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macroeconomics

Questions and Answers of Macroeconomics

You learned in Chapter 2 that informal work at home (e.g., preparing meals, taking care of children) is not counted as part of GDP. Such work also does not constitute employment in labor-market
Go to the Web site maintained by the U.S. Bureau of Labor Statistics (www.bls.gov). Find the latest Employment Situation Summary. Look under the link "National Employment."a. What are the latest
The typical dynamics of unemployment over a recession The table below shows the behavior of annual real GDP growth during three recessions. These data are from Table B-4 of the Economic Report of the
Discuss the following statements.a. The Phillips curve implies that when unemployment is high, inflation is low, and vice versa. Therefore, we may experience either high inflation or high
Changes in the natural rate of unemploymenta. Repeat Problem 6 but now draw separate graphs for the period 1970 to 1990 and the period since 1990.b. Do you find that the relation between inflation
Changes in the natural rate of unemploymenta. Repeat Problem 6 but now draw separate graphs for the period 1970 to 1990 and the period since 1990.b. Do you find that the relation between inflation
Using the natural rate of unemployment to predict changes in inflation The estimated Phillips curve from Figure 8.4 is\[\pi_{t}-\pi_{t-1}=3.0-0.5 u_{t}\]Fill in the table below using the data
The rate of inflation and expected inflation in different decades Fill in the values in table below for inflation and expected inflation using the 1960s. Here you will have to find the data using
The two paths to the medium-run equilibrium explored in this chapter make two different assumptions about the formation of the level of expected inflation. One path assumes the level of expected
A shock to aggregate supply will also have different outcomes when there are different assumptions about the formation of the level of expected inflation. As in Question 3, one path assumes that the
Okun's Law is written as \(u-u(-1)=-0.4\left(g_{Y}-3 \%ight)\)a. What is the sign of \(u-u(-1)\) in a recession? What is the sign of \(u-u(-1)\) in a recovery?b. Explain where the \(3 \%\) number
Consider the data in the Focus Box, "Deflation in the Great Depression."a. Do you believe that output had returned to its potential level in 1933?b. Which years suggest a deflation spiral as
Consider the data in the Focus Box, "Deflation in the Great Depression."a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year's rate of
The Great Depression in the United Kingdom Answer the following questions based on information found in the table belowa. Is there evidence of the deflation spiral from 1929 to 1933 in the United
Assume that the average consumer in Mexico and the average consumer in the United States buy the quantities and pay the prices indicated in the following table:a. Compute U.S. consumption per capita
Consider the production function:a. Compute output when \(K=49\) and \(N=81\).b. If both capital and labor double, what happens to output?c. Is this production function characterized by constant
Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological
Convergence between Japan and the United States since 1960 The Bureau of Labor Statistics has a user-friendly Web site of GDP per capita at
Growth successes and failures Go to the Web site containing the Penn World Table and collect data on real GDP per capita (chained series) for 1970 for all available countries. Do the same for a
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The saving rate is always equal to the investment rate.b. A higher
Consider the following statement: "The Solow model shows that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. saving rate. Increasing
In Chapter 3 we saw that an increase in the saving rate can lead to a recession in the short run (i.e., the paradox of saving). We examined the issue in the medium run in Problem 5 at at the end of
Discuss how the level of output per person in the long run would likely be affected by each of the following changes:a. The right to exclude saving from income when paying income taxes.b. A higher
Suppose the United States moved from the current pay-asyou-go Social Security system to a fully funded one and financed the transition without additional government borrowing. How would the shift to
Suppose that the production function is given by:\[Y=0.5 \sqrt{K} \sqrt{N}\]a. Derive the steady-state levels of output per worker and capital per worker in terms of the saving rate, \(s\), and the
The Cobb-Douglas production function and the steady state This problem is based on the material in the chapter appendix. Suppose that the economy's production function is given by:\[Y=K^{\alpha}
Continuing with the logic from Problem 7, suppose that the economy's production function is given by \(Y=K^{1 / 3} N^{2 / 3}\) and that both the saving rate, \(s\), and the depreciation rate,
Deficits and the capital stock For the production function, \(Y=\sqrt{K} \sqrt{N}\) equation (11.9)gives the solution for the steady-state capital stock per worker.a. Retrace the steps in the text
RED and growtha. Why is the amount of R\&D spending important for growth? How do the appropriability and fertility of research affect the amount of R\&D spending?How do each of the policy proposals
Sources of technological progress: Leaders versus followersa. Where does technological progress come from for the economic leaders of the world?b. Do developing countries have other alternatives to
For each of the economic changes listed in (a) and (b), assess the likely impact on the growth rate and the level of output over the next five years and over the next five decades.a. A permanent
