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Principles Of Macroeconomics 8th Edition Robert Frank, Ben Bernanke, Kate Antonovics, Ori Heffetz - Solutions
6. How would each of the following be likely to affect the value of the dollar, all else being equal? Explain. (LO3) a. U.S. stocks are perceived as having become much riskier financial investments. b. European computer firms switch from U.S.-produced software to software produced in India, Israel,
5. a. Gold is $350 per ounce in the United States and 2,800 pesos per ounce in Mexico. What nominal exchange rate between U.S. dollars and Mexican pesos is implied by the PPP theory? (LO2) b. Mexico experiences inflation so that the price of gold rises to 4,200 pesos per ounce. Gold remains $350
4. The demand for U.S.-made cars in Japan is given by Japanese demand = 10,000 − 0.001(Price of U.S. cars in yen). Similarly, the demand for Japanese-made cars in the United States is U.S. demand = 30,000 − 0.2(Price of Japanese cars in dollars).The domestic price of a U.S.-made car is $20,000,
3. Between last year and this year, the CPI in Blueland rose from 100 to 120 and the CPI in Redland rose from 100 to 115. Blueland’s currency unit, the blue, was worth 80 cents (U.S.) last year and is worth 60 cents (U.S.) this year. Redland’s currency unit, the red, was worth 20 cents (U.S.)
2. A British-made automobile is priced at £20,000 (20,000 British pounds). A comparable U.S.-made car costs $26,000. One pound trades for $1.50 in the foreign exchange market. Find the real exchange rate for automobiles from the perspective of the United States and from the perspective of Great
1. Using the data in Table 17.1, find the nominal exchange rate between the Mexican peso and the Japanese yen. Express in two ways. How do your answers change if the peso appreciates by 10 percent against the dollar while the value of the yen against the dollar remains unchanged? (LO1)
8. Contrast fixed and flexible exchange rates in terms of how they affect (a) the ability of monetary policy to stabilize domestic output and (b) the predictability of future exchange rates. (LO6)
7. Use a supply and demand diagram to illustrate the effects of a speculative attack on an overvalued exchange rate. Why do speculative attacks often result in a devaluation? (LO5)
6. Define overvalued exchange rate. Discuss four ways in which government policymakers can respond to an overvaluation. What are the drawbacks of each approach? (LO5)
5. Under a flexible exchange rate, how does an easing of monetary policy (a lower real interest rate) affect the value of the exchange rate? Does this change in the exchange rate tend to weaken or strengthen the effect of the monetary ease on output and employment? Explain. (LO4)
4. Why do U.S. households and firms supply dollars to the foreign exchange market? Why do foreigners demand dollars in the foreign exchange market? (LO3)
3. Would you expect the law of one price to apply to crude oil? To fresh milk? To taxi rides? To music produced in different countries by local recording artists? Explain your answer in each case. (LO2)
2. Define nominal exchange rate and real exchange rate. How are the two concepts related? Which type of exchange rate most directly affects a country’s ability to export its goods and services? (LO1)
1. Japanese yen trade at 110 yen per dollar and Mexico pesos trade at 10 pesos per dollar. What is the nominal exchange rate between the yen and the peso? Express in two ways. (LO1)
LO6 Discuss the advantages and disadvantages of flexible versus fixed exchange rates.
LO5 Detail how exchange rates can be fixed.
LO4 Explain how monetary policy impacts the exchange rate.
LO3 Use supply and demand to analyze how the nominal exchange rate is determined in the short run.
LO2 Summarize the law of one price and understand how purchasing power parity determines the long-run real exchange rate.
LO1 Define the nominal exchange rate, fixed versus flexible exchange rates, and real exchange rates.
