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Questions and Answers of Macroeconomics

The table shows several possible situations for the economy in terms of output gaps and the rate of change of wages. Real GDP is measured in billions of dollars. Assume that potential output is \(\$
Consider an economy that is in equilibrium with output equal to \(Y^{*}\). There is then a significant reduction in the world's demand for this country's goods.a. Illustrate the initial equilibrium
Consider an economy that is in equilibrium with output equal to \(Y^{*}\). There is then a significant reduction in the world price of an important raw material, such as iron ore. (Assume that this
The table below shows hypothetical data for five economies. Real GDP is measured in millions of dollars.a. Fill in the missing data. Which economies have an inflationary gap? Which have a
Consider the following sets of values for MPC, \(t\), and \(m\), and recall that the simple multiplier is given by \(1 /\) \([1-M P C(1-t)-m]\). Assume the \(A S\) curve is upward sloping and
In our discussion of automatic fiscal stabilizers, we argued that income taxes and transfers increased the stability of real GDP in the face of \(A D\) and \(A S\) shocks. Recall from Chapter 22 that
Which of the following would be automatic stabilizers? Explain why.a. Employment-insurance paymentsb. Cost-of-living escalators in government contracts and pensionsc. Income taxesd. Free university
The following diagram shows the \(A D, A S\), and \(Y *\) curves for an economy. Suppose the economy begins at point \(A\). Then the government increases its level of purchases \((G)\).a. Describe
Between 200 6 and 201 2, the Canadian government reduced both personal and corporate income taxes. Is this a demand-side or a supply-side policy? Explain.
Fill in the blanks to make the following statements correct.a. Long-run, sustained increases in potential output are called .b. Increases in material living standards occur with increases in real
In this chapter, we developed a theory of the market for financial capital. Using that theory, fill in the blanks to make the following statements correct.a. An increase in the real interest rate
Fill in the blanks to make the following statements correct.a. An important aspect of Neoclassical growth theory is that increases in the supply of one factor, all else held constant, imply
In the text we said that, over many years, small differences in growth rates can have large effects on the level of income. This question will help you understand this important point. Consider an
The diagram below shows two paths for aggregate consumption. One grows at a rate of 3 percent per year; the other grows at 4 percent per year but begins at a lower level.a. Suppose the economy jumps
The table below shows aggregate values for a hypothetical economy. Real GDP is equal to potential GDP. Figures are billions of dollars.a. What is the level of private saving?b. What is the level of
Consider an economy in the long run with real GDP equal to the level of potential output, \(Y^{*}\).a. Draw the diagram of the market for financial capital. Explain the slopes of the investment
Consider the market for financial capital and the relationship among saving, investment, and the interest rate. In what follows, assume that the economy is in a long-run equilibrium with
The Neoclassical growth theory is based on the existence of an aggregate production function-showing the relationship between labour \((L)\), capital \((K)\), technology \((T)\), and real GDP
In this chapter we discussed four major determinants of growth in real output: increases in the labour force, increases in the stock of physical capital, increases in human capital, and improvements
In the early 197 0s the Club of Rome, extrapolating from the rates of resource use at the time, predicted that the supply of natural resources (especially oil) would be used up within a few decades.
