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macroeconomics principles

Questions and Answers of Macroeconomics Principles

What is the effect on the monetary base of an open market purchase of U.S. Treasury securities? What is the effect on the money supply?
What is the reserve–deposit ratio, and how does it affect bank runs?
Besides open-market operations, what other means does the Federal Reserve have for controlling the money supply? Explain how these alternative methods work.
Besides open-market operations, what other means does a central bank like the European Central Bank use to control the money supply? Explain how these alternative methods work.
Describe how the federal funds rate is determined in a regime of abundant reserves.
Describe the main sources of uncertainty that affect monetary policymakers and give an example of each.
Define the main tools the Fed used in the Great Recession to avoid problems caused by the zero lower bound.
Describe the Taylor rule. What are the variables that determine the recommended interest rate according to the rule? How has the rule performed historically?
How does the use of inflation targeting improve central bank credibility? What is the main disadvantage of inflation targeting?
How would the following monetary decisions of the European Central Bank influence individuals?a. A decrease in interest ratesb. An asset purchase program to support struggling member-statesc. A
Since 1989, many central banks have adopted inflation targeting as a strategy for conducting monetary policy. What is inflation targeting? What influence do the following decisions have on
Describe the following measures of monetary policy the Fed used to fight the Great Recession starting in 2007. What effect did they have on the U.S. economy?a. Zero lower bound and forward guidanceb.
Why do many governments have policies against negotiating with hostage-taking terrorists? Under what conditions, if any, are such policies likely to reduce hostage taking? Discuss the analogy to
During much of the postwar period, the Fed attempted to stabilize nominal interest rates. However, during 1979-1982 the Fed under Paul Volcker greatly reduced its emphasis on interest rate
As discussed in the text, if money demand is unstable, the Fed may prefer to target interest rates rather than the money supply itself. When the Fed follows an interest-rate-targeting policy, "Fed
Plot monthly data, beginning in 1990 , on the U.S. monetary base and excess reserves of depository institutions. How would you characterize the relationship between the two variables before and after
Explain the difference between the overall government budget deficit, the current deficit, and the primary current deficit. Why are three deficit concepts needed?
Who bears the burden of government debt? Explain why. Under what circumstances is there no burden to be borne?
How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level, to still higher levels?
At the beginning of year one, there is no government debt outstanding. The government runs a \(\$ 100\) billion deficit in year one. Interest at a nominal rate of \(10 \%\) must be paid starting in
Find the largest nominal deficit that the government can run without raising the debt-GDP ratio, under each of the following sets of assumptions:a. Nominal GDP growth is \(10 \%\) and outstanding
In this problem you are asked to analyze the question: By issuing new bonds and using the proceeds to pay the principal and interest on its old bonds, can government avoid ever repaying its debts?a.
Why is some state and local spending paid for by grants in aid from the Federal government instead of entirely through taxes levied by states and localities on residents? What are the advantages and
a. Use the fact that the nominal deficit equals the nominal primary deficit plus nominal interest payments on government debt to rewrite Equation (15.4) showing the change in the debt-GDP ratio as a
A constitutional amendment has been proposed that would force Congress to balance the budget each year (that is, outlays must equal revenues in each year). Discuss some advantages and disadvantages
Using quarterly data since 1959, graph Federal government expenditures and receipts as a percentage of GDP. Separately, graph state and local government expenditures and receipts as a percentage of
Using quarterly data since 1948, graph the Federal deficit as a percentage of GDP. What is the cyclical behavior of the Federal deficit? Repeat this exercise for the deficits of state and local
Go to the website of the Congressional Budget Office (www.cbo.gov) and find projections for the government budget deficit for the coming five years. Compare the size of the deficit and the
Discuss the potential relationship between government deficits and inflation. In this question, you will investigate the data on government debt as a share of GDP and the monetary base as a share of
An economic variable is persistent if declines in the variable tend to be followed by more declines, and increases by more increases. This question asks you to study the persistence of the civilian
How does each of the following variables behave over the business cycle? Develop graphs to show your results and give economic explanations.a. Real importsb. Federal government receiptsc. Housing
It has been argued that the stock market predicts recessions. Using quarterly data since 1961, plot the real value of the stock market index (the Wilshire 5000 index in the last month of the quarter
Graph the levels of real GDP for the United States, Canada, and Germany (data can be found at www.oecd.org under Statistics and then under National Accounts). Are U.S. and Canadian business cycles
In the FRED database, find a variable that is available in both a seasonally adjusted form and a not seasonally adjusted form. Plot both over time and describe how large the seasonal variation in the
In a particular economy the real money demand function is\[ \frac{M^{d}}{P}=3000+0.1 Y-10,000 i \]Assume that \(M=6000, P=2.0\), and \(\pi^{e}=0.02\).a. What is the real interest rate, \(r\), that
For each of the following changes, what happens to the real interest rate and output in the very short run, before the price level has adjusted to restore general equilibrium?a. Wealth declines.b.
