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macroeconomics principles
Macroeconomics In Context: A European Perspective 1st Edition Sebastian Dullien, Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras - Solutions
1. 2. Suppose the inflation rate in an economy is observed to be falling.Sketching an AS/AD model for each case, determine which of the following phenomena could be the cause. (There may be more than one.)a. The government gives households a substantial tax cut.b. Agricultural harvests are
1.1. For each of the following, indicate which curve in the AS/AD model shifts (initially), and in which direction(s):a. A beneficial supply shockb. An increase in government spendingc. A monetary contraction designed to lower the long-run inflation rated. An increase in taxese. An adverse supply
1. 10. What underlying dynamic did Keynes believe is behind the business cycle? Illustrate with an AS/AD graph.
1. 9. What does the AS curve look like in the classical model, and why?
1. 8. Describe, using the AS/AD model, the effects of austerity and structural reforms.
1. 7. Describe, using the AS/AD model, how ECB policy might bring down inflation over time.
1. 6. Describe, using the AS/AD model, the impact of an adverse supply shock.
1. 5. Describe, using the AS/AD model, a combination of events that might cause an economy to suffer from “stagflation.”
1. 4. What shifts the AS curve?
1. 3. What does the AS curve represent, and why does it have the shape that it has?
1. 2. What shifts the AD curve?
1.1. What does the AD curve represent, and why does it slope downward(differentiate between countries with a central bank of their own and euro-area countries without a national central bank deciding on monetary policy)? In what respect is the AD curve different from the AE curve?
1. 2. Which do you think gives a better description of economic realities:classical or Keynesian macroeconomic theory? Explain.
1.1. What is the effect of expansionary fiscal and monetary policies in the classical model?
1. 2. Stagflation—a combination of unemployment and inflation—seems to be the worst of both worlds. What policies were used to respond to the stagflation of the late 1970s and early 1980s? What factors led to improving economic conditions in the later 1980s and the 1990s? Why do you think that
1.1. Under what circumstances can aggregate demand be increased without leading to problems with inflation? Under what circumstances is an increase in aggregate demand likely to cause inflation?
1. 2. In some euro-area countries, certain wage contracts are automatically linked to inflation, meaning that workers get automatic pay raises if consumer prices increase. Why does this practice have important macroeconomic consequences?
1.1. Describe in words how the AS curve differs from the AD curve. What does each represent? What explains their slopes?
1. 2. Does the ECB always want the inflation rate to be as low as possible?Why or why not?
1.1. “The negative slope of the AD curve means that higher levels of output will lead to lower levels of inflation.” Is this statement correct or not?Discuss.
1. 8. (Appendix A2) Suppose that the nominal prime interest rate for a one year loan is currently 6 percent.a. If inflation is 1 percent per year, what is the current real interest rate?b. Suppose that many people believe that the inflation rate is going to rise in the future—probably up to 2
1. 7. (Appendix A1) Suppose that you have a bond with a face value of €200 and coupon amount of €10 that matures one year from now.a. If the going interest rate is 3 percent, how much can you sell it for today?b. If the going interest rate is 8 percent, how much can you sell it for today?c.
1. 6. The president of the ECB regularly gives testimony before the European Parliament’s Economic and Monetary Affairs Committee about the state of monetary policy. Find the most recent such testimony at www.ecb.europa.eu/. What does the president of the ECB identify as the most significant
1. 5. Match each concept in Column A with the best definition or example in Column B.Column A Column Ba. Expansionary monetary policyb. Flat moneyc. Accelerator principled. Monetary neutralitye. Velocityf. Liquidity g. Commodity money h. A good property for money to have i. To maintain price
1. 4. Suppose that the level of nominal GDP in Estilvania is €30 billion and the level of the money supply is €10 billion.a. What is the velocity of money in Estilvania?b. Suppose that the money supply increases to €15 billion and nominal GDP rises to €45 billion. What has happened to
1. 3. Suppose that investor confidence falls, and the ECB is aware of this fact.Using the model presented in this chapter, show (a) through (c) below graphically:a. How a fall in investor confidence affects the schedule for intended investment.b. What the ECB could do, influencing the money market,
1. 2. Suppose that the ECB increases its main refinancing rate by 0.25 percentage points.a. Assuming that the level of business confidence remains unchanged, show on a graph how this interest rate increase will change the level of intended investment.b. What would you expect to happen to money
1.1. Suppose that the QRS bank has extended loans by €2,000,000 to its customers and credited the money to the customers’ overnight accounts.a. Show how this affects the balance sheet of QRS Bank.b. Assume that QRS Bank did have €10,000,000 in required reserves but did not have any excess
1. 12. Explain how problems in the banking sector, such as insufficient capital, can affect the transmission mechanism between interest rate cuts and aggregate demand.
