitaland that sH= sK= s and that both forms of capital depreciateat
Supposetwo regions in thesamecountry haveidentical production functions, savings rates, population growth rates, and depreciation rates. Supposethat percapita GDP differs by 20%between them, but that this gap isclosed by 2%perannum. Howmany years will it taketo closethe gap to 5%?
In thesteady state, output per effectivelabour Y/AL is constant. What happens to output per capita when theaverage number of hours worked declines, holding all else constant?
Explain, formally or informally, the difference between averagelabour productivity and output percapita.
Drawa graph showingtheevolution of Y/Lin thecatch-up phaseand then in theensuingsteady statewhen theeconomy starts fromacapital–effectivelabour ratio belowits steady-statelevel. Drawa diagramshowinginvestment (not thecapitalstock).
The golden rule(3.17) is MPK = δ + a + n. In comparison with the no-technologicalchangecase, we now requirea higher marginal productivity ofcapital. With diminishing marginal productivity, this meansalowercapitalstock pereffective unit of labour. Is that not surprising?Howcan you explain
Definethe golden rule. Explain why it is achieved at in Figure 3.9. To establish this result, imaginethat you start to theleft of and explain why moving to theright increasesconsumption. Similarly showthat consumption decreases whenmovingrightwards froma position to theright of .
Suppose the aggregate production function is given by . Does it have increasing, decreasing, or constant returns to scale? Show that the marginal products of capitaland labourare declining. Showthat they areincreasingin theinput of the other factor.
Consideracountry with zero technological progressandK/L= 3. Its population growsat therate of 2%per year. What is thesteady-staterate of growth of GDP percapita if thesavingrateis 20%?If it is 30%?Howdo youranswerschangeif depreciation occursat arate of 6%per year?
SupposeK/Yisconstant at 2. (a) Assumefirst that thereis no population growth and no technological progress. What is thesteady-statesaving–output ratio consistent with arate of depreciation of 5%?(b) Nowallowfor positiveeconomic growth, dueto either population growth or technological progress.
Define the steady state. How is a steady state important in the context of the Solow growth model? Explain why stylized facts are helpful to organize the discussion of economic growth.
Use graph paper (oracomputerspreadsheet) to plot thefollowingintensive-formproduction functions (expressingy asafunction of k) fromtheinterval [0, 100]:(a) f(k) = 2k;(b) f(k) = 10 + k 0.5;(c) f(k) = k 1.1;(d) f(k) = 10 + 2k − 0.5k 2;(e) f(k) =max(0, − 10 + 2k).Which of these functions has
Drawintensive-formproduction functions f(k) with decreasing,constant,and increasingreturns to scale.
‘TheEUmemberstates don’t need balance of payments statistics. Theindividualstates of theUSAget alongfinewithout them.’ Discuss.
Countries which generatemost economicactivity fromtheexploitation of natural resources often experiencelargefluctuations in their national incomeand product account results.Explain why this might bethecase,carefully definingtheterms valueadded and costs of production. Why might the national
GDP mixes up everything. It includes ‘goods’such as apples we eat and theatre shows we enjoy, but also ‘bads’such as petrol burnt in traffic congestion and burial costs. It ignores many ‘goods’as well: the value of a good neighbour or thefreetimethat wecan spend watching asunset.
In recent years firms in Europeas wellas in the USAhave begun to ‘outsource’ or divest themselves of many traditionalservicefunctions, purchasingthemon themarket instead.Companiesareincreasingly obtainingcomputer,catering, legal,consulting,and other business services by orderingthemfromoutside,
Evaluatethefollowingstatement: ‘Bringingthe underground economy above groundwould increasetheGDP, but worsen taxreceiptsand the balance of payments.’
By definition, we do not know what is in the Errors and Omissions account. Beyond genuine datacollection mistakes, wecan only speculate what is in there. Table 2.8 shows large values in thecases of theUS, Chinaand, to alesserextent, theEurozone. Can you guess what items theseentries might include?
Howwould thefollowingtransactions berecorded in the French balance of payments?A French resident buys an Austin Mini produced in the United Kingdom.A French resident purchases stocks in a German corporation froma German bank based in Germany.A French national living in Switzerland buys stock in a
‘Commuters increaseGDP becausethey send homealargefraction of theirearnings.’ Comment.
Over the past five years, taxes wereabout 60% of GDP in Sweden. Yet disposableincome over the past five years also amounted to 60% of GDP. How can these numbers be reconciled?