Which school of economists, classical or Keynesian, supports government intervention in the face of economic shock? Explain your answer based on the underlying assumptions.
During a recession, some workers would urge the government to increase its purchases temporarily (for example, by building roads) so as to increase employment and raise wages. If you were a classical
An expansion of economic activities is observed to be followed by an increase in money supply. How would classical economists explain this—does the latter cause the former or vice versa? Explain.
In the classical model, money is neutral in both the short run and the long run. Explain how the introduction of price misperception and unanticipated change in monetary policy to the classical model
In a certain economy, the production function is\[ Y=A\left(150 N-N^{2}\right), \]where \(Y\) is the output, \(A\) is productivity, and \(N\) is the total hours worked. The marginal product of labor
A simplified model of the economy of Finland is described as follows:Desired consumption Desired investment\(C^{d}=100+0.5(Y-T)-50 r\).Real money demand Full-employment output\(I^{d}=150-50
Consider the following economy.Desired consumption \(\quad C^{d}=200+0.4(Y-T)-400 r\).Desired investment \(\quad I^{d}=300-400 r\).Real money demand \(\quad L=0.6 Y-400 i\).Full-employment output
An economy has the following \(A D\) and \(A S\) curves.\[\begin{array}{ll}A D \text { curve } & Y=400+25(M / P) . \\A S \text { curve } & Y=Y_{f}+15\left(P-P^{e}\right) .\end{array}\]Here,
Output in an economy is given by the production function \(Y=A K^{0.3} N^{0.7}\), where \(Y\) is output, \(A\) measures productivity, the capital stock, \(K\), is fixed at 30 , and employment \(N\)
Suppose firms invest in a new artificial intelligence program that develops high caliber robots that can handle large amounts of data and deliver instructions to workers.a. Explain how the investment
According to the real business cycle theory, productivity shocks are an important source of business cycles. Using the Cobb-Douglas production function and annual data since 1961, calculate and graph
This question asks you to study whether unanticipated declines in the money stock tend to raise interest rates and lead to recessions, as implied by the misperceptions theory.a. Using quarterly data
Are people's inflation forecasts rational? To investigate this question, go to the website of the Federal Reserve Bank of Philadelphia at www.philadelphiafed.org. Find the webpages for Research and
The University of Michigan has conducted an extensive survey of consumers since 1978, including a question on consumers' forecasts of inflation. Gather data on inflation expectations from the
Define efficiency wage. What assumption about worker behavior underlies the efficiency wage theory? Why does it predict that the real wage will remain rigid even if there is an excess supply of labor?
How does the full-employment level of employment, \(\bar{N}\), defined in the Keynesian model differ from that defined in the classical model? How might a productivity shock affect \(\bar{N}\) for
How do the assumptions of prices in the Keynesian and classical models have different implications on monetary policy?
Describe three alternative responses available to policymakers when the economy is in recession. What are the advantages and disadvantages of each strategy? Be sure to discuss the effects on
Why does the classical model perform better than the Keynesian model in explaining the business cycle fact of procyclical labor productivity? How can the concept of labor hoarding help Keynesians
A firm identifies the following relationship between the real wage it pays and the effort made by workers:The marginal product of labor for this firm is\[M P N=\frac{E(60-N)}{27},\]where \(E\) is the
Consider the following Keynesian closed economy:Consumption \(\quad C=388+0.4(Y-T)-600 r\).Investment \(I=352-400 r\).Government purchases \(G=280\).Taxes \(\quad T=300\).Full-employment output
An economy is described by the following equations:Desired consumption \(C^{d}=300+0.5(Y-T)-300 r\).Desired investment \(\quad I^{d}=100-100 r\).Government purchases \(\quad G=100\).Taxes
Consider the following economy.Desired consumption \(\quad C^{d}=325+0.5(Y-T)\) \(-500 r\).Desired investment \(I^{d}=200-500 r\).Government purchases \(\quad G=150\).Taxes \(T=150\).Real money
Examine the effect of each of the following on output, the real interest rate, employment, and the price level in the short run and the long run. Use the Keynesian IS-LM graph to explain your
Examine the effect of each of the following on output, the real interest rate, employment, and the price level in the short run and the long run. Use the Keynesian IS-LM graph to explain your
Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money
Keynesian theory predicts that expansionary fiscal policy-either higher spending or lower taxes-will raise the real interest rate. Using data since 1960, graph the Federal government budget deficit,
Because of price stickiness, the Keynesian model predicts that an increase in the growth rate of money will lead to higher inflation only after some lag, when firms begin to adjust their prices.
The theory of macroeconomic stabilization policy in this chapter provides a playbook for monetary policy. When the economy is weak, the Federal Reserve eases monetary policy by increasing the money
What is the Phillips curve? Does the Phillips curve relationship hold for U.S. data? Explain.
