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Macroeconomics
A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five year TIIS (FII5)
A measure of real interest rates can be approximated by the Treasury Inflation- Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five year TIIS
Go to the St. Louis Federal Reserve FRED database, and find data on the Bank Prime Loan Rate (MPRIME), the Effective Fed Funds Rate (FEDFUNDS), and the 3-Month Treasury Bill: Secondary Market Rate
Suppose the liquidity preference function is given byFor the data given in the table below, calculate velocity using Equation 2. L(i, Y) Y 8 - 1,000i.
According to the portfolio theory approach to money demand, what would be the effect of a stock market crash on the demand for money?
What basic relationship does the short-run Phillips curve describe? What trade-offs does this relationship seem to offer policy makers?
What basic relationship does the long-run Phillips curve describe? How does this relationship differ from that described by the short-run Phillips curve?
According to the expectations-augmented Phillips curve, what factors determine the rate of inflation? How do changes in each factor affect the short-run Phillips curve?
What are adaptive expectations? What justifies the assumption of adaptive expectations in Phillips curve analysis?
According to modern Phillips curve analysis, what factors determine the rate of inflation?How do changes in each factor affect the short-run Phillips curve?
What relationship does the aggregate supply curve describe? How is this relationship depicted with the long-run aggregate supply curve?
What is Okun’s law? How do we combine it with Phillips curve analysis to derive the short-run aggregate supply curve?
What causes the long-run aggregate supply curve to shift?
Plot the Phillips curve for Canada using the following data. Do you find evidence in favor of the Phillips curve in your plot? Explain. Inflation Rate (%) Unemployment Rate (%) 1960 1961 1.4 1 7 7.2
The following graph shows inflation and unemployment rates for Canada for the period between 1970 and 2012. Does this graph show evidence in favor of the Phillips curve? 14 12 10 8 6 4 1 O 2 Canada
Suppose that the expectations-augmented Phillips curve is given by π = πe – 0.5(U – Un). If expected inflation is 3% and the natural rate of unemployment is 5%, complete the following:a)
During 2007, the U.S. economy was hit by a price shock when the price of oil increased from around $60 per barrel to around $130 per barrel by June 2008. While inflation increased during the fall of
Suppose Okun’s law can be expressed according to the following formula:Assuming that potential output grows at a steady rate of 2.5% and that the natural rate of unemployment remains unchanged,a)
Assuming that Okun’s law is given by U – Un = –0.75 × (Y – YP) and that the Phillips curve is given by π = πe - 0.6 × (U – Un) + ρ,a) Obtain the short-run aggregate supply curve if
Using the expression for the short-run aggregate supply curve obtained in Problem 6, draw a new short-run aggregate supply curve on the same graph if there is a price shock such that ρ = 2.Calculate
Although Okun’s law holds for different countries, those with more flexible labor markets experience a higher response of unemployment to changes in GDP. During the recent financial crisis, real
Internet sites that allow people to post their resumes online reduce the costs of job searches and create opportunities for individuals looking for jobs to be matched with potential employers more
Some Federal Reserve officials have discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher
Go to the St. Louis Federal Reserve FRED database, and find data on the unemployment rate (UNRATE) and a measure of the price level, the personal consumption expenditure price index (PCECTPI). For
Go to the St. Louis Federal Reserve FRED database, and find data on potential output (GDPPOT), real GDP (GDPC1), and a measure of the price level, the personal consumption expenditure price index
Go to the St. Louis Federal Reserve FRED database, and find data on potential output (GDPPOT), real GDP (GDPC1), a measure of the price level, the personal consumption expenditure price index
How does the condition for short-run equilibrium differ from that for long-run equilibrium?
Describe the adjustment to long-run equilibrium if an economy’s short-run equilibrium output is above potential output.
What are demand shocks? Distinguish between positive and negative demand shocks.
Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a positive demand shock?
What are supply shocks? Distinguish between positive and negative supply shocks and between temporary and permanent ones.
Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a temporary negative supply shock?
Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a permanent negative supply shock?
Suppose that Congress passes legislation that establishes a tax credit for small businesses and tax incentives for all businesses that invest in new plant and equipment.a) What is the anticipated
Evaluate the accuracy of the following statement: “The recent depreciation of the U.S. dollar had a positive effect on the U.S. aggregate demand curve.”
Suppose that the White House decides to sharply reduce military spending without increasing government spending in other areas.a) Comment on the effect of this measure on aggregate demand.b) Show
Oil prices declined in the summer of 2008, following months of increases since the winter of 2007. Considering only this fall in oil prices, explain the effect on short-run aggregate supply and
Suppose that in an effort to reduce the current federal government budget deficit, the White House decides to sharply decrease government spending. Assuming the economy is at its longrun equilibrium,
According to aggregate demand and supply analysis, what would be the effect of appointing a Federal Reserve System chairman known to have no interest in fighting inflation?
An article in the Wall Street Journal reported that inflation-adjusted wages have slumped in recent years. Is this statement consistent with the aggregate demand and supply analysis of the recent
The consequences of climate change on the economy is a popular topic in the media.Suppose that a series of wildfires destroys crops in the western states at the same time a hurricane destroys
Suppose that the President gets legislation passed that encourages investment in research and development of new technologies. Assuming this policy results in positive technological change for the
Go to the St. Louis Federal Reserve FRED database, and find data on real government spending (GCEC1), real GDP (GDPC1), taxes (W006RC1Q027SBEA), and a measure of the price level, the personal
Go to the St. Louis Federal Reserve FRED database, and find data on real personal disposable income (DPIC96), a measure of household net worth (TNWBSHNO), a measure of the price level, the personal
Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1), real private domestic investment (GPDI), corporate profits (CP), a measure of the price level (PCECTPI), a
Go to the St. Louis Federal Reserve FRED database, and find data on a measure of the price level (PCECTPI), real compensation per hour (COMPRNFB), a measure of worker productivity (OPHNFB), the price
Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1) and a measure of the price level, the personal consumption expenditure price index (PCECTPI). Convert the price
Describe the two primary objectives of macroeconomic stabilization policy.
Should policy makers strive to achieve zero rates of unemployment and inflation? Why or why not?
Distinguish between hierarchical and dual mandates. Which best describes the policy making environment in the United States?
What is the equilibrium real interest rate? How does it influence the interest rate decisions of Federal Reserve policy makers?
Why does the divine coincidence simplify the job of policy making? In what situations will it prevail? Why?
Summarize the main points of disagreement in the debate between activists and nonactivists.
Describe the five time lags involved in implementing stabilization policy.
How does the Taylor rule relate to the monetary policy curve?
Would it be a good idea for monetary policy makers to set the federal funds rate solely using the Taylor rule?
Explain the processes of cost-push and demand-pull inflation. How do macroeconomists distinguish between the two?
According to the Reserve Bank of New Zealand Act of 1989 (section 8): “The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving
The recent debate about healthcare reform in the United States included arguments about how the proposed reform might affect the efficiency of the U.S. economy. Based on the aggregate demand and
The following table shows the inflation rate and output level for four consecutive periods in a given economy. In period 1, the economy is at its long-run equilibrium (i.e., the inflation rate equals
The following panels describe two different short-run aggregate supply curves. In which situation is the case for nonactivist policy stronger?Explain why. (a) AS Inflation Rate, AD Aggregate Output,
Assume that policy makers are using the Taylor rule as a basis for policy changes, as specified in Equation 1.Under each of the following scenarios, show how the real interest rate, output, and
The following table shows unemployment and inflation rates for Canada during the 1972–1982 period:a) Plot Canada’s unemployment rates during this period. On the same graph, draw a horizontal line
The Taylor rule suggests that the policy rate target should be increased when the output gap is positive. Do you think the Taylor rule encourages or discourages demand-pull inflation?Which might be a
On January 29, 2013, the Federal Reserve released a special statement that clarified its goals of “price stability” and “maximum employment.” Specifically, it stated that “the Committee
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the
What role does the financial system play in promoting economic growth?
