Macroeconomics 17th Edition Campbell McConnell, Stanley Brue - Solutions

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Are the data in Table 10-1 for European unemployment consistent with the existence of a natural rate of unemployment in these countries? Explain why or why not.
Beginning in the late 1960s, the number of entrants to the labor market increased as the baby boom generation reached working age. In addition, labor force participation rates for women began to increase in the mid-1960s. What effect do you think these demographic factors had on the U.S. natural
In both Friedman’s and the Keynesian models of the Phillips curve the formation of expectations of inflation plays an important role. Explain how expectations are formed in their respective models. Are there any differences in expectation formation between the models?
Milton Friedman often said that the real trade-off was not between inflation and unemployment but between unemployment today and unemployment in the future. What do you think he meant by this? How does the statement relate to Figures 10-2 and 10-3 ?
“A supply shock such as the exogenous increase in the price of oil analyzed in Section 8.5 would have no effect on real or nominal income within Friedman’s model. This follows because such a supply shock would not affect the quantity of money, which is the dominant factor determining nominal
At the end of the inflationary decade of the 1970s, the Federal Reserve is widely perceived to have moved to a much more restrictive monetary policy. How do you think Milton Friedman would use the Phillips curve framework of Figures 10-2 and 10-3 to analyze the effects of this policy shift on
Explain why a Keynesian does not accept the noninterventionist policy position.
Contrast Friedman’s and the Keynesian views of the relationship between real output (or employment) and aggregate demand in both the short run and the long run. Contrast the conclusions that Friedman and Keynesians draw from this analysis of the aggregate demand–output relationship for the
Contrast Friedman’s views on monetary policy in the short run and in the long run.
Analyze the effects of a decrease in taxes from T0 to T1 in the monetarist framework. In your answer, be sure to take account of the financing of the deficit that results from the tax cut. How are the equilibrium levels of income and the interest rate affected by the tax cut?
Compare monetarist and modern Keynesian views on the proper conduct of monetary policy. For both monetarists and Keynesians, explain not only their conclusions concerning monetary policy but also how those conclusions are related to their respective theories.
Compare monetarist and Keynesian views on the proper conduct of fiscal policy. For both monetarists and Keynesians, explain not only their conclusions concerning fiscal policy but also how those conclusions are related to their respective theories.
Show how the IS and LM schedules look in the monetarist view. Use these schedules to illustrate the monetarist conclusions about the relative effectiveness of monetary and fiscal policy.
In what sense is Milton Friedman’s theory of demand for money a restatement of the Cambridge equation?
Why were early Keynesian economists so pessimistic about the effectiveness of monetary policy?
According to the monetarists, what type of monetary policy should a country pursue to achieve a stable economy? Explain.
Within the variable price–fixed wage version of the Keynesian model analyze the effects of an increase in money demand (shift in liquidity preference) due to a loss of confidence in risky stocks and bonds such as occurred in the 2007–09 financial crisis.
Compare the effects of an expansionary fiscal policy action—an increase in government spending financed by government bond sales to the public, for example—in the Keynesian and classical models. Include in your answer the effects of this policy shift on the level of real income, employment, the
What do you see as the essential differences between the classical and Keynesian theories of aggregate demand?
What do you see as the essential differences between the classical and Keynesian theories of aggregate supply?
“Money is more important in the Keynesian system than in the classical system.” Do you agree? Or would you maintain that the opposite is true?
Assume that there is an exogenous decline in the price of imported oil. Using the graphical analysis in this chapter, explain how such a shock would affect output and the price level.Explain the role inflationary expectations play in this adjustment.
In the Keynesian system, increases in aggregate demand lead to increases in output because the money wage rises less than proportionately with the price level in response to such increases in demand. This condition is necessary because firms will hire more workers only if the real wage ( W / P )
Analyze the effects of a decline in the government expenditure within the Keynesian model where both the price level and money wage are assumed to be variable. Include in your answer the effects on the level of real income, the price level, and the money wage.
