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macroeconomics

Questions and Answers of Macroeconomics

What are the various ways in which the Federal Reserve can influence the money supply?
Explain how each of the following events affects the monetary base, the money multiplier, and the money supply.a. The Federal Reserve buys bonds in an openmarket operation.b. The Fed increases the
In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve–deposit ratio is 0.25.a. What are the money supply, the monetary base,
In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in
Give an example of a bank balance sheet with a leverage ratio of 20. If the value of the bank’s assets rises by 2 percent, what happens to the value of the owners’ equity in this bank? How large
Jimmy Paul Miller starts his own bank, called JPM. As owner, Jimmy puts in $2,000 of his own money. JPM then borrows $4,000 in a long-term loan from Jimmy’s uncle, accepts $14,000 in demand
In the country of Wiknam, the velocity of money is constant. Real GDP grows by 3 percent per year, the money stock grows by 8 percent per year, and the nominal interest rate is 9 percent. What isa.
An economy has the following money demand function: (M/P )d = .2Y/i ½.a. Derive an expression for the velocity of money. What does velocity depend on?Explain why this dependency may occur.b.
In each of the following scenarios, explain and categorize the cost of inflation.a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than
What are the net capital outflow and the trade balance? Explain how they are related.
Consider an economy described by the following equations:a. In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange
Here is a table similar to Table 6-2 (but in alphabetical order) for the currencies of four imaginary nations. Use the theory of purchasing-power parity to fill in the blanks with a number or
Do Europeans work more or fewer hours than Americans? List three hypotheses that have been suggested to explain the difference.
Consider an economy with the following Cobb–Douglas production function:a. Derive the equation describing labor demand in this economy as a function of the real wage and the capital stock.b. The
Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations:where L is labor (in number of workers), W is the
In any city at any time, some of the stock of usable office space is vacant. This vacant office space is unemployed capital. How would you explain this phenomenon? In particular, which approach to
Country A and country B both have the production functiona. Does this production function have constant returns to scale? Explain.b. What is the per-worker production function, y = f (k)?c. Assume
Consider an economy described by the production function: Y = F(K, L) = K0.4L0.6.a. What is the per-worker production function?b. Assuming no population growth or technological progress, find the
Draw a well-labeled graph that illustrates the steady state of the Solow model with population growth. Use the graph to find what happens to steady-state capital per worker and income per worker in
Give an example of an institutional difference between countries that might explain the differences in income per person.
Suppose an economy described by the Solow model has the following production function:a. For this economy, what is f (k)?b. Use your answer to part (a) to solve for the steady-state value of y as a
An economy has a Cobb–Douglas production function:capital share of a third, a saving rate of 24 percent, a depreciation rate of 3 percent, a rate of population growth of 2 percent, and a rate of
When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?
Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant.a. What happens to the aggregate demand curve?b. What happens to the level of output and the price
The official arbiter of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER’s Web site (http://www.nber.org) and find the
Use the Keynesian cross model to predict the impact on equilibrium GDP of the following.In each case, state the direction of the change and give a formula for the size of the impact.a. An increase in
In the Keynesian cross model, assume that the consumption function is given byPlanned investment is 200; government purchases and taxes are both 400.a. Graph planned expenditure as a function of
Suppose that the money demand function iswhere r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5.a. Graph the supply and demand for real money
The following equations describe an economy.a. Identify each of the variables and briefly explain their meaning.b. From the above list, use the relevant set of equations to derive the IS curve. Graph
Label each of the following statements true, false, or uncertain. Explain briefly.a. Output growth was negative in both advanced as well as emerging and developing countries in 2009.b. World output
Macroeconomic policy in Europe Beware of simplistic answers to complicated macroeconomic questions. Consider each of the following statements and comment on whether there is another side to the
Chinese economic growth is the outstanding feature of the world economic scene over the past two decades.a. In 2014, U.S. output was $17.4 trillion, and Chinese output was $10.4 trillion. Suppose
Label each of the following statements true, false, or uncertain. Explain briefly.a. U.S. GDP was 32 times higher in 2014 than it was in 1960.b. When the unemployment rate is high, the participation
Suppose you are measuring annual U.S. GDP by adding up the final value of all goods and services produced in the economy. Determine the effect on GDP of each of the following transactions.a. A
Suppose that an economy shows only the following activities in a specific year:i. It costs an automobile manufacturing company \(€ 10\) million to assemble 5,000 cars. The cars are then sold to
An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2009 and 2010 are as follows:a. What is nominal GDP in 2009 and in 2010? By what percentage
Consider the economy described in Problem 4.a. Use the prices for 2009 as the set of common prices to compute real GDP in 2009 and in 2010. Compute the GDP deflator for 2009 and for 2010, and compute
Consider the economy described in Problem 4.a. Construct real GDP for years 2009 and 2010 by using the average price of each good over the two years.b. By what percentage does real GDP change from
The Consumer Price Index The Consumer Price Index (CPI) is a measure of the average price of goods that a typical household consumes. To calculate the CPI, a basket of 700 goods and services that
Using macroeconomic relations:a. Okun's law stated that when output growth is higher than usual, the unemployment rate tends to fall. Explain why usual output growth is positive.b. In which year, a
