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macroeconomics

Questions and Answers of Macroeconomics

What is the distinction between endogenous variables and exogenous variables in economic models?
What is the five-step process for developing macroeconomic models?
What three macroeconomic data series are of particular interest to macroeconomists? Why?
What is the business cycle? Which part of the business cycle is of particular concern to macroeconomists? Why?
What happens to the overall level of prices during periods of inflation and deflation?
What is a nation’s saving rate and why is it an important concern for macroeconomists?
What is a government budget deficit? Why are macroeconomists concerned with budget deficits?
Explain the difference between fiscal policy and monetary policy. What are some of the reasons these macroeconomic policies are used?
What is stabilization policy? What two important debates occur among macroeconomists regarding its use, and who are the parties to these debates?
What are global trade imbalances and why do economists focus on them?
Sciences other than economics also use models to explain the behavior of endogenous variables based on assumptions about the environment and changes in exogenous variables. Suppose you have to design
Suppose your model predicts that overweight children have an 80% higher risk of suffering from diabetes in their adult life. If data show that overweight children do not suffer from diabetes as
The following table shows Spain’s (annualized) quarterly real GDP growth rates for the 2007–2012 period. (Roman numbers refer to quarters.)a) Plot real GDP growth rate in a graph. Can you
Unemployment is a very important topic in macroeconomics. A high unemployment rate means that a lot of individuals willing to work cannot find a job. This is bad for the economy, as some resources
During the 1970s, most Latin American countries ran huge budget deficits. As their governments resorted to printing money (increasing the money supply) to pay for these deficits, very high inflation
Assume that a civil war erupts in a given country, creating chaos and destroying most of the economy’s infrastructure (e.g., roads, businesses, and telecommunications).a) What would be the effect
The recent global financial crisis is a good example of how important the financial system is for the performance of any economy. Usually the immediate effects of a financial crisis include a
The United States has been experiencing very low or even negative savings rates during the recent past. If this situation persists, what does it means for future generations?
A Council of Economic Advisers post on January 15, 2010, stated that “The American Recovery and Reinvestment Act [...] was the boldest countercyclical fiscal action in American history. [...] the
The Federal Reserve took swift action to help restore the United States financial system after the global financial crisis started in fall 2007. The various instruments used by the Federal Reserve
Consider the difficult task of raising children. One of the most widely recognized challenges of this task is to properly balance rules and ad-hoc decisions. Constantly breaking rules might send the
For each of the following pairs of variables, pull the data from the St. Louis Federal Reserve FRED database and create a scatterplot graph of the two variables using Excel.For each pair, name the
Go to the St. Louis Federal Reserve FRED database, and calculate the GDP growth rate and inflation rate. For GDP, use (GDPC1). For the inflation rate, use the personal consumption expenditure price
Go to the St. Louis Federal Reserve FRED database, and pull data on annual unemployment rates for the following countries, starting in 2000: United States (USAURNAA), Canada (CANURNAA), United
Go to the St. Louis Federal Reserve FRED database, and pull data on a common measure of standard of living, real GDP per capita, in 2011 U.S. dollars. Choose the following countries: United States
What is the fundamental identity of national income accounting? What is its significance?
How is GDP defined in the production approach to measuring economic activity?Explain how economists at the U.S.Department of Commerce’s Bureau of Economic Analysis account for the production of
Distinguish between a flow measure and a stock measure. Which type of measure is GDP?
Why are capital goods and inventories treated differently from intermediate goods in the production approach to measuring GDP?
Identify the four major expenditure components in the national income identity and discuss the major subcategories of each component.
What are the main types of income included in national income? Why doesn’t national income equal GDP?
How do macroeconomists distinguish between nominal and real values of variables? Does nominal GDP or real GDP provide a better picture of changes in economic activity and economic well-being? Why?
Describe the GDP deflator and the personal consumption expenditure deflator.
What is the consumer price index, who calculates it, and how is it calculated and used to measure the inflation rate?
What does the unemployment rate measure, who calculates it, and how is it calculated?
Explain the differences between nominal and real interest rates and between ex ante and ex post real interest rates.
Is it correct to assume that total income equals total expenditure for a household? What about for the whole economy?