Return to the case considered in question 2, where investment is completely interest inelastic and the IS schedule is vertical. Analyze the effects of an increase in government spending in this case within the variable price–fixed wage version of the Keynesian model. Compare the effects with
Why are fiscal policy multipliers smaller in magnitude in the variable price–fixed wage version of the Keynesian model than in the fixed-price IS – LM model? Why are these multipliers still smaller when we allow the money wage as well as the price level to be variable?
Explain the consequence of combining the Classical theory of aggregate supply with the Keynesian system of demand schedule.
Derive the Keynesian aggregate demand schedule for the case in which investment is completely interest inelastic and therefore the IS schedule is vertical (follow the procedure in Figure 8-2 ). Explain the resulting slope of the aggregate demand-schedule for this case.
Explain why, according to Keynes, the money wage would not adjust sufficiently to keep the economy at full employment.
Within the open-economy version of the Keynesian model, including taxes (see question 13), suppose there is an autonomous increase in imports of 20 units [ u in equation (5.25)rises by 20]. To counteract the effects of this contraction in domestic aggregate demand, assume that the government cuts
7, we now include taxes. Disposable income (YD = Y - T) therefore replaces GDP ( Y ) in the consumption function (5.24). Compute the expression for equilibrium income for this version of the open-economy model. Compute an expression for the tax multiplier (Y>T)in the model.
Suppose that within the open-economy version of the Keynesian model in Section
In question 8, assume that, beginning from the initial equilibrium position (investment equal to 100, government expenditure equal to 75, and net taxes fixed at 100), there was an autonomous fall in consumption and an increase in saving such that the consumption function shifted from C = 25 + 0.8YD
Suppose that, instead of a fixed level of taxes, we had an income tax so that T = t1Y where t1 was the income tax rate. Following the procedure of Section 5.4 , derive an expression for equilibrium income Y analogous to equation (5.14) for this case in which the level of tax collections depends on
Suppose that government spending was increased by 10 units and that this increase was financed by a 10-unit increase in taxes. Would equilibrium income change or remain the same as a result of these two policy actions? If equilibrium income changed, in which direction would it move, and by how
Suppose that initially equilibrium income was 200 units and that this was also the fullemployment level of income. Assume that the consumption function is C = 25 + 0.8YD and that, from this initial equilibrium level, we now have a decline in investment of 8 units.What will be the new equilibrium
What will be the new level of equilibrium income?
Suppose that for a particular economy and period, investment was equal to 200, government expenditure was equal to 100, net taxes were fixed at 150, and consumption (C) was given by the consumption function C = 20 + 0.6YD where YD is disposable income and Y is GDP.a. What is the level of
Explain carefully why the tax multiplier [Y>T = -b>(1 - b)] is negative and why it is smaller in absolute value than the government expenditure multiplier [Y>G = 1>(1 - b)].
In the simple Keynesian model, an increase of 1 dollar in tax will cause equilibrium income to decrease by only a fraction (b) of this 1-dollar increase. Explain the process by which this happens.
Consider the numbers in Table 5-1 giving consumption as a percentage of income in prosperous years (1929, 1955, 1973, 1979, 1989, 2000, 2006) compared with recession years (1933, 1958, 1975, 1982, 1991, 2001, 2008). Notice that in each case consumption is higher as a percentage of income in the
Explain Keynes’s theory of how expectations affect investment demand. How is this theory related to Keynes’s view that aggregate demand would be unstable in the absence of government stabilization policies?
Explain how the level of saving is determined in the simple Keynesian consumption function. What is the effect of an increase in disposable income on the level of saving?
Interpret each of the three ways of writing the condition for equilibrium income in the simple Keynesian model [equations (5.2), (5.5)., and (5.6)]. Explain why the three ways are equivalent.
Explain how the origins of the Keynesian revolution can be found in the problem of unemployment.
What are the major policy conclusions of classical economics? Explain how these policy conclusions follow from the key assumptions of the classical theoretical system.
Within the classical model, analyze the effects of an increase in the marginal income tax rate. Explain how output, employment, and the price level are affected. Consider cases in which the increased revenue produced by the tax increase results in a decline in bond sales to the public and in which
In deriving the labor supply curve in Figure 3-3 , we implicitly assumed that the marginal income tax rate ( t y) was equal to zero. Assume instead that t y = 0.20. Redraw the figure with this modification and compare the resulting labor supply curve with the present one in Figure 3-3 b .