Givethethree definitions of GDP. Explainwhether thefollowingtransactionscontributetoUKGDP,and, ifso,explain howall three definitionsapply.(a) A resident of York purchases a bag ofsweets produced in Manchester.(b) A tourist visiting York purchases a bag ofsweets produced in Manchester.(c) An
Suppose you havethefollowingdata on pricesand quantities transacted:
I bought my housefor €100,000. I havejust sold it for €200,000,and theestateagent received a 10%commission fromthe buyer. What is theeffect onGDP?
‘Services do not contribute to GDP as much as industry because industry produces things—tangible goods.’ Comment on this using what you have learned about the national incomeaccounts.
What happens to GDP when amusicteacher marries his student whomhewas tutoringprevious to themarriage, but stops billingher for her privatelessons? What happens when a housewife becomes self-employed at her own day-carecentre?
You are given thefollowingdata:Compute:NDP, national income, personal disposable income,consumption, government purchases, GDP, the current account balance. State yourassumptions clearly. GDP Depreciation Before-tax corporate profits Social security contributions Transfers to households and firms
When a large increase in aggregate demand has an even greater increase in real GDP, economists refer to this as(A) the balanced budget multiplier.(B) the money multiplier.(C) the foreign substitution effect.(D) the wealth effect.(E) the spending multiplier.
An import quota on foreign automobiles is expected to(A) increase domestic efficiency and protect domestic producers at the expense of foreign producers.(B) decrease the price of automobiles and protect domestic consumers at the expense of foreign producers.(C) increase the price of automobiles and
Which component of a nation’s balance of payments recognizes the purchase and sale of physical and financial assets between nations?(A) The capital account(B) The official reserves account(C) The current account(D) The trade deficit account(E) The trade surplus account
If in a given year the government collects more money in net taxes than it spends, there would exist(A) a current account deficit.(B) a budget surplus.(C) a trade surplus.(D) a budget deficit.(E) a trade deficit.
U.S. dollars and the European Union’s (EU’s) euros are exchanged in global currency markets. Which of the following is true?(A) If inflation is high in the EU and the price level in the United States is stable, the value of the dollar appreciates.(B) If the Fed decreases the money supply, the
Suppose the President plans to cut taxes for consumers and also plans to increase spending on the military. How does this affect real GDP and the price level?(A) GDP increases and the price level decreases.(B) GDP decreases and the price level increases.(C) GDP stays the same and the price level
As the Japanese economy expands, in what ways do U.S. net exports, the values of the dollar and the yen change?
Suppose the economy is in long-run equilibrium when an expansionary supply shock is felt in the economy. This changes the short-run Phillips curve, the short-run unemployment rate, and the long-run unemployment rate in which of the following ways?
Which of the following is a predictable outcome of expansionary monetary policy in a recession?(A) It decreases aggregate demand so that the price level falls, which increases demand for the dollar.(B) It increases investment, which increases aggregate demand and increases employment.(C) It
Which of the following could limit the ability of a central bank to conduct expansionary monetary policy?(A) Money demand is nearly perfectly elastic.(B) Investment demand is nearly perfectly elastic.(C) Banks make loans with all excess reserves.(D) Households carry very little cash, holding their
Holding all else equal, which of the following monetary policies would be used to boost U.S. exports?(A) Increasing the discount rate(B) Increasing the reserve ratio(C) Buying government securities(D) Lowering tariffs(E) Removing import quotas
Which of the following is likely to shift the long-run aggregate supply curve to the right?(A) A nation that devotes more resources to nondurable consumption goods, rather than durable capital goods(B) Research that improves the productivity of labor and capital(C) More restrictive trade
Congress has embarked on another round of expansionary fiscal policy to boost employment and get reelected. As chair of the central bank, how would you reduce the “crowding-out” effect and what macroeconomic problem might your policy exacerbate?(A) Increase the reserve ratio, risking the
Suppose that elected officials and the central bank agree to combine fiscal and monetary policies to lessen the threat of inflation. Which of the following combinations would likely accomplish this goal?
For a given level of government spending, the federal government usually experiences a budget____during economic____and a budget ______during economic_______.(A) deficit, recession, surplus, expansion(B) surplus, recession, deficit, expansion(C) deficit, expansion, surplus, recession(D) surplus,

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Elite Student Edition 5 Steps To A 5 AP Macroeconomics 2020 1st Edition Eric R. Dodge - Solutions

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