How does direct finance differ from indirect finance? Which form of finance is more important?
What is asymmetric information? What two asymmetric information problems hinder the operation of the financial system?
Why are asymmetric information problems particularly challenging in developing countries?What does this imply about the importance of financial intermediation and the role of banks in these countries?
Why do governments provide safety nets for bank depositors, and what are their consequences?
What are the benefits of financial deepening?
Suppose a firm has a great idea: overnight shipping. This idea will decrease costs for many businesses and will therefore result in a more efficient economy. If the entrepreneurs who create this
Suppose a given country encourages its citizens to save 20% of their income and then allocates these funds through governmentowned financial intermediaries. As a result, many government officials get
Identify the type of asymmetric information problem described in each of the following scenarios:a) A loan officer requests information about your work and credit history before approving your car
Financial regulators have been working to improve transparency and reduce risk in the derivatives market. How do you think increased transparency will affect financial intermediaries that trade
One of the main characteristics of financial deepening is that more individuals participate in the financial system: more people open checking and saving accounts, and more firms rely on financial
Microcredit programs (i.e., very small loans issued to the extremely poor) usually target a group of women and assign funds to them under the condition that decisions about the use of funds are made
Go to the St. Louis Federal Reserve FRED database, and find data on the three-month U.S. Treasury note (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the three-month AA
Go to the St. Louis Federal Reserve FRED database, and find data on the St. Louis Fed financial stress index (STLFSI), the percent value of loans collateralized for commercial and industrial loans
The Heritage Index, published yearly by the Heritage Foundation, provides a comprehensive numerical measure of overall economic freedom for countries, with specific indicators reflecting the overall
Why is a financial crisis likely to lead to a contraction in economic activity?
Describe the three factors that commonly initiate financial crises, and explain how each one contributes to a crisis
What causes bank panics and why do they worsen financial crises?
Why does debt deflation make financial crises worse?
How did financial innovations in mortgage markets contribute to the 2007–2009 financial crisis?
What principal-agent problems resulted from the originate-to-distribute mortgage lending model?
What are the two types of asset-price bubbles?Which type poses a bigger threat to the financial system? Why?
How should central banks respond to asset-price bubbles?
Suppose you are about to buy a car and ask to see a vehicle history report to check on previous accidents or problems reported for that car. When you are told that this information is not available,
The following figure, from the Federal Reserve Monetary Policy Report to the Congress (July 21, 2009), shows the gross issuance of mortgage backed securities (MBS) in the United States from 2007 to
As the effects of the 2007–2009 financial crisis became more pervasive, legislators and policy makers debated about the role played by the Federal Reserve as a regulatory agency. While the Federal
According to the FDIC, thirty banks failed or were assisted during 2008: six were based in California, two in Florida, and five in Nevada. The New York Times reported in 2007 that Nevada (–36.1%),
The following figure, from the Federal Reserve Monetary Policy Report to the Congress (July 21, 2009), shows mortgage delinquency rates from 2001 to 2009 in the United States.a) Explain why mortgage
According to the Federal Reserve Act of 1913(Section 13.3), “In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, […] may authorize any Federal Reserve
Critics of the Federal Reserve in 2013 warned that the Federal Reserve’s commitment to keeping the federal funds rate near zero for an extended period of time might increase expected inflation.
Suppose a central bank identifies an increase in lending to the floral industry. In particular, many small businesses are borrowing aggressively to import tulips. As market participants observe a
Describe the effects on the economy if the Federal Reserve uses monetary policy to burst a wrongfully identified asset-price bubble.
One of the possible solutions to asset-price bubbles is the enforcement of macroprudential regulation. Financial intermediaries have an incentive to constantly look for profitable opportunities,
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