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macroeconomics principles

Questions and Answers of Macroeconomics Principles

The waters off the North Atlantic coast were once teeming with fish. But due to overfishing by the commercial fishing industry, the stocks of fish became seriously depleted. In 1991, the
In the Atlantic provinces and QuÃ©bec, you must have a licence to harvest lobster commercially; these licences are issued yearly. The federal Department of Fisheries and Oceans Canada is
Many university and college students attempt to land internships before graduation to burnish their resumes, gain experience in a chosen field, or try out possible careers. The hope shared by all of
Study the four accompanying diagrams. Consider the following statements and indicate which diagram matches each statement. Which variable would appear on the horizontal and which on the vertical
The University of Chicago Booth School of Business hosts an online panel of economic experts every two weeks or so to consider a timely economic question. A specific economic opinion is put forward,
Suppose the U.S. unemployment rate in October 2009 had been 6% instead of 10.0%. How many more people would have been working (assuming the labor force remained the same)?
Using the FRED database, download graphs of the U.S. employment-population ratio for men and women.(a) Display the graphs.(b) What are some possible explanations for the different trends in the two
In the past 50 years, both the fraction of hours worked by college graduates and the relative wage of college graduates have gone up. Why?
Assume annual hours worked per person in the United States is equal to 800. Using the data from Table 7.2 and the €œCountry Snapshots€ file (snapshots.pdf), compute GDP per hour
Using the data on the Consumer Price Index reported in Table, calculate the value in 2022 of the following items (use the nearest year in the table to do the calculation; for example, in part (a)
Using the FRED database, download a graph of the inflation rate for China and India.(a) Display the two graphs.(b) What is the average inflation rate in each country for the most recent 5 years of
Explain how a rise in M̅t , V̅, and Y̅t affects the price level according to the quantity theory.
Who pays the inflation tax?
Using the FRED database, create a single graph containing the 10-year government bond yield (one measure of a nominal interest rate) and the inflation rate for Italy. You may find it helpful to use
A Monetary History of the United States, 1867 to 1960, by Milton Friedman and Anna Schwartz, is a classic study of monetary policy and was published in 1963. Read the interview with Anna Schwartz
How do the long-run model and the short-run model fit together? What is the purpose of each model?
Using the FRED database, locate the Congressional Budget Office’s measure of potential GDP by searching for “GDPPOT.” Using the “Add Data Series” option, add the series “GDPA” (real
What are some recent shocks that have hit the macro economy?
Suppose the economy has a natural rate of unemployment of 5%.(a) Suppose short-run output over the next 4 years is +1%, 0%, −1%, and −2%. According to Okun’s law, what unemployment rates would
Using the FRED database, create a graph of the price of crude oil since 1987 based on “Crude Oil Brent—Europe.”(a) Display this graph.(b) How much more expensive (in nominal terms) is oil today
Many economists have recommended higher capital requirements to solve the problems associated with financial crises.(a) What is a capital requirement?(b) How could higher capital requirements
Why is the relationship between output and the real interest rate called the “IS curve”?
Using the FRED database, construct a graph containing two data series, one for real GDP (“GDPC1”) and another for real government consumption and investment expenditures (“GCEC96”). Use the
According to the permanent income hypothesis, how does your consumption change in each of the following scenarios? To keep things simple, suppose the interest rate is 10% and you will live forever.
Suppose the Fed announces today that it is lowering the fed funds rate by 50 “basis points” (that is, by half a percentage point). Using the IS-MP diagram, explain what happens to economic
How does a central bank influence economic activity in the short run?
This question asks you to use the FRED database to predict the fed funds rate using the chapter’s monetary policy rule. Of course, there are many possible inflation measures you could use. This
What are some examples of shocks that shift the AD curve? What about the AS curve?
Throughout much of the 2010–2015 period, the fed funds rate was substantially lower than what a Taylor rule for monetary policy would seem to indicate. Why?
Why are capital requirements an important part of any reform to improve the functioning of the financial system?
What justification can one give for a fiscal stimulus during the financial crisis?
What economic decisions do agents make in DSGE models?
What key simplifying assumption allows us to use the labor market block of a DSGE model to study the immediate impact of shocks on the economy in that framework?
Figures 16.3 and 16.4 show household debt as a percentage of GDP and the personal saving rate. According to these graphs, the ratio of household debt to GDP in 2007, before the financial crisis took
Create a graph of the investment rate in physical capital, such as we might use in studying the Solow growth model. In doing this, you will learn to appreciate some of the subtleties in the National
How large is the current budget balance? What about the current debt-GDP ratio? Is the current fiscal situation especially troublesome? Why or why not?
Table 18.1 reports the composition of the federal budget as a percentage of GDP in 2015. Create a similar table using the latest available data from the Economic Report of the President. Has the
Explain the flow version of the government budget constraint. Explain the government’s intertemporal budget constraint.