In a particular economy, recent labor statistics show that unemployment has fallen. Its economic advisor explains that economic expansion and falling inflation may persist if oil prices continue to
Can policymakers exploit the Phillips curve relationship by trading more inflation for less unemployment in the short run? In the long run? Explain both the classical and Keynesian points of view.
Two changes are observed in a labor market: firms are quicker to hire and fire workers, and the mismatch across industrial sectors increases. Will these raise the natural unemployment rate? If yes,
How does the sacrifice ratio measure the costs of disinflation? Use the expectations-augmented Phillips curve to explain how expectations can reduce the costs of disinflation.
Why does the Federal Reserve work hard to establish its credibility? What benefits might the public gain if the Federal Reserve has a great deal of credibility?
Suppose that the government provides more job training programs and job search services so as to help workers improve productivity and find jobs.a. What will be the effect on the natural unemployment
Using annual data since 1956, create scatter plots of the following variables:a. CPI inflation rate (December to December) against the average unemployment rate for the year.b. CPI inflation rate
In this exercise, you are going to examine the historical data on Okun's Law, which we used in our discussion of the costs of unemployment. The level form of Okun's Law in Eq. (3.5) states that the
For each month since January 1960, calculate the share of total unemployment accounted for by people unemployed for 15 weeks or more. How is this ratio related to the business cycle (for peak and
Download data from FRED on inflation expectations from the University of Michigan survey of consumers. In Excel, plot the change in the expected inflation rate from 12 months earlier. In which
What is the J curve? What explains the behavior of net exports represented by the J curve?
Why is the real exchange rate important in macroeconomic analysis? How does it affect net exports? Explain and give an example.
After seven years of decreasing and steadily low interest rates, the Federal Reserve Bank decided in December 2015 to make a policy change and increase the Federal Fund Rate. Assuming that all other
What are the factors that influence the open economy IS curve? How did China benefit from opening its economy?
How are net exports affected by expansionary fiscal policy? By expansionary monetary policy? What is the potential ambiguity in determining these effects?
Find a country that has fixed its exchange rate to a foreign currency. Describe its advantages and disadvantages for the economy.
Discuss the relative advantages and disadvantages of flexible exchange rates, fixed exchange rates, and a currency union.
Japan produces and exports only cameras, and Saudi Arabia produces and exports only barrels of oil. Initially, Japan exports 40 cameras to Saudi Arabia and imports 64 barrels of oil. The real
Consider the following Keynesian economy:a. What are the general equilibrium (that is, long-run) values of output, the real interest rate, consumption, investment, net exports, and the price level?b.
Consider the following classical economy:\[\begin{array}{ll}A D & Y=400+50 \mathrm{M} / \mathrm{P} \\A S & Y=\bar{Y}=1000 .\end{array}\]This economy produces only wine, its output is measured in
a. For the economy described in Numerical Problem 4, find the values of all the parameters of Eqs. (13.B.1), (13.B.2), and (13.B.3). Use Eqs. (13.B.8) and (13.B.9) to derive the open-economy IS curve
Recessions often lead to calls for protectionist measures to preserve domestic jobs. Suppose that a country that is in a recession imposes restrictions that sharply reduce the amount of goods
After the financial crisis reached Europe in 2008, a lot of EU citizens sold their euro investments and converted the money into Swiss francs or gold. Why did they do this? What impact did this have
The Greek government-debt crisis started in late 2009 and forced the European Union and the European Central Bank (ECB) to adapt their policies in order to save Greece from bankruptcy.a. What was the
Use a diagram like that in Fig. 13.7a to analyze the effect on a country's net exports of a beneficial supply shock that temporarily raises full-employment output by 100 per person. Assume that the
Consider the theoretical impact of a trade war, with increased tariffs imposed by all major countries in the world. Suppose that the trade war's main effect is to reduce the benefits of comparative
The Bretton Woods fixed-exchange-rate system was terminated in 1972, and the main currencies of the world now follow a flexible exchange rate system governed by market forces.a. Graph the eurozone's
Using quarterly data since 1994, graph Japan's real exchange rate against its net exports as a fraction of GDP. Also create a scatterplot of these two variables and add a trend line for each. Is the
Plot the exchange rate of the Hong Kong dollar relative to the U.S. dollar from January 1981 to the present. Was the Hong Kong dollar generally appreciating or depreciating relative to the U.S.
Plot data on the exchange rate between the dollar and the euro, along with the FRED series for the trade weighted broad exchange rate for the United States. How do the patterns of the two exchange
If you were a member of the NBER business-cycle dating committee, would you declare that the U.S. economy is now in a recession? Why? Describe the major variables that you would look at to determine
When a recession occurs, do economists expect it to be temporary? Or is there some degree of permanence? What is the empirical evidence for this?
What are the two components of a theory of business cycles?
Figure 8.1 shows that business cycle peaks and troughs are identified with peaks and troughs in the level of aggregate economic activity, which is consistent with current NBER methodology. However,

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