Hedonic pricing As the first Focus box in this chapter explains, it is difficult to measure the true increase in prices of goods whose characteristics change over time. For such goods, part of any
Measured and true GDP Suppose that instead of cooking dinner for an hour, you decide to work an extra hour, earning an additional \$12. You then purchase some (takeout) Chinese food, which costs you
Comparing the 2008 global financial crisis and the European Sovereign debt crisis.EUROSTAT is the statistical agency of the European Commission that provides data to the institutions of the 28
Label each of the following statements true, false, or uncertain. Explain briefly.a. The largest component of GDP is consumption.b. Government spending, including transfers, was equal to \(18.1 \%\)
The following equations refer to the goods market of an economy in billions of euros:\[\begin{aligned}C & =480+0.5 Y_{D} \\I & =110 \\T & =70 \\G & =250\end{aligned}\]a. Solve for the goods market
Refer to the economy in Problem 2.a. Calculate the private savings, public savings, and investment spending.b. Calculate the multiplier and explain how it affects equilibrium output.c. Suppose that
The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in \(G\) and \(T\) that
Automatic stabilizers In this chapter we have assumed that the fiscal policy variables\(G\) and \(T\) are independent of the level of income. In the real world, however, this is not the case. Taxes
Balanced budget versus automatic stabilizers It is often argued that a balanced budget amendment would actually be destabilizing. To understand this argument, consider the economy in Problem 5.a.
Taxes and transfers Recall that we define taxes, T, as net of transfers. In other words,\[T=\text { Taxes }- \text { Transfer Payments }\]a. Suppose that the government increases transfer payments to
Investment and income This problem examines the implications of allowing investment to depend on output. Chapter 5 carries this analysis much further and introduces an essential relation — the
The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may find making a diagram helpful for parta. For this problem, you do not need to
Greece's usage of fiscal policy to avoid the meltdown and the debt crisis As a result of the combined effects of the global financial crisis and the sovereign debt crisis, the GDP of Greece declined
The "exit strategy" problem in fighting the recession associated with the crisis, taxes were cut, and government spending was increased. The result was a large government deficit. To reduce that
Label each of the following statements true, false, or uncertain. Explain briefly.a. Income is a flow variable while financial wealth is a stock variable.b. Economists distinguish between investors
Suppose that the household nominal income for an economy is \(£ 50,000\) billion and the demand for money in this economy is given by\[M^{d}=£ Y(0.2-0.8 i)\]a. What is the demand for money when the
Consider a bond that promises to pay \(\$ 100\) in one year.a. What is the interest rate on the bond if its price today is \$75? \$85? \$95?b. What is the relation between the price of the bond and
The following are the money demand and money supply functions in an economy.\[\begin{gathered}M^{s}=€ 8,000 \\M^{d}=€ 40,000(0.25-i)\end{gathered}\]a. Calculate the equilibrium interest rate.b.
Suppose that a person's wealth is \(\$ 50,000\) and that her yearly income is \(\$ 60,000\). Also suppose that her money demand function is given by\[M^{d}=\$ Y(0.35-i)\]a. Derive the demand for
The demand for money and bonds You have learnt in this chapter that the interest rate affects both the prices of bonds and the demand for money. Explain each of these relationships.Do these
ATMs and credit cards This problem examines the effect of the introduction of ATMs and credit cards on money demand. For simplicity, let's examine a person's demand for money over a period of four
Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following:i. The public holds no currency.ii. The ratio of reserves to deposits is 0.
Tools of monetary policy Suppose that the household nominal income in an economy is \(£ 5,000\) billion and the demand for money is given by\[M^{d}=£ Y(0.08-0.4 i)\]a. If the money demand is equal
Monetary policy in a liquidity trap Suppose that money demand in problem 9 holds as long as interest rates are positive. Answer the following questions when the interest rate is equal to zero:a. What
Current monetary policy The central bank of the Federal Republic of Germany is the Deutsche Bundesbank, also known as BUBA. BUBA is the most influential member of the European Central Bank and the
Label each of the following statements true, false, or uncertain. Explain briefly.a. The main determinants of investment are the level of sales and the interest rate.b. If all the exogenous variables
Consider first the goods market model with constant investment that we saw in Chapter 3.Consumption is given by\[\begin{gathered}C=c_{0}+c_{1}(Y-T) \\\text { and } \mathrm{I}, \mathrm{G}, \text { and
The response of the economy to fiscal policya. Use an IS-LM diagram, show the effects on output of a decrease in government spending. Can you tell what happens to investment? Why? Now consider the
Consider the money market to better understand the horizontal LM curve in this chapter.The money market relation (equation 5.3) is \(\frac{M}{P}=Y L(i)\)Equation 5.3a. What is on the left-hand side
Consider the following numerical example of the IS-LM model:\[\begin{aligned}C & =100+0.3 Y_{D} \\I & =150+0.2 Y-1000 i \\T & =100 \\G & =200 \\\bar{i} & =.01\end{aligned}\]a. Find the equation for
Investment and the interest rate The chapter argues that investment depends negatively on the interest rate because an increase in the cost of borrowing discourages investment. However, firms often
The Fiscal-Monetary policy mix in the aftermath of the global financial crisis The global financial crisis of 2008 left many nations with slow GDP growth rates and high levels of public debt. While
What policy mix of monetary and fiscal policy is needed to meet the objectives given here?a. Increase \(Y\) while keeping \(\bar{i}\) constant. Would investment (I) change?b. Decrease a fiscal
The (less paradoxical) paradox of saving A chapter problem at the end of Chapter 3 considered the effect of a drop in consumer confidence on private saving and investment, when investment depended on
Consumption, investment, and GDP in China Along with other emerging market economies, China has been considered as the main driver of global growth especially during the global financial crisis.