How much can the government borrow?
What are three sources of saving that can be used to finance investment? What is “crowding out”?
What is the fiscal problem of the twenty-first century, and what are some possible solutions?
The trade balance data is currently most easily obtained from the World Bank site: data.worldbank.org. Use that database to analyze graphs of the trade balance as a share of GDP in China and
Look back at the Big Mac Index in Table 20.1. Compute the level of the exchange rate that would be needed to equalize the dollar price of the Big Mac across all countries. State whether each currency
Using the FRED database, search for the exchange rate of a country of your choosing relative to the U.S. dollar other than for the euro area or Japan.(a) Display the graph of the exchange rate over
Does the level of the exchange rate matter in the long run? Why or why not?
Using the Country Snapshots data file (snapshots.pdf), study the macroeconomic performance of Mexico, Indonesia, and Korea after the financial crises in each region. How large were the declines in
Consider a onetime change in government policy that immediately and permanently increases the level of the labor force in an economy (such as a more generous immigration policy). In particular,
In 2015, the U.S. National Income Accounts began to “count” intellectual property products— such as R&D, computer software, books, music, and movies—explicitly as investment. More
Now let the production function for output be Yt = AtKtα L1−αyt. That is, we’ve made the exponent on capital a parameter (α) rather than keeping it as a specific number. Notice
Make one change to the basic combined model that we studied in this appendix: let the production function for output be Yt = AtKt1/4Lyt 3/4.That is, we’ve reduced the exponent on capital and
By manipulating the equations of the Solow model mathematically, it is possible to make more precise quantitative statements about the behavior of growth rates over time. For example, one way of
(a) Use the production function in equation (5.6) and the rules for computing growth rates from page 53 of Chapter 3 to write the growth rate of per capita GDP as a function of the growth rate of the
Search the FRED database for the “investment share of GDP” and one of the first links to appear is for “gross private domestic investment.”(a) Display a graph of this series.(b) How does its
What is the economic meaning of the vertical gap between the investment curve and the depreciation curve in the Solow diagram?
Compute the average annual growth rate of per capita GDP in each of the cases below. The levels are provided for 1980 and 2014, measured in constant 2011 dollars. 1980 2014 United States 29,288
The poorest countries in the world have a per capita income of about $600 today. We can reasonably assume that it is nearly impossible to live on an income below half this level (below $300). Per
What might explain why TFP differs so much across countries?
The table below reports per capita GDP and capital per person in the year 2014 for 10 countries. Your task is to fill in the missing columns of the table.(a) Given the values in columns 1 and 2, fill
Look back at Table 4.3. Why do such large differences in capital lead to relatively small differences in predicted GDP across countries? TABLE 4.3 The Model's Prediction for Per Capita GDP (U.S. = 1)
Why, and in what sense, do the three growth rates shown in Figure 3.9 add up? FIGURE 3.9 U.S. Population, GDP, and Per Capita GDP Ratio scale 3.5% Total GDP Per capita GDP 2.0% Population 1.5% 1940
Using the FRED database, locate the data on real and nominal GDP for the U.S. economy. You may notice that there are both annual and quarterly data (i.e., measures of production every 3 months)
Consider the economy from exercise 4. Calculate the inflation rate for the 2020??2021 period using the GDP deflator based on the Laspeyres, Paasche, and chain-weighted indexes of GDP. Real and
Why do you suppose growth in living standards was virtually nonexistent for thousands of years? Why did this situation change in recent centuries?
In 2014, Ethiopia had a per capita income of $1,500, about $4 per day. Compute per capita income in Ethiopia for the year 2050 assuming average annual growth is:(a) 1% per year.(b) 2% per year.(c) 4%
Japanese GDP in 2012 was 468 trillion yen (U.S. GDP was $16.2 trillion). The exchange rate in 2012 was 79.8 yen per dollar. Contrary to China and India, however, Japan had higher prices than the
Indian GDP in 2014 was 119 trillion rupees,while U.S. GDP was $16.5 trillion. The exchange rate in 2014 was 61.0 rupees per dollar. India turns out to have lower prices than the United States (this
Using the FRED database, download a graph of the share of income paid to labor for the nonfarm business sector of the U.S. economy, back to 1947.(a) Display this graph.(b) The graph most likely shows
Create a new table that contains only the last three columns of the table in exercise 5. This time, instead of reporting the numbers relative to the U.S. value, report the inverse of these numbers.
Repeat exercise 5, but this time assume the production function is given by Y = AÌ… K3/4L1/4. That is, assume the exponent on capital is 3/4 rather than 1/3 so that the diminishing
Toward the end of the Using the Theory section, you learned that higher inflation in China than in the U.S. has reduced the yuan’s undervaluation in recent years. To see how this works, draw a
It is often stated that the U.S. trade deficit with Japan results from Japanese trade barriers against U.S. exports to Japan.a. Suppose that Japan and the United States trade goods but not assets.