7. Suppose the domestic demand and supply for automobiles is as given in Problem 6. (LO3, LO4) a. The economy opens to trade. The world price of automobiles is $10,000. Find the domestic quantities demanded and supplied and the quantity of imports or exports. b. Now assume that the government
6. The demand and supply for automobiles in a certain country is given in the following graph. (LO3, LO4) a. Assuming that the economy is closed, find the equilibrium price and production of automobiles.b. The economy opens to trade. The world price of automobiles is $8,000. Find the domestic
$30,000 annually by working in the shoe industry. The domestic price of a robot is $3,000, so that a U.S. worker can also earn $30,000 annually working in the robot industry. Now suppose that the U.S. opens trade with the rest of the world. Foreign workers can produce 500 pairs of shoes or 1 robot
5. Suppose that a U.S. worker can produce 1,000 pairs of shoes or 10 industrial robots per year. For simplicity, assume there are no costs other than labor costs and firms earn zero profits. Initially, the U.S. economy is closed. The domestic price of shoes is $30 a pair, so that a U.S. worker can
4. Suppose that Carlos and Maria can produce coffee and computers as described in Problem 3. A third worker, Pedro, joins the Costa Rican economy. Pedro can produce either 140 pounds of coffee or 1 computer per week. Like the other two workers, Pedro works 50 weeks per year. (LO2) a. Find the PPC
3. Suppose that Costa Rican worker Carlos can produce either 100 pounds of coffee or 1 computer per week, and a second worker, Maria, can produce either 150 pounds of coffee or 1 computer per week. Both Carlos and Maria work 50 weeks per year. (LO2) a. Find the PPC for Costa Rica. Give numerical
2. A developing economy requires 1,000 hours of work to produce a television set and 10 hours of work to produce a bushel of corn. This economy has available a total of 1,000,000 hours of work per day. (LO2) a. Draw the PPC for daily output of the developing economy. Give numerical values for the
1. An economy has two workers, Bella and Edward. Per day of work, Bella can pick 100 apples or 25 bananas, and Edward can pick 50 apples or 50 bananas. Bella and Edward each work 200 days per year. (LO1, LO2) a. Which worker has an absolute advantage in apples? Which has a comparative advantage?
7. Show graphically the effects of a quota on imported automobiles on the domestic market for automobiles. Who does the quota hurt and who benefits? Explain. (LO4)
6. Show graphically the effects of a tariff on imported automobiles on the domestic market for automobiles. Who is hurt by the tariff and why? Who benefits and why? (LO4)
5. True or false: If a country is more productive in every sector than a neighboring country, then there is no benefit in trading with the neighboring country. Explain. (LO3)
4. A small, open economy is equally productive in producing coffee and tea. What will this economy produce if the world price of coffee is twice that of tea? Half that of tea? What will the country produce if the world price of coffee happens to equal the world price of tea? (LO3)
3. What is meant by the “consumption possibilities” of a country? How are consumption possibilities related to production possibilities in a closed economy? In an open economy? (LO2) countries—consumption possibilities are typically greater than, and never less than, the economy’s
2. Sketch a PPC for a four-worker economy that produces two goods, hot dogs and hamburgers. Give an economic interpretation of the vertical intercept, the horizontal intercept, and the slope of the graph. (LO2)
1. Imagine that, all else equal, it takes U.S. workers a quarter of the time it takes Chinese workers to design a new mobile phone model. Also, imagine that it takes U.S. workers half the time it takes Chinese workers to produce a million pieces of the new model. Which of the two countries has
LO3 Explain how the price of a tradable good is set in a closed versus an open economy, how the quantities of imports or exports are determined, and discuss who are the winners and losers from trade.
11.* For the economy described in Problem 10, suppose that the central bank’s policy reaction function is as follows: (LO1)Rate of inflation, π Real interest rate, r 0.0 0.04 0.01 0.045 0.02 0.05 0.03 0.055 0.04 0.06 a. Construct a table showing the relationship between short-run equilibrium
10.* An economy is described by the following equations: C = 1,600 + 0.6(Y − T) − 2,000r, I p = 2,500 − 1,000r, G = __ G = 2,000, NX = ___ NX = 50, T = T = 2,000. Suppose also that the central bank’s policy reaction function is the same as in Problem 9. (LO1) a. Find an equation relating
9.* Planned aggregate expenditure in Lotusland depends on real GDP and the real interest rate according to the following equation PAE = 3,000 + 0.8Y − 2,000r.The Bank of Lotusland, the central bank, has announced that it will set the real interest rate according to the following policy reaction
8. An economy is initially in recession. Using the AD-AS diagram, show the process of adjustment: (LO2, LO4) a. If the Fed responds by easing monetary policy (moving its reaction function down). b. If the Fed takes no action. What are the costs and benefits of each approach, in terms of output loss
7. Suppose that a permanent increase in oil prices both creates an inflationary shock and reduces potential output. Use an AD-AS diagram to show the effects of the oil price increase on output and inflation in the short run and the long run, assuming that there is no policy response. What happens
6. Suppose that the government cuts taxes in response to a recessionary gap, but because of legislative delays, the tax cut is not put in place for 18 months. Using an AD-AS diagram and assuming that the government’s objective is to stabilize output and inflation, show how this policy action
5. For each of the following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. (LO1, LO2, LO3) a. An increase in consumer confidence that leads to higher consumption spending. b. A reduction in taxes. c. An
4. This problem asks you to trace out the adjustment of inflation when the economy starts with an output gap. Suppose that the economy’s aggregate demand curve is Y = 1,000 − 1,000π, where Y is short-run equilibrium output and π is the inflation rate, measured as a decimal. Potential output