Dr. David Suzuki, an opponent of further economic growth, has argued that despite the fact that "in the twentieth century the list of scientific and technological achievements has been absolutely
Fill in the blanks to make the following statements correct.a. Money serves three functions: __________,________and _________.b. Suppose children at a summer camp are each given a credit of \(\$ 20
Fill in the blanks to make the following statements correct. Answer these questions in the sequence given.a. Suppose the Bank of Canada purchases a \(\$ 100 0\) bond from Bob's Financial Firm, and
Which of the following items can be considered money in the Canadian economy? Explain your answers by discussing the three functions of money-medium of exchange, store of value, and unit of
Sunshine Bank has the following list of entries on its balance sheet. All figures are in millions of dollars.a. Draw the balance sheet for Sunshine Bank and record the entries appropriately in the
The table below shows the balance sheet for the Regal Bank, a hypothetical commercial bank. Assume that the Regal Bank has achieved its target reserve ratio.a. What is the Regal Bank's target reserve
Consider a new deposit to the Canadian banking system of \(\$ 100 0\). Suppose that all commercial banks have a target reserve ratio of 10 percent and there is no cash drain. The following table
Consider a withdrawal of \(\$ 500 0\) from the Canadian banking system. Suppose all commercial banks have a target reserve ratio of 8 percent and there is no cash drain.a. Using a table like that
Consider an individual who immigrates to Canada and deposits \(\$ 300 0\) in Canadian currency into the Canadian banking system. Suppose all commercial banks have a target reserve ratio of 10 percent
Consider an individual who moves to Canada and brings with him \(\$ 400 00\) in Canadian currency, which he deposits in a Canadian bank. For each of the cases below, compute the overall change in
This question is intended to illustrate the similarity between the simple income-expenditure multiplier from Chapters 21 and 22 and the deposit multiplier that we examined in this chapter.a.
Suppose that on January 1 , 201 1, a household had \(\$ 300 \) 000 , which it wanted to hold for use one year later. Calculate, by using resources available online or in your university library,
During 201 1, after the worst of the global financial crisis was over, the governor of the Bank of Canada expressed concern that the commercial banks were still "hoarding" cash rather than extending
Fill in the blanks to make the following statements correctly reflect the theory developed in this chapter.a. Monetary equilibrium occurs when the quantity of _________ equals the quantity of _______
Fill in the blanks to make the following statements correctly reflect the theory developed in this chapter.a. If money is neutral in the long run, then changes in the money supply have no effect on
The following table shows the stream of income produced by several different assets. In each case, \(P_{1}, P_{2}\), and \(P_{3}\) are the payments made by the asset in Years 1 , 2 , and 3 .a. For
The table below provides information for six different bonds: current market price \((P)\), the face value of the bond \((V)\), and the number of years before the bond matures \((N)\).a. In each
Consider a bond that promises to make coupon payments of \(\$ 100 \) one year from now and \(\$ 100 \) two years from now, and to repay the principal of \(\$ 100 0\) three years from now. Suppose
What motives for holding money-transactions, precautionary, or speculative-do you think explain the following holdings? Explain.a. Currency in the cash register of the local grocery store at the
The diagram below shows the demand for money and the supply of money.a. Explain why the \(M_{D}\) function is downward sloping.b. Suppose the interest rate is at \(i_{A}\). Explain how firms and
The following diagrams show the determination of monetary equilibrium and the demand for investment. The economy begins with money supply \(M_{S}\), money demand \(M_{D}\), and investment demand
In the text we discussed why, in an open economy with international capital mobility, there is a second part to the monetary transmission mechanism. (It may be useful to review Figure 27 -7 when
In the text we discussed the historical debate between Keynesians and Monetarists regarding the effectiveness of monetary policy in changing real GDP (see Figure 27 -10 to review). Using the same
In 200 8, stock markets in Canada and other developed countries experienced very large declines, largely in response to the failure of several large U.S. and European banks and the resulting
Consider the effects of events in the U.S. economy on the Canadian economy and on Canadian monetary policy.a. If a serious recession begins in the United States, what is the likely effect on Canadian
Fill in the blanks to make the following statements correct.a. In general, there are two approaches to implementing monetary policy. The central bank can attempt to influence __________ directly or
Fill in the blanks to make the following statements correct.a. The interest rate that commercial banks charge each other for overnight loans is called the _____________b. The bank rate is __________