Refer to the following figure in the chapter. Remember that there was no trade deficit at point A. What is the U.S. trade deficit with Japan in dollars at point B? Dollars per Yen Japanese purchases
a. Use the information in the following table to find the exchange rate if the euro and the U.S. dollar are allowed to float freely.b. What will happen to the exchange rate if the demand for euros
If the inflation rate in Country A is 4 percent and the inflation rate in Country B is 6 percent, explain what will happen to the relative value of each country’s currency.
Some nations that fix their exchange rates make their currency more expensive for foreigners (an overvalued currency), while others make their currency artificially cheap to foreigners (an
As in problem 5, note that Jordan fixes its national currency—the dinar against the dollar at 1.41 dollars per dinar.a. Draw a diagram illustrating the market in which Jordanian dinars are traded
Jordan fixes its national currency—the dinar—against the dollar. In mid 2011, the fixed rate was 1.41 dollars per dinar.a. Draw a diagram illustrating the market in which Jordanian dinars are
Suppose the United States and Mexico are each other’s sole trading partners. The Fed, afraid that the economy is about to overheat, raises the U.S. interest rate.a. Will the dollar appreciate or
Let the demand and supply of Philippine pesos each month be described by the following equations:Demand for pesos = 100 - 2000eSupply of pesos = 20 + 3000ewhere the quantities are millions of pesos,
Let the monthly demand for British pounds and the monthly supply of British pounds be described by the following equations:Demand for pounds = 10 - 2eSupply of pounds = 4 + 3ewhere the quantities are
Would each of the following events, ceteris paribus, cause the dollar to appreciate against the euro or to depreciate?a. Health experts discover that red wine, especially French and Italian red wine,
This chapter mentioned what would happen if the Fed over- or underestimated the natural rate of unemployment. Using the AD–AS model, suppose the economy is at the true natural rate of unemployment,
Suppose the economy is experiencing ongoing inflation. The Fed wants to reduce expected inflation, so it announces that in the future it will tolerate less inflation. How does the Fed’s credibility
Using a graph similar to the following figure, and some additional curves, show what would happen in the future if the Fed tried to keep the unemployment rate permanently at a level like
“The idea of the Fed having to choose between hawk and dove policies in Figure 5 is silly. All the Fed has to do is shift the AS curve back to its original position, which would prevent both
Suppose the economy has been experiencing a low inflation rate. A new chair of the Federal Reserve is named, and he or she is known to be sympathetic to dove policies. Explain the possible effects on
Suppose that, initially, the price level is P1 and GDP is Y1, with no built-in inflation. The Fed reacts to a negative demand shock by neutralizing it. The next time the Fed receives data on GDP and
Suppose that, in a world with no ongoing inflation, the government raises taxes. Using AD and AS curves, describe the effects on the economy if the ed decides to keep the money supply constant.
Suppose that a law required the Fed to do everything possible to keep the inflation rate equal to zero. Using AD and AS curves, illustrate and explain how the Fed would deal with (a) a negative
During the 1990s, because of technological change, the AS curve was shifting downward, but—except for a few months—the price level did not fall. Why not?
Suppose that wages are slow to adjust downward but rapidly adjust upward. What would the AS curve look like? How would this affect the economy’s adjustment to demand shocks (compared to the
Using AD and AS curves:a. Graphically show the effects of a temporary decrease in nonlabor input prices.b. How will your results change if this decrease lasts for an extended period?c. How would your
Increased international trade has forced many U.S. firms to compete with foreign producers. The increased competition has likely affected the average markup in the U.S. economy. (How?) Use AS and AD
What would happen to the AD curve if both government purchases and net taxes were increased by the same amount?
In 1991, the Fed lowered its interest rate target, helping to bring the recession of that year to a rapid end. Make two copies of Figure 14(a) on a sheet of paper. Add curves to illustrate your
A new government policy successfully lowers firms’ unit costs. What are the short-run and the long-run effects of such a policy? (Assume that full employment output does not change.)
Use an AD and AS graph to explain the short-run and long-run effects on real GDP and the price level of an increase in autonomous consumption spending. Assume the economy begins at full employment.
With an AD and AS diagram only, explain the shortrun and long-run effects of a decrease in the money supply on real GDP and the price level. Assume the economy begins at full employment.
Suppose firms become pessimistic about the future and consequently investment spending falls. With an AD and AS graph, describe the short run effects on real GDP and the price level. If the AS curve
With a three-panel diagram—one panel showing the money market, one showing the aggregate expenditure diagram, and one showing the AD curve—show how a decrease in the money supply shifts the AD

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