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Exploring Macroeconomics 5th Edition Robert L. Sexton - Solutions
8. Give an example of a positive productivity shock.
7. What is the real business cycle theory?
6. Why do expected rainstorms have different effects on people than unexpected rainstorms?
5. Even if individuals could quickly anticipate the consequences of government policy changes, how could long-term contracts (e.g., three-year labor agreements and 30-year fixed rate mortgages) and the costs of changing price lists and catalogs result in unemployment still being affected by those
4. In a world of rational expectations, why is it harder to reduce unemployment below its natural rate but potentially easier to reduce inflation rates?
3. Why can the results of rational expectations be described as generating the long-run results of a policy change in the short run?
2. Why could an unexpected change in inflation change real wages and unemployment, while an expected change in inflation could not?
1. What is the rational expectations theory?
1. What do the critics say about the real business cycle theory?
1. What is the real business cycle theory?
1. What do critics say about the rational expectations theory?
1. What is the rational expectations theory?
5. What does the long-run Phillips curve say about the relationship between macroeconomic policy stimulus and unemployment in the long run?
4. Why would inflation have to accelerate over time to keep unemployment below its natural rate (and real output above its natural level) for a sustained period?
3. Why is the economy being on the long-run Phillips curve equivalent to its being on the long-run aggregate supply curve?
2. Why would you expect no relationship between inflation and unemployment in the long run?
1. Is the Phillips curve stable over time?
1. What is the difference between the longrun and short-run Phillips curves?
1. Is the Phillips curve stable over time?
1. How reliable is the Phillips curve?
4. For a given upward-sloping short-run aggregate supply curve, how does an increase in aggregate demand correspond to a movement up and to the left along a Phillips curve?
3. What is the argument for why the Phillips curve is relatively steeper at lower rates of unemployment and higher rates of inflation?
2. How does the change in real wage rates (relative to output prices) as inflation increases affect the unemployment rate?
1. How does the rate of inflation affect real wage rates if nominal wages rise less or more slowly than output prices?
1. How does the Phillips curve relate to the aggregate supply and demand model?
1. What is the Phillips curve?
6. How is fine-tuning the economy like driving a car with an unpredictable steering lag on a winding road?
5. What are the arguments for and against having monetary policy more directly controlled by the political process?
4. If fiscal policy was expansionary, but the Fed wanted to counteract the fiscal policy effect on aggregate demand, what could it do?
3. How can the activities of global and nonbank institutions weaken the Fed’s influence on the money market?
2. Why would a banking system that wanted to keep some excess reserves rather than lending out all of them hinder the Fed’s ability to increase the money supply?
1. Why is the lag time for adopting policy changes shorter for monetary policy than for fiscal policy?
1. What problems exist in coordinating monetary and fiscal policies?
1. What problems exist in implementing monetary policy?
4. If velocity is unstable, does stabilizing the money supply help stabilize the economy? Why or why not?
3. If the money supply increases and velocity does not change, what will happen to nominal GDP?
2. If nominal GDP is $200 billion and the money supply is $50 billion, what must velocity be?
1. If M1 is $10 billion and velocity is 4, what is the product of the price level and real output (nominal GDP)? If the price level is 2, what does the dollar value of output (nominal GDP) equal?
2. How will a contractionary monetary policy affect RGDP and the price level at a point beyond full employment?
1. How will an expansionary monetary policy affect RGDP and the price level at less than full employment?
1. How does monetary policy impact real GDP and the price level?
1. How does monetary policy work in the open economy?
1. What is contractionary monetary policy?
1. What is expansionary monetary policy?
14. Why is the relationship between bond prices and interest rates an inverse one?
13. When the Fed buys bonds, what happens to the price of bonds and the interest rate?
12. When the Fed sells bonds, what happens to the price of bonds and the interest rate?
11. What is the relationship between interest rates and aggregate demand in monetary policy?
10. Will an increase in national income increase or decrease the short-run equilibrium real interest rate, other things being equal?
9. Will an increase in the money supply increase or decrease the short-run equilibrium real interest rate, other things being equal?
8. What Federal Reserve policies would shift the money supply curve to the left?
7. How does an increase in income or a decrease in the interest rate affect the demand for money?
6. Who controls the supply of money in the money market?
5. How is the money market equilibrium established?
4. Why might people who expect a major market “correction” (a fall in the value of stock holdings) wish to increase their holdings of money?
3. For the economy as a whole, why would individuals want to hold more money as GDP rises?
2. If the earnings available on other financial assets rose, would you want to hold more or less money? Why?
1. What are the determinants of the demand for money?
1. How are the real and nominal interest rates connected in the short run?
1. Why does the Fed target the interest rate rather than the money supply?
1. What is the relationship between bond prices and the interest rate?
1. How does the Fed’s buying and selling bonds affect RGDP in the short run?
1. How do changes in income change the money market equilibrium?
1. What causes the demand for money to change?
4. If the Fed raised the discount rate from 12 to 15 percent, what effect would this have on the money supply?
3. Would the money supply rise or fall if the Fed made an open market purchase of government bonds, ceteris paribus?
2. What three main tactics could the Fed use in pursuing an expansionary monetary policy?
1. What three main tactics could the Fed use in pursuing a contractionary monetary policy?
1. How does the money supply increase and decrease as the result of open market operations?To increase the money supply, the Fed instructs its bond traders at the Fed bank in New York to buy government bonds in the bond market.
1. How are bank failures avoided today?
1. What other powers does the Fed have?
1. What is the purpose of the Fed’s tools?
1. What are the three major tools of the Fed?
3. How is the Fed tied to the executive branch? How is it insulated from executive branch pressure to influence monetary policy?
2. What is the FOMC, and what does it do?
1. What are the six primary functions of a central bank?
1. How is the Fed tied to Congress and the executive branch?
1. Who controls the Federal Reserve System?
1. What are the functions of a central bank?
3. What is the FDIC, and how did its establishment increase bank stability and reassure depositors?
2. What are the four reasons cited in the text for the collapse of the U.S. banking system in this period?
1. How did the combination of increased holding of excess reserves by banks and currency by the public lead to bank failures in the 1930s?
1. How are bank failures avoided today?
1. What caused the collapse of the banking system between 1920 and 1933?
4. Why do banks choosing to hold excess reserves or borrowers choosing to hold some of their loans in the form of currency reduce the actual impact of the money multiplier below that indicated by the multiplier formula?
3. If a particular bank with a reserve requirement of 10 percent has $30,000 in new cash deposits, how much money could it create through making new loans?
2. Why would each bank involved in the process of multiple expansions of the money supply lend out a larger fraction of any new deposit it receives the lower the reserve requirement?
1. Why do the supply of money and the volume of bank loans both increase or decrease at the same time?
1. What is the money multiplier?
1. How does the process of multiple expansions of the money supply work?
6. Suppose you found $10,000 while digging in your backyard and you deposited it in the bank. How would your new demand deposit account create a situation of excess reserves at your bank?
5. If the Bonnie and Clyde National Bank’s only deposits were demand deposits of $20 million and it faced a 10 percent reserve requirement, how much money would it be required to hold in reserves?
4. Is a demand deposit an asset or a liability?
3. How do legal reserve deposit regulations lower bank profits?
2. In what way is it true that “banks make money by making money”?
1. What is happening to the number of banks now that interstate banking is allowed?
1. How do reserve requirements affect how much money can be created?
1. What is a reserve requirement?
1. How is money created?
1. What do pawn shops sell?
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