Within the classical form of the quantity theory, the demand for money is given by Md = kPY (4.7)Suppose income (Y) is given at 400 units, and the money supply (M) is fixed at 200 units.Suppose k drops from its initial value of 0.5 to 0.25.What is the initial price level? What is the new price
Explain how the interest rate works in the classical system to stabilize aggregate demand in the face of autonomous changes in components of aggregate demand such as investment or government spending.
Explain how the interest rate is determined in the classical theory.
Classical economists assumed that velocity was stable in the short run. But suppose that, because of a change in the payments mechanism—for example, greater use of credit cards—there was an exogenous rise in the velocity of money. What effect would such a change have on output, employment, and
Explain how aggregate demand is determined within the classical model. What would be the effects on output and the price level of a drop in money supply?
Define the term velocity of money . What factors determine the velocity of money in the classical system? What is the relationship between the velocity of money and the Cambridge k ?
What are the differences between the Fisherian and Cambridge versions of the quantity theory of money?
Explain the role of money according to the Cambridge approach. Specifically, explain the relationship between the quantity of money, the price level, and the level of output.
Consider the effects of a government employment subsidy whereby the government paid 10 percent of the wages of newly hired workers. How would employment and output be affected by the program in the classical model? What would be the effect on the position of the aggregate supply schedule in Figure
Suppose that, due for example to reconstruction after a war, the capital stock of a nation increases. Use the graphical framework of Figure 3-4 to illustrate the effect that the increase in the capital stock would have on output, employment, and the real wage in the classical model.
Provide examples of demand-side factors that would not affect the level of output and employment.
In microeconomics, we expect the supply curve for the firm to slope upward to the right when drawn against price. The classical aggregate supply curve is based on this microeconomic theory of the firm but is vertical. Why?
We termed the classical view of the labor market an auction market . What assumptions underlie this characterization?
Suppose that the public’s taste changes in such a way that leisure comes to be more desirable than commodities. How would you expect such a change to affect output, employment, and the real wage in the classical model?
Explain the relationship between profit maximization condition and the labor demand as shown by equation (3.4).
Explain the concept of an aggregate production function. How would you expect the production function in Figure 3-1 to be affected by an increase in the average and marginal productivity of labor for a given output level, owing, for example, to increased education of the labor force? How would such
How would the classical views on the creation of wealth differ from those of the mercantilists?
Suppose a worker’s income was $15,000 in 1960 and $45,000 in 2010. Using the GDP deflator as a price index, calculate whether the worker’s real income had increased or decreased over this period.
Explain the concept of potential output. Why is potential output difficult to measure?
Explain the concept of chain-weighted real GDP. What problems with the previous measure of real GDP led to the introduction of this new measure?
Using the data in Table 2-6 , compute the percentage change in the price level between 1960 and 1970, between 1973 and 1980, and between 1960 and 2010.
Three price indices were considered in this chapter: the GDP deflator, the CPI, and the PPI.Explain the differences among these different measures of the price level.
Define the terms personal income and personal disposable income . Conceptually, how do these income measures differ from national income? Of what use are these measures?
Explain some of the major limitations of the GDP concept.
What are the two types of intermediary goods that are counted in the GDP calculation?Explain why these two goods are integrated in the GDP calculation.
Define the term gross domestic product . Explain which transactions in the economy are included in GDP.
Summarize the behavior of U.S. federal government budget deficits and U.S. merchandise trade deficits since 1953. Does this behavior suggest a relationship between the two deficits? Perhaps at some times and not at others?
Explain how inflation rate is calculated. Summarize the behavior of inflation rates during the period from the 1980s onward.
There were several shifts in the output–inflation relationship over the 1953–2010 period.Explain the nature of these shifts.
Summarize the behavior of the inflation and unemployment rates since 1990. Did the movement of these rates over this period more closely resemble those of the 1970s or those of the 1950s and 1960s?
Provide examples of the types of policy questions that macroeconomists ask. Why would macroeconomists disagree on these questions?