Suppose that the economy's production function is\[Y=\sqrt{K} \sqrt{A N}\]that the saving rate, s, is equal to \(16 \%\), and that the rate of depreciation, \(\delta\), is equal to \(10 \%\). Suppose
Suppose an economy is characterized by the following equations:\[\begin{gathered}\text { Price setting: } P=(1+m)(W / A) \\\text { Wage setting: } W=A^{e} P^{e}(1-u)\end{gathered}\]a. Solve for the
Discuss the following statement: "Higher labor productivity allows firms to produce more goods with the same number of workers and thus to sell the goods at the same or even lower prices. That's why
How might the policy changes in (a) through (d) the wage gap between low-skill and high-skill workers in the United States?a. Increased spending on computers in public schools.b. Restrictions on the
Technological progress, agriculture, and employment Discuss the following statement: "Those who argue that technological progress does not reduce employment should look at agriculture. At the start
Productivity and the aggregate supply curve Consider an economy in which production is given by:\[Y=A N\]Assume that price setting and wage setting are described in the following
The churn The Bureau of Labor Statistics presents a forecast of occupations with the largest job decline and the largest job growth. Examine the tables at www.bls.gov/emp/emptab4.htm (for the largest
Income Inequalitya. What evidence is presented in the text that income inequality has increased over time in the United States?b. Use supply and demand of educated workers to explain the increase in
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The present discounted value of a stream of returns can be calculated in
For which of the problems listed in (a) through (c) would you want to use real payments and real interest rates, and for which would you want to use nominal payments and nominal interest rates to
Compute the two-year nominal interest rate using the exact formula and the approximation formula for each set of assumptions listed in (a) through (c).a. \(i_{t}=2 \% ; i_{t+1}^{e}=3 \%\)b.
The equity premium and the value of stocksa. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and expects to pay its next
Approximating the price of long-term bonds The present value of an infinite stream of dollar payments of\(\$ z\) (that starts next year) is \(\$ \mathrm{z} / \mathrm{i}\) when the nominal interest
Monetary policy and the stock market Assume all policy rates, current and expected into the future had been \(2 \%\). Suppose the Fed decides to tighten monetary policy and increase the short-term
Regular IRAs versus Roth IRAs You want to save \(\$ 2,000\) today for retirement in 40 years. You have to choose between the two plans listed in (i) and (ii).i. Pay no taxes today, put the money in
House prices and bubbles Houses can be thought of as assets with a fundamental value equal to the expected present discounted value of their future real rents.a. Would you prefer to use real payments
The Economist annually publishes The Economist House Price Index. It attempts to assess which housing markets, by country, are the most overvalued or undervalued relative to fundamentals. Find the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. For a typical college student, human wealth and nonhuman wealth are
A consumer has nonhuman wealth equal to \(\$ 100,000\). She earns \(\$ 40,000\) this year and expects her salary to increase by \(5 \%\) in real terms each year for the following two years. She will
A pretzel manufacturer is considering buying another pretzel-making machine that costs \(\$ 100,000\). The machine will depreciate by \(8 \%\) per year. It will generate real profits equal to \(\$
Suppose that at age 22, you have just finished college and have been offered a job with a starting salary of \(\$ 40,000\). Your salary will remain constant in real terms. However, you have also been
Suppose that every consumer is born with zero financial wealth and lives for three periods: youth, middle age, and old age. Consumers work in the first two periods and retire in the last one. Their
Continue with the setup from Problem 5, but suppose now that borrowing restrictions do not allow young consumers to borrow. If we call the sum of income and total financial wealth "cash on hand,"
Consider a consumer who lives for three periods: youth, middle age, and old age. When young, the consumer earns \(\$ 20,000\) in labor income. Earnings during middle age are uncertain; there is a
Go to the FRED database operated by the Federal Reserve Bank of St. Louis. Find annual data for personal consumption expenditures and gross private domestic investment as well as for real GDP. The
Go to the Web site of the FRED economic data base and download the series for real personal disposable income per capita (series name A229RXO), the University of Michigan Survey of Consumers Index of
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Changes in the current one-year real interest rate are likely to have a
Consider these two quotes concerning recent Federal Reserve policy On December 12, 2012 the Federal Reserve issued the following statement:"In particular, the Committee decided to keep the target
For each of the changes in expectations in parts (a) through (d), determine whether there is a shift in the IS curve, the LM curve, both curves, or neither. In each case assume that no other
Consider the following statement: "The rational expectations assumption is unrealistic because, essentially, it amounts to the assumption that every consumer has perfect knowledge of the economy."