Fill in the blanks to make the following statements correct.a. The long-run policy target for the Bank of Canada is the _______________. The current target is to keep the inflation rate at
Read Applying Economic Concepts 28 -1, which discusses the Bank of Canada's open-market operations and how these influence the amount of currency in circulation in the Canadian economy. Using
In the text we stated that the Bank of Canada's longrun policy target is the rate of inflation.a. What observations have led many central banks to choose this long-run policy target?b. The Bank of
The diagram below shows the demand for money and the supply of money.a. Given the position of the \(M_{D}\) curve, explain why it is not possible for the Bank of Canada to set the money supply and
Milton Friedman was a professor of economics at the University of Chicago and was the most influential Monetarist of his generation. He was known for accusing the Federal Reserve (the U.S. central
Suppose it is mid-2007 and the stock market has been growing rapidly for the past five years. Some economists argue that the stock market has become "overvalued" and thus a "crash" is imminent.a. How
Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to \(Y^{*}\).a. Suppose the world price for raw
In the last few years, the path of CPI inflation has deviated from the path of core inflation several times (see Figure 28 -4).a. Why is core inflation less volatile than CPI inflation?b. Why might
During the financial crisis of 200 7-2008, the Bank of Canada took extraordinary actions to inject liquidity into the banking system. As a result, the amount of reserves in the banking system
Fill in the blanks to make the following statements correct.a. The term NAIRU stands for the ___________.b. Unemployment is said to be equal to the NAIRU when GDP is equal to __________.c. Changes in
Fill in the blanks to make the following statements correct.a. Suppose the economy is initially at potential GDP \(\left(Y^{*}ight)\) and then there is a sudden increase in the demand for Canadian
The table below shows several macroeconomic situations, each with a given amount of excess demand (or supply) for labour and a level of inflation expectations. Both are expressed in percentage per
What sources of inflation are suggested by each of the following quotations?a. A newspaper editorial in Manchester, England: "If American unions were as strong as those in Britain, America's
This exercise requires you to compute inflationary expectations based on a simple formula, and it will help you to understand why backward-looking expectations adjust slowly to changes in economic
In the \(A D / A S\) diagram here, the economy is in longrun equilibrium with real GDP equal to \(Y^{*}\); the price level is stable at \(P_{0}\).a. Suppose the central bank announces that it will
Consider the following \(A D / A S\) diagram. Suppose the economy experiences a positive aggregate demand shock-say, an increase in the demand for Canada's exports. This increases real GDP to
Consider the following \(A D / A S\) diagram. Suppose the economy experiences a negative aggregate supply shock-say, an increase in wages driven by a major union settlement. This reduces real GDP to
The table that follows shows some data on various disinflations. In each case, assume that potential GDP is equal to \(\$ 900 \) billion.a. In each case, compute the sacrifice ratio.b. Explain why
What is the relationship between the sacrifice ratio and the central bank's credibility?a. Explain why a more credible policy of disinflation reduces the costs of disinflation.b. Explain how you
In the summer of 201 5 , a time when U.S. inflation was rising and output was approaching potential, a story in The Globe and Mail reported that the release of strong employment-growth data for the
Fill in the blanks to make the following statements correct.a. The overall unemployment rate in Canada is not a good indicator of the level of activity in the labour market because ____________.b.
Fill in the blanks to make the following statements correct.a. The NAIRU is composed of ____________ unemployment and ________ unemployment. The NAIRU is always _________ than zero.b. If there are
The table below provides employment and labour force data for a small economy over a 3 -month period.a. What is the unemployment rate on September 1 , October 1 , and November 1 ?b. Explain why the
The following table shows the pattern of real GDP, potential GDP, and the unemployment rate for several years in Cycleland.a. On a scale diagram, draw the path of real GDP and potential GDP (with
Interpret the following statements from newspapers in terms of types of unemployment.a. "Recession hits local factory; 180 0 workers laid off."b. "Of course, I could take a job as a dishwasher, but
The diagram below shows a simple \(A D / A S\) diagram. The economy begins in long-run equilibrium at \(E_{0}\) with real GDP equal to \(Y^{*}\).a. At \(E_{0}\), the unemployment rate is 8 percent.
The diagram below shows a simple \(A D / A S\) diagram. The economy begins in long-run equilibrium at \(E_{0}\) with real GDP equal to \(Y^{*}\).a. At \(E_{0}\), the unemployment rate is 6 percent.