1. 11. Discuss how monetary expansion can lead to high inflation, using the quantity equation.
1. 10. What is monetarism?
1. 9. What is the quantity equation? What is the quantity theory of money?
1. 8. Describe how ECB policy operated during the 2000–2015 period.
1. 7. Show the effects of an expansionary monetary policy in a Keynesian cross diagram.
1. 6. How is investment related to the interest rate? What other factors affect investment? Use a graphical analysis to show these relationships.
1.5. Describe how a change in the ECB’s main refinancing rate might lead to changes in the money supply M1.
1. 4. Describe two tools the ECB uses to keep money market interest rates close to its main refinancing rate.
1. 3. Describe how decisions by a bank to extend loans finally lead to an increase in reserves in the banking sector and why the increase in reserves is usually lower than the increase in initial loans.
1. 2. Show what happens to the ECB’s balance sheet and the balance sheet of a commercial bank when the commercial bank borrows from the ECB.
1.1. Draw up and explain the components of the balance sheet of the ECB.
1. 2. How does the issue of time lags affect fiscal and monetary policy?
1.1. What are some arguments in favor of having the ECB having a broader mandate? What are some arguments against it?
1. 2. Has inflation been reported to be a problem in any recent news reports?Check recent inflation data at http://ec.europa.eu/eurostat/de. How do you think this is related to recent ECB monetary policy?
1.1. What is the difference between the quantity theory of money and the quantity equation?
1. 2. Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great Recession and in the euro crisis?
1.1. What is quantitative easing? How is it different from the ECB’s main refinancing operations? What other “unconventional” tools has the ECB employed since the outbreak of the euro crisis? Has the ECB had favorable results with its policies since the 2008–2009 financial crisis?
1. 2. Is it always true that a cut in interest rates leads to an increase in investment and aggregate demand? Why or why not?
1.1. What sorts of interest rates are relevant to your own economic activities? Do you think that ECB policies affect their levels?
1. 2. The setup of the ECB’s instruments with the main refinancing operation, the deposit facility, and the marginal lending facility is often also called a “corridor system.” Can you explain in your own words why interest rates in the money market usually do not move out of the corridor
1.1. Describe in words how the money supply increases in the euro area and which role the ECB plays in the process.
1. 2. The Bank of England has also been given independence from government interference by an Act of the British Parliament. How far do you think this type of independence compares to that of the ECB?
1.1. What is the ECB, the Eurosystem, and a national central bank in the euro area? Why was the ECB created?
1.7. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Excess reserves 1. The ease of use of an asset as a medium of exchangeb. Barter 2. A measure of the money supply that includes currency and overnight depositsc. Deflation 3. An institution such as a
1. 6. State whether the following statements are true or false. If false, also write a corrected statement.a. Inflation erodes the value of savings.b. Inflation creates “menu costs.”c. Inflation reduces uncertainty.d. Inflation hurts people on fixed incomes.e. Inflation redistributes wealth
1. 5. Assume a required reserve of 0.20 (20 percent) to complete the following:Assets Liabilities Reserves€3,000,000 Deposits€11,500,000 Loans€6,000,000 Bonds€2,500,000 Total€11,500,000 Total€11,500,000a. Calculate the required reserves for this bank.b. Calculate the excess reserves for
1.4. Assume a required reserve of 0.01 (1 percent) to complete the following:Assets Liabilities Reserves€100,000 Loans from the ECB€200,000 Loans€1,000,000 Deposits€1,800,000 Bonds€900,000 Total€2,000,000 Total€2,000,000a. Calculate the required reserves for this bank.b. Calculate the
1. 3. Determine whether each of the following belongs on the asset side or the liability side of the balance sheet identified in parentheses.a. €20,000 loan for a new automobile (balance sheet for an individual)b. 10-year government bonds (balance sheet for a bank)c. €1,000 checking account
1. 2. Use the statistics section on the ECB’s Web site (www.ecb.int categories), to locate monetary data for M1 money and M2 money(monthly data of each stock, seasonally adjusted). How do the two series relate in size? How do the changes in the two series compare to one another? Does your
1.1. Search for the “World Economic Outlook Database” on the Internet and locate the most recent version. Use this database to select inflation data(units of percentage change) for the euro area, Japan, the United States, and your home country for the period 2000 to 2015. Construct a table of
1. 10. What does it mean to say that foreign currency can be a store of value but not a medium of exchange?
1. 9. What is a financial bubble? Give some examples, and explain some of the causes of financial bubbles.
1. What is the primary advantage of the pooling process?
1. 8. What are “pooled funds”? Describe two different kinds of pooled funds.
1. 7. What is meant by leverage? What are its advantages and its dangers?
1. 6. What characteristics are needed to make commodity money effective?
1. 5. Draw up and explain the components of a balance sheet for a private bank.