A new president, who promised during the campaign that she would cut taxes, has just been elected. People trust that she will keep her promise, but expect that the tax cuts will be implemented only
The Focus box "Can a Budget Deficit Reduction Lead to an Output Expansion? Ireland in the 1980s" provides an example of fiscal consolidation. Ireland had a large budget deficit in 1981 and 1982.a.
Suppose, in a hypothetical economy, that the chairman of the Fed unexpectedly announces that he will retire in one year. At the same time, the President announces her nominee to replace the retiring
As seen in the following table, the crisis left the United States with an enormous federal budget deficit in 2009. There was a substantial fiscal consolidation from 2011 onward yet real output
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. If there are no statistical discrepancies, countries with current account
Consider two fictional economies, one called the domestic country and the other the foreign country. Given the transactions listed in(a) through (g), construct the balance of payments for each
Consider two bonds, one issued in euros ( \(€\) ) in Germany, and one issued in dollars ($) in the United States. Assume that both government securities are one-year bonds - paying the face value
Consider a world with three equal-sized economies ( \(A, B\), and \(C\) ) and three goods (clothes, cars, and computers). Assume that consumers in all three economies want to spend an equal amount on
Suppose the domestic currency depreciates (i.e., E falls).Assume that \(P\) and \(P *\) remain constant.a. How does the nominal depreciation affect the relative price of domestic goods (i.e., the
Retrieve the nominal exchange rates between Japan and the United States from the Federal Reserve Bank of St. Louis FRED data site. It is series AEXJPUS. This exchange rate written as yen per
Retrieve the most recent World Economic Outlook (WEO) from the Web site of the International Monetary Fund (www.imf.org). In the Statistical Appendix, find the table titled "Balances on Current
Saving and investment throughout the world Retrieve the most recent World Economic Outlook (WEO) from the Web site of the International Monetary Fund (www.imf. org). In the Statistical Appendix, find
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The current U.S. trade deficit is the result of unusually high investment,
Real and nominal exchange rates and inflation Using the definition of the real exchange rate (and Propositions 7 and 8 in Appendix 2 at the end of the book), you can show
A further look at Table 18-1 Table 18-1 has four entries. Using Figure 18-5 as a guide, draw the situations illustrated in each of the 4 entries in Table 18-1. Be sure you understand why the
Net exports and foreign demanda. Suppose there is an increase in foreign output. Show the effect on the domestic economy (i.e., replicate Figure 18-4). What is the effect on domestic output? On
Eliminating a trade deficita. Consider an economy with a trade deficit \((N X
Multipliers, openness, and fiscal policy Consider an open economy characterized by the following equations:\[\begin{aligned}C & =c_{0}+c_{1}(Y-T) \\I & =d_{0}+d_{1} Y \\I M & =m_{1} Y \\X & =x_{1}
Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by\[C=10+0.8(Y-T), I=10, G=10 \text {, and }
The U.S. trade deficit, current account deficit, and investmenta. Define national saving as private saving plus the government surplus-that is, as \(S+T-G\). Now, using equation (18.5), describe the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The interest rate parity condition means that interest rates are equal
Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of
In this chapter, we showed that a reduction in the interest rate in an economy operating under flexible exchange rates leads to an increase in output and a depreciation of the domestic currency.a.
Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.a. In an IS-LM-UIP diagram,
Suppose there is an expansionary fiscal policy in the foreign country that increases \(Y^{*}\) and \(i^{*}\) at the same time.a. In an IS-LM-UIP diagram, show the effect of the increase in foreign
Consider a fixed exchange rate system, in which a group of countries (called follower countries) peg their currencies to the currency of one country (called the leader country). Because the currency
A flexible exchange rate combined with a willingness to change the domestic interest rate can increase the effectiveness of monetary policy in an open economy. Consider an economy that suffers a fall
This question explores how an increase in demand for U.S. assets may have slowed the depreciation of the dollar that many economists believe is warranted by the large U.S. trade deficit and the need
Bond yields and long run currency movementsa. Go the web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section "Markets \& Data" and then the
In year 1, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that$1,500, he saves $200. What is Adam’s MPC out of his $500 raise?a.
If the MPS rises, then the MPC will:a. fall.b. rise.c. stay the same.
Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent
Which of the following scenarios will shift the investment demand curve right? Select one or more answers from the choices shown.a. Business taxes increase.b. The expected return on capital
True or False. Real GDP is more volatile (variable) than gross investment.
If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?a. 1.0b. 2.5c. 4.0d. 5.0
True or False. Larger MPCs imply larger multipliers.
Refer to the table in Figure 10.5 and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at
What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1?What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of
True or False. The aggregate expenditures model assumes flexible prices.

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