The inhabitants of Pandora value their natural environment (e.g., forests, springs, breathable air, etc.) twice as much as the inhabitants of Utopia. Suppose that the value added for all goods and
Consider the expenditure approach to the measurement of GDP. For each of the following situations, decide if the transaction will affect GDP and, if so, in which expenditure category will it be
Use the following table, based on BEA data from the first quarter of 2013 (billions of dollars), to calculate items (a) and (b):a) Other incomeb) Net factor income Compensation of employees Corporate
Mario and Lucia are discussing current economic data printed in the morning newspaper. Mario is quite happy about the fact that nominal GDP has increased at a steady rate for the last two years and
Based on surveys conducted by the BLS, the CPI basket assigns a weight of approximately 15% to transportation spending. Suppose you walk to your workplace every day and you do not use any other means
Suppose that Apple Inc. manufactures a new generation of iPhones that can ascertain whether your interlocutor is lying. Assuming that the price of this good will be higher than that of the currently
Use the accompanying table to calculate the following statistics for Brazil:a) Labor forceb) Labor-force participation ratec) Unemployment rate Adult Population (millions) Unemployed (millions)
Refer to the previous exercise for data and assume that three million unemployed individuals become “discouraged” and decide not to look for a job anymore. Calculate the new unemployment rate for
Suppose you take out a loan at your local bank and the nominal interest rate is 12%. The bank expects the inflation rate to be 4% during the life of your loan.a) What is the bank’s ex ante real
Go to the St. Louis Federal Reserve FRED database, and find the most recent values for Gross Domestic Product (GDP) and Gross National Product (GNP).a) Calculate net factor income using the most
Go to the St. Louis Federal Reserve FRED database and find the most recent values, and values from one year earlier, for nominal GDP (GDP) and real GDP (GDPC1).a) Compute the GDP price deflator for
Go to the St. Louis Federal Reserve FRED database and find the most recent values of the unemployment rate (UNRATE), the labor force participation rate (CIVPART), and the labor force (CLF16OV). Using
The U.S. Treasury issues some bonds as Treasury Inflation Indexed Securities, or TIIS, which are bonds adjusted for inflation: hence the yields can be roughly interpreted as real interest rates. Go
What relationship does the aggregate production function portray? Which of the production function’s variables are endogenous and which are exogenous?
How does total factor productivity differ from labor productivity?
Explain each symbol or term in the Cobb-Douglas production function. Which element in the production function cannot be measured directly? How is it measured?
Explain the two characteristics of the Cobb-Douglas production function that make it particularly useful to macroeconomists.
What are supply shocks and from what sources can they arise? Distinguish between positive and negative supply shocks.
What are factor prices? What classical assumptions are used in explaining how they are determined?
Explain each term in the profit function for a firm.
What rule do firms follow to determine how much of each input to hire in order to maximize profits?
Why do the factor demand and supply curves have their particular slopes?
Explain how an equilibrium factor price is established in a factor market if there is either an excess demand for the factor or an excess supply of the factor.
What determines the distribution of national income between payments to labor and payments to capital?
Consider the following production function: Y = F(K, L) = A(2K + 3L). Does this production function exhibit constant returns to scale? (Replace K and L by 2K and 2L, respectively, and check if F(2K,
Consider the following production function: Y = F(K, L) = AK0.4 L1.0.a) Calculate the marginal product of labor.b) Does this production function exhibit diminishing marginal product of labor?
Suppose Equation 2 represents the production function of both Mexico and Spain. Use the following information to answer the next questions.a) Calculate total factor productivity for both countries
The figure below represents the production function relating output to capital in the United States. Suppose unusual weather conditions result in a higher than expected crop yield in the midwestern
A manufacturer of toys is employing fifty workers and using fifteen pieces of equipment to assemble toys. Currently, the marginal product of labor is $5 and the marginal product of capital is $25.