THE YEN-DOLLAR EXCHANGE RATE The Federal Reserve Board of Governors provides exchange rates for various currencies for the last decade at www.federalreserve.gov/releases (Foreign Exchange Rates; Historical bilateral rates). Has the dollar appreciated, depreciated, or remained constant relative to
THE U.S. BALANCE ON GOODS AND SERVICES—WHAT ARE THE LATEST FIGURES? The U.S. Census Bureau reports the latest data on U.S. trade in goods and services at its Web site, www.census.gov/indicator/www/ustrade.html . In the latest month, did the trade balance in goods and services improve (that is,
What have been the major causes of the large U.S. trade deficits since 1997? What are the major benefits and costs associated with trade deficits? Explain: “A trade deficit means that a nation is receiving more goods and services from abroad than it is sending abroad.” How can that be called
KEY QUESTION Explain why the U.S. demand for Mexican pesos is downward-sloping and the supply of pesos to Americans is upward-sloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate
Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.
“A rise in the dollar price of yen necessarily means a fall in the yen price of dollars.” Do you agree? Illustrate and elaborate: “The critical thing about exchange rates is that they provide a direct link between the prices of goods and services produced in all trading nations of the
China had a $150 billion overall current account surplus in 2005. Assuming that China’s net debt forgiveness was zero in 2005 (its capital account balance was zero), what can you specifically conclude about the relationship of Chinese purchases of financial and real assets abroad versus foreign
KEY QUESTION Alpha’s balance-of-payments data for 2006 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on current account, and (d) balance on capital and financial account? Suppose Alpha needed to deposit
KEY QUESTION Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:a. A U.S. airline firm purchases several Airbus planes assembled in France.b. A German automobile firm decides to build an assembly plant in South Carolina.c. A U.S.
Explain how a U.S. automobile importer might finance a shipment of Toyotas from Japan. Trace the steps as to how a U.S. export of machinery to Italy might be financed. Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.”
THE U.S. INTERNATIONAL TRADE COMMISSION—WHAT IS IT AND WHAT DOES IT DO? Go to www.usitc.gov to determine the duties of the U.S. International Trade Commission (USITC). How does this organization differ from the World Trade Organization (question 13)? Go to the “Information Center” and find
TRADE LIBERALIZATION—THE WTO Go to the Web site of the World Trade Organization ( www.wto.org ) to retrieve the latest news from the WTO. List and summarize three recent news items relating to the WTO.
LAST WORD What are the main concerns of the WTO protesters? What problems, if any, arise when too many extraneous issues are tied to efforts to liberalize trade?
What is the WTO and how does it relate to international trade? How many nations belong to the WTO? (Update the number given in this book at www.wto.org .) What did the Uruguay Round (1994) of WTO trade negotiations accomplish? What is the name of the current WTO round of trade negotiations?
What is offshoring of white-collar service jobs, and how does it relate to international trade? Why has it recently increased? Why do you think more than half of all the offshored jobs have gone to India? Give an example (other than that in the textbook) of how offshoring can eliminate some U.S.
What forms do trade adjustment assistance take in the United States? How does such assistance promote support for free trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other
Suppose Japan agreed to a voluntary export restriction(VER) that reduced U.S. imports of Japanese steel by 10 percent. What would be the likely short-run effects of that VER on the U.S. and Japanese steel industries? If this restriction were permanent, what would be its long-run effects in the two
Evaluate the following statements:a. Protective tariffs reduce both the imports and the exports of the nation that levies tariffs.b. The extensive application of protective tariffs destroys the ability of the international market system to allocate resources efficiently.c. Unemployment in some
“The potentially valid arguments for tariff protection are also the most easily abused.” What are those arguments?Why are they susceptible to abuse? Evaluate the use of artificial trade barriers, such as tariffs and import quotas, as a means of achieving and maintaining full employment.
KEY QUESTION Draw a domestic supply and demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately onehalf of the assumed
KEY QUESTION Refer to Figure 3.6, page 54.Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price of $1, $2, $3, $4, and $5? Use this information to construct the U.S. export supply curve and import

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Macroeconomics 17th Edition Campbell McConnell, Stanley Brue - Solutions

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