3. An economy’s relationship between short-run equilibrium output and inflation (its aggregate demand curve) is described by the equation Y = 13,000 − 20,000π. Initially, the inflation rate is 4 percent, or π = 0.04. Potential output Y* equals 12,000. (LO2) a. Find the output in short-run
2. For the economy in Problem 1, suppose that potential output Y* = 960. From the policy reaction function in the table in Problem 1, what can you infer about the Fed’s objective for the inflation rate in the long term? (LO1)
1. We have seen that short-run equilibrium output falls when the Fed raises the real interest rate. Suppose the relationship between short-run equilibrium output Y and the real interest rate r set by the Fed is given by Y = 1,000 − 1,000r. Suppose also that the Fed’s reaction function is the
10. Most central banks place great value on keeping inflation low and stable. Why do they view this objective as so important? (LO4)
9. How does a tight monetary policy, like that conducted by the Volcker Fed in the early 1980s, affect output, inflation, and the real interest rate in the short run? In the long run? (LO4)
8. Why, in the absence of public beliefs that the central bank is committed to maintaining low inflation, does an adverse inflation shock pose a particularly difficult dilemma for policymakers? (LO3)
7. What factors led to increased inflation in the United States in the 1960s and 1970s? (LO3)
6. True or false: The economy’s self-correcting tendency makes active use of stabilization policy unnecessary. Explain. (LO2)
5. Sketch an aggregate demand–aggregate supply diagram depicting an economy away from long-run equilibrium.Indicate the economy’s short-run equilibrium point. Discuss how the economy reaches long-run equilibrium over a period of time. Illustrate the process in your diagram. (LO2)
4. Discuss the relationship between output gaps and inflation. How is this relationship captured in the aggregate demand–aggregate supply diagram? (LO2)
3. Why does the overall rate of inflation tend to adjust more slowly than prices of commodities, such as oil or grain? (LO2)
2. State how each of the following affects the AD curve and explain: (LO1) a. An increase in government purchases. b. A cut in taxes. c. A decline in planned investment spending by firms. d. A decision by the Fed to lower the real interest rate at each level of inflation.
1. What two variables are related by the aggregate demand (AD) curve? Explain how the behavior of the Fed helps determine the slope of this curve. List and discuss two other factors that lead the curve to have the slope that it does. (LO1)
LO4 Discuss the short-run and long-run effects of an anti-inflationary monetary policy.
LO3 Analyze how the economy is affected by aggregate spending shocks, inflation shocks, and shocks to potential output.
LO2 Define the long-run and short-run aggregate supply curves, explain their orientation, and explain what may shift them. In particular, show how the curves capture the idea of inflation inertia and the link between inflation and the output gap.
LO1 Define the aggregate demand curve, explain why it slopes downward, and explain what may shift it.
13. What are some of the uncertainties that Fed policymakers face, and how do these uncertainties affect monetary policymaking? (LO6)
12.*Here is another set of equations describing an economy: (LO5) C = 14,400 + 0.5(Y − T) − 40,000r, I P = 8,000 − 20,000r, G = 7,800, NX = 1,800, T = 8,000, Y* = 40,000. a. Find a numerical equation relating planned aggregate expenditure to output and to the real interest rate. b. At what
11. For the economy described in Problem 10, suppose that potential output Y* equals 12,000. (LO5) a. What real interest rate should the Fed set to bring the economy to full employment? You may take as a given that the multiplier for this economy is 5. b. Repeat part a for the case in which
10. An economy is described by the following information: C = 2,600 + 0.8(Y − T) − 10,000r, I P = 2,000 − 10,000r, G = 1,800, NX = 0, T = 3,000. The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent). (LO5) a. Find a numerical equation relating planned aggregate
9. Explain why an increase in interest that banks receive from the Fed on the required and excess reserves that banks hold with the Fed, would also increase the interest rates that commercial banks charge their borrowers. (LO4)
8. Which of the following is not an example of an “unconventional” monetary policy tool available to the Fed when the federal funds rate is already at or close to zero: forward guidance, quantitative easing, or discount lending? (LO4)
7. In August 2015, the Chinese central bank decided to reduce China’s required reserve-deposit ratio from 18.5 percent to 18 percent. Assuming no change in the amount of cash held by the Chinese public, that commercial banks lend all their excess reserves, and that bank reserves was a constant
6. Assume that the central bank of a nation decides to lower the reserve requirements for commercial banks. What changes can one predict regarding the amount of: required reserves, excess reserves, the amount of loans generated by commercial banks, the economywide money supply, and finally interest
5. Using a supply and demand graph of the market for money, show the effects on the nominal interest rate if the Fed takes the following monetary policy actions: (LO2, LO3) a. The Fed lowers the discount rate and increases discount lending. b. The Fed increases the reserve requirements for
4. Suppose the economywide demand for money is given by P(0.3Y − 25,000i). The price level P equals 3.0, and real output Y equals 10,000. At what value should the Fed set the nominal money supply if: (LO1, LO2) a. It wants to set the nominal interest rate at 4 percent. b. It wants to set the
3. How would you expect each of the following to affect the economywide demand for U.S. money? Explain. (LO1) a. Competition among brokers forces down the commission charge for selling holdings of bonds or stocks. b. Grocery stores begin to accept credit cards in payment. c. Financial investors
2. The following table shows Uma’s estimated annual benefits of holding different amounts of money: (LO1)Average money holdings ($) Total benefit ($) 500 35 600 47 700 57 800 65 900 71 1,000 75 1,100 77 1,200 77 a. How much money will Uma hold on average if the nominal interest rate is 9 percent?