Assume that the marginal product of labor is given by the following expression: MPL = 52/L0.3 (L is measured in millions).a) What is the marginal product of labor when L = 80 million?b) Determine the
Assume that the marginal product of capital is given by the following expression:a) Graph the demand curve for capital and find the equilibrium real rental rate of capital if capital supply is ten
Suppose an economy has total income of $8 trillion, where total labor income equals $6 trillion and capital income equals $2 trillion. Which are the values of the exponents on labor and capital using
Suppose that you work at the statistical office of a given country. The graph plots estimates of the labor and capital income shares for that country over time. Your boss suggests that a Cobb-Douglas
Suppose that the following Cobb-Douglas production function represents the economy of Chile: Y = F1K, L2 = AK0.4 L0.6. Assuming Chile’s national income equals $170 billion, calculate real labor
Go to the St. Louis Federal Reserve FRED database, and find data on nominal wages (COMPNFB) and prices using the consumer price index (CPIAUCSL). Convert the data series to annual data by using the
GDP per capita can be expressed as GDP/Population = GDP/Worker × Workers/Population, or GDP per capita = Labor Productivity × Labor Force Participation Rate. Go to the St. Louis Federal Reserve
Although they are distinctly different, the marginal product of labor, MPL, and labor productivity are closely related and should behave similarly. Go to the St. Louis Federal Reserve FRED database,
Describe the two components of national saving and explain how saving affects national wealth.
What determines the desired amounts of national saving and investment? What relationship between desired saving and desired investment is required for goods market equilibrium, and how is this
What causes desired saving to increase? What effects will an increase in desired saving have in a closed economy?
Distinguish between a closed and an open economy. How do the conditions required for goods market equilibrium differ in the two types of economies?
What determines the world real interest rate?Why must the domestic real interest rate be the same as the world rate?
How does a small open economy differ from a large open economy?
What determines whether a small open economy will have a trade surplus or a trade deficit?
What happens in a small open economy if there is an increase in domestic saving?
What is the effect of an increase in domestic saving or domestic investment on the trade balance and net capital outflows?
How are the effects of changes in domestic saving and investment for large open economies similar to those for small open economies and closed economies?
Suppose Japan has a GDP of $5 trillion, and that its national savings rate is 25%.a) Calculate Japan’s national saving.b) Calculate Japan’s government saving if private saving is $800 billion.
Assume that you have saved $20,000 and that you are considering a couple of options. One of them is to use these funds as a down payment on a newly built house. The other one is to buy a U.S. savings
Consider the (rather implausible) scenario in which the U.S. government phases out all Social Security transfers to retirees. Assuming the goods market is in equilibrium, graph the new saving curve
The financial crisis that hit the United States first and then the world economy starting in fall 2007 meant that the future prospects of many firms looked gloomy at best for some time. Comment on
On March 23, 2010, President Obama signed into law a major overhaul of the U.S. healthcare system. The Congressional Budget Office estimated that this legislation will reduce the U.S. government
Suppose Japan has a GDP of $5 trillion, and that its national savings rate is 25%. Assuming Japan is an open economy,a) calculate Japan’s investment if net exports are 1% of GDP.b) calculate
Consider the following diagram of a small open economy:a) Calculate net exports and the capital outflow when the world real interest rate is 7%.b) Calculate net exports and the capital outflow when
Consider a small open economy that is currently running a trade surplus. Answer the following questions using a graphical representation of desired saving and investment in the small open economy:a)
Comment on the effect of a decrease in autonomous investment on wealth when the economy can be considered aa) closed economy.b) small open economy.
Comment on the effect of an increase in the government budget surplus (or a decrease in the government budget deficit) on the real interest rate, desired saving, and net exports for aa) large open
Go to the St. Louis Federal Reserve FRED database, find data on Gross Private Saving (GPSAVE) and Gross Saving (GSAVE), and download the data.a) How have these variables changed from 5 years earlier
Go to the St. Louis Federal Reserve FRED database, and find data on exports (BOPXGS) and imports (BOPMGS).a) Calculate net exports for the most current period available. Is the United States
Go to the St. Louis Federal Reserve FRED database and find data on government saving (GGSAVE).a) Describe what has happened to government saving from 2005 to the most current data available.b) Based
What is the monetary base? How does the Federal Reserve influence its size?
Suppose the Fed buys U.S. Treasury securities from Bank of America. According to the simple model of multiple deposit creation, how does this open market purchase affect the money supply? What are
Identify the five factors that determine the money supply. For each factor, explain which player(s) in the money supply process—the Federal Reserve, depositors, and banks—control or influence it,

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