Label each of the following statements true, false, or uncertain. Explain briefly.a. The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money.b.
Suppose the interest rate in France is 1. 7%, and the expected French inflation is \(0.8 \%\). The Swiss interest rate is also \(1.7 \%\) and the expected Swiss inflation is \(0.5 \%\).a. What are
Fill in the table below and answer the questions that relate to the data in the tablea. Which situations correspond to a liquidity trap as defined in Chapter 4?b. Which situations correspond to the
Modern bank runs Suppose that a European bank has customer deposits of \(€ 500\)million and capital of \(€ 100\) million and total assets of \(€ 600\) million, divided as loans equal to \(€
The IS-LM view of the world with more complex financial markets Consider an economy described by Figure 6-6 in the text.a. What are the units on the vertical axis of Figure 6-6?Figure 6-6b. If the
The Troubled Asset Relief Program (TARP)Consider a bank that has assets of 100, capital of 20, and short term credit of 80. Among the bank's assets are securitized assets whose value depends on the
Calculating the risk premium on bonds The text presents a formula where\[(1+i)=(1-p)(1+i+x)+p(0)\]\(p\) is the probability the bond does not pay at all (the bond issuer is bankrupt) and has a zero
Unconventional monetary policy: financial policy and quantitative easing The IS curve represents the equilibrium in the goods market and the LM curve represents the equilibrium in the money market.
The spread between riskless and risky bonds. Immediately after the British voted for Brexit, two major credit rating agencies, Standard \& Poor's and Fitch, downgraded the U.K.'s sovereign rating
Inflation-indexed bonds Some bonds issued by the U.S. Treasury make payments indexed to inflation. These inflation-indexed bonds compensate investors for inflation. Therefore, the current interest
Label each of the following statements true, false, or uncertain. Explain briefly.a. Since 1950, the participation rate in the United States has remained roughly constant at \(60 \%\).b. Each month,
Answer the following questions using the information provided in this chapter.a. As a percentage of employed workers, what is the size of the flows into and out of employment (i.e., hires and
The natural rate of unemployment Suppose that the markup of the prices of products over wage cost, \(z\), is \(10 \%\), and that the wage-setting equation is\[W=P(1-2 m+z)\]where \(m\) is the
Reservation wages In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than \(\$ 10,000\) (presumably per day).a. What is your own reservation wage?b. Did your
Bargaining power and wage determination Even in the absence of collective bargaining, workers do have some bargaining power that allows them to receive wages higher than their reservation wage. Each
The existence of unemploymenta. Consider Figure 7-6. Suppose the unemployment rate is very low. How does the low unemployment rate change the relative bargaining power of workers and firms? What do
The informal labor market You learned in Chapter 2 that informal work at home (such as home-based unregistered cooks, baby sitters or garment workers working from home) is not counted as part of GDP.
Go to the Web site of the Office of National Statistics (https:// www.ons.gov.uk/), the United Kingdom's producer of official data and check the section "Employment and labor market."a. How does the
The typical dynamics of unemployment over a recession The table below shows the behavior of the annual growth rate of real GDP of the United Kingdom during four recession episodes: the eighties, the
Label each of the following statements true, false, or uncertain. Explain briefly.a. The original Phillips curve is the negative relation between unemployment and inflation that was first observed in
Discuss the following statements.a. The Phillips curve implies that when an economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in
The natural rate of unemploymenta. The Phillips curve is \(\pi_{t}=\pi_{t}^{e}+(m+z)-\alpha u_{t}\). Rewrite this relation as a relation between the deviation of the unemployment rate from the
The formation of expected inflation The text proposes the following model of expected inflation\[\pi_{t}^{e}=(1-\theta) \pi+\theta \pi_{t}-1\]a. Describe the process of the formation of expected
Mutations of the Phillips curve Suppose that the Phillips curve is given by\[\pi_{t}=\pi_{t}^{e}+0.1-2 u_{t}\]and suppose that \(\theta\) is initially equal to \(O\) and \(\bar{\pi}\) is given and
The macroeconomic effects of the indexation of wages Suppose that the Phillips curve is given by\[\pi_{t}-\pi_{t}^{e}=0.1-2 u_{t}\]where\[\pi_{t}^{e}=\pi_{t-1}\]Suppose that inflation in year \(t-1\)

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