1. 4. Describe at least two measures of money.
1. 3. Describe at least three different types of money.
1. 2. Describe the three roles played by money.
1.1. Describe three scenarios that could describe economies in very different situations, with regard to their banking systems and price (in)stability.
1. 2. Do you think that it is a good idea to allow commercial banks to invest in stocks? In real estate? In junk bonds? Explain.
1.1. What is the difference between the real, monetary, and financial economies? In what way are they related to each other? Should growth in one imply growth in the others?
1. 2. Does it bother you that banks hold only a small fraction of the value of their deposits on reserve? Why or why not?
1.1. How do banks lend money that they do not physically possess to their customers? To what extent are they creating money in the process?
1. 2. What do you commonly use to make payments? Cash? Credit cards?Online payments? In which of these cases are you using “money”?
1.1. Suppose that you asked someone who has not taken an economics class why a euro bill has value. What do you think he or she would say?Would he or she be correct?
1. 3. What are the main problems about deflation? Isn’t it great if the purchasing power of savings increases?
1. 2. Unemployment and inflation are usually considered the “bads” that can come with business cycles. Compare the costs to society of unemployment to the costs to society of inflation.
1.1. Which of the three conditions just described—low inflation, high inflation, or deflation—best characterizes the euro-area economy right now? Do you know of any country currently in one of the other conditions?
1. 4. Which of the following are examples of automatic stabilizers, and which are examples of discretionary policy? Could some be both? Explain.a. Tax revenues rise during an economic expansionb. Personal tax rates are reducedc. Government spending on highways is increasedd. Farm support payments
1. 3. Go to the European Commission’s Directorate for Economic and Financial Affairs’Web(http://ec.europa.eu/economy_finance/eu/forecasts/index_en.htm site).Locate the most recent economic forecast. Consult the most recent summary table on “Structural budget balance.” Are euro-area
1. 2. Using Table 10.1 and the formulas and numbers given in the text for the multiplier and tax multiplier, calculate the effect on equilibrium GDP of a government spending level of 100 combined with a tax level of 100.What does this imply about the impact of a balanced government budget on GDP,
1.1. Using the data in Table 10.1, determine the economic equilibrium for a government spending level of 60.
1. 8. What is crowding out? How specifically does crowding out happen?Explain. What is crowding in?
1. 7. What is a cyclical deficit? What is a structural deficit? How are they different?
1. 6. What are some of the advantages and disadvantages of discretionary fiscal policy? Give some examples of the use of discretionary fiscal policy.
1. 5. What is meant by an automatic stabilizer? Give some examples of economic institutions that function as automatic stabilizers.
1. 4. How is the budget surplus or deficit defined? How has the budget position of the euro area (and your country) varied in recent years?
1. 3. Give some examples of expansionary and contractionary fiscal policy.
1. 2. What is the impact of a lump-sum change in taxes on aggregate expenditure and economic equilibrium? How does it differ from a change in government spending?
1.1. What is the impact of a change in government spending on aggregate expenditure and economic equilibrium?
1. 2. Why doesn’t the government run surpluses every year instead of deficits? Wouldn’t doing so be better for the economy?
1.1. Do you think that your country’s government is mostly responsible for persistent budget deficits? Are budget deficits necessarily bad?
1. 2. In general, tax increases are politically unpopular. Would you ever be likely to favor a tax increase? Under what circumstances, if any, might a tax increase be beneficial to the economy?
1.1. What recent changes in government spending or tax policy have been in the news? How would you expect these to affect GDP and employment levels?
1. 8. Match each concept in Column A with a definition or example in Column B.Column Aa. mult ĪI Column B 1. Peak 2.b. an injectionc. an assumption evident in the equation AE = C+IId. okun’s “law”an inverse relationship between unemployment and rapid GdP growth 3. households save more when
1. Answer the following questions, using algebraic manipulations only.1. What is the equation for the AE curve?2. What is the level of equilibrium income?3. If intended investment increases by 10 units to 60 units, by how much will equilibrium income rise?
1. 6. Suppose that the behavior of households and firms in an economy is determined by the following equations:C = 90 + 0.75Y Ii = 35 1. Show in a table what the levels of C and AE would be at income levels of 0, 500, and 600.2. If, for some reason, income equaled 600, would there be unintended
1. 5. What happens in the Keynesian model if households decide to be“thriftier”—that is, spend less and save more? Do the following multistep exercise to find out.a. Suppose that the economy starts out in a situation we already developed in the text: C = 20 + .8Y and II = 60 (see Table
1. 4. Draw a Keynesian cross graph and assume that the macroeconomy starts and ends in equilibrium. Label the initial aggregate expenditure line AE0. Then show what happens in the diagram when a rise in consumer wealth raises (autonomous consumption) in your diagram.(This event might happen if the
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