The diagram below shows a perfectly competitive labour market. The initial equilibrium is with wage \(w^{*}\) and employment \(L^{*}\).a. Suppose the demand for labour decreases to
Consider two hypothetical countries. In Country A, 20 percent of the labour force is unemployed for half the year and employed for the other half; the remaining 80 percent of the labour force is
The Canadian government recently announced its plan to modify the employment insurance (EI) program, generating a great deal of debate over the appropriate level of generosity for EI.a. Explain what
Consider an economy that begins with real GDP equal to potential. There is then a sudden increase in the prices of raw materials, which shifts the \(A S\) curve upward.a. Draw the initial long-run
The table below shows the percentage of the labour force accounted for by youths (15 to 24 years old) and older workers (25 years and older) over several years. Suppose that because of their lower
In its 2009 and 2010 budgets, the Canadian government significantly increased its planned spending on infrastructure projects in order to fight the existing recession and protect jobs.a. Explain
Fill in the blanks to make the following statements correct.a. The government's budget constraint shows that government expenditures must be equal to the sum of ________ and ___________.b. The
Fill in the blanks to make the following statements correct.a. When there is no change in the government's fiscal policy it is still possible for the budget deficit to fall because.b. For a given set
Fill in the blanks to make the following statements correct.a. In a closed economy, when the government borrows to finance the deficit, interest rates will ___________ and some private investment
The table below shows government spending data over eight years in Debtland. All figures are in billions of dollars. The symbols used are as defined in the text.a. Compute Debtland's budget deficit
The figure below shows the budget deficit function for a country.a. Explain why the budget deficit function is downward sloping.b. If the government increases its level of purchases \((G)\), what
In the late 199 0 s, the U.S. government was slightly ahead of the Canadian government in reducing its budget deficit. The following table shows the actual budget deficit and the structural budget
The Canadian federal budget moved from a surplus of \(\$ 9 .6\) billion in the 200 7-2008 fiscal year to a deficit of \(\$ 5 .8\) billion the next year, and a large deficit of \(\$ 55 .6\) billion in
The following table shows hypothetical data from 201 0 to 201 6 that can be used to compute the change in the debt-to-GDP ratio. The symbols used are as defined in the text.a. Remember from the text
The diagram below shows an AD/AS diagram. The economy begins at \(E_{0}\) with output equal to \(Y^{*}\). Suppose the government in this closed economy increases \(G\) and finances it by running a
The diagram below shows an \(A D / A S\) diagram. The economy begins at \(E_{0}\) with output equal to \(Y^{*}\). Suppose the government in this closed economy decreases its budget deficit by
A Member of Parliament recently exclaimed, "The prime minister's policies are working! Lower interest rates combined with staunch fiscal policy have reduced the deficit significantly." What do
The following table shows how many tonnes of dairy products and beef products can be produced in New Zealand and Australia with one unit of equivalent resources.a. Which country has an absolute
Fill in the blanks to make the following statements correct.a. The ________ argument provided the rationale for Canada's National Policy of 187 6. A high tariff wall allowed many Canadian industries
Fill in the blanks to make the following statements correct.a. A regional trade agreement, such as the NAFTA, or a common market, such as the European Union, allows for ___________ , whereby trade
Deficits and fiscal consolidation As seen in the following table, the 2008 financial crisis left the United States with an enormous federal budget deficit in 2009.There was a substantial fiscal
a. The equation of the Phillips curve from 1970 to 1995 is:\[\pi_{t}-\pi_{t-1}=7.4 \%-1.2 u_{t}\]Calculate and define the natural rate of unemployment using this curve.b. The equation of the Phillips
Suppose that the mark-up of goods prices over marginal cost is \(5 \%\), and that the wage-setting equation is:\[W=P(1-u)\]where \(u\) is the unemployment rate.a. What is the real wage, as determined
How can a lockdown result in stagflation?A lockdown can have three different effects:a. The first happens when demand during the lockdown decreases so that actual output, \(Y_{t}\), falls exactly to
Why is the effect of a lockdown different from that of an oil shock?There is an important difference between a lockdown and an oil shock. Although a lockdown is typically temporary, not all firms
Why might the 'Goggle mobility index' not be a good measure} of the fall in economic activity during a lockdown?Whether it provides, or not, a good measure of economic activity, depends on the

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