1. During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. (LO1) a. What would you expect to happen to the money demand curve during the Christmas season? Show graphically. b. If the Fed took no action, what would happen to
9. Discuss why the analysis of this chapter overstates the precision with which monetary policy can be used to eliminate output gaps. (LO6)
8. The Fed decides to take a contractionary policy action. What would you expect to happen to the nominal interest rate, the real interest rate, and the money supply? Under what circumstances would this type of policy action most likely be appropriate? (LO5)
7. The Fed faces a recessionary gap. How would you expect it to respond? Explain step by step how its policy change is likely to affect the economy. (LO5)
6. Why does the real interest rate affect planned aggregate expenditure? Give examples. (LO5)
5. In a situation where short-run interest rates have hit their zero lower bound, can the Fed still lower other, higher, longer-term interest rates? Discuss specific actions that the Fed can take and how they would work. (LO4)
4. What other methods does the Fed have for affecting short-run interest rates besides open-market operations? Discuss whether these methods can be used for only lowering short-run interest rates, for only increasing them, or for both lowering and increasing them. (LO3)
3. What effect does an open-market purchase of bonds by the Fed have on nominal interest rates? Discuss in terms of (a) the effect of the purchase on bond prices and (b) the effect of the purchase on the supply of money. (LO2)
2. Show graphically how the Fed controls the nominal interest rate. Can the Fed control the real interest rate? (LO2)
1. What is the demand for money? How does the demand for money depend on the nominal interest rate? On the price level? On income? Explain in terms of the costs and benefits of holding money. (LO1)
LO6 Discuss the extent to which monetary policymaking is an art or science. CHAPTER 14 Jonathan Larsen/iStock/Getty Image
LO5 Explain how changes in real interest rates affect aggregate expenditure and how the Fed uses changes in the real interest rate to fight a recession or inflation.
LO4 Describe the additional monetary policy tools that the Fed can use when interest rates hit the zero lower bound.
LO3 Discuss how the Fed uses its ability to affect bank reserves and the reserve-deposit ratio to affect the money supply.
LO2 Explain how the Fed uses its ability to affect the money supply to influence nominal and real interest rates.
LO1 Show how the demand for money and the supply of money interact to determine the equilibrium nominal interest rate.
9.* An economy has zero net exports. Otherwise, it is identical to the economy described in Problem 7. (LO3, LO4, LO5) a. Find short-run equilibrium output. b. Economic recovery abroad increases the demand for the country’s exports; as a result, NX rises to 100. What happens to short-run
8.* An economy is described by the following equations: (LO3, LO4, LO5) C = 2,500 + 0.8(Y − T) I p = 2,500 G = 3,500 NX = 300 T = 3,000 Y* = 31,400 a. For this economy, find the following: autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap. b. Illustrate this
7. An economy is described by the following equations: C = 40 + 0.8(Y − T) I p = 70 G = 120 NX = 10 T = 150 Y* = 580 The multiplier in this economy is 5. (LO4, LO5) a. Find a numerical equation relating planned aggregate expenditure to output. b. Construct a table to find the value of short-run
6. An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the mpc of this economy is 0.75 and that the multiplier is 4. (LO4, LO5) a. How large is the recessionary gap after the
5. For the economy described in Problem 3, take as given that the multiplier for this economy is 2.5. Find the effect on short-run equilibrium output of: (LO4) a. An increase in government purchases from 1,500 to 1,600. b. A decrease in tax collections from 1,500 to 1,400 (leaving government
4. For the economy described in Problem 3: (LO3) a. Construct a table like Table 13.1 to find short-run equilibrium output. Consider possible values for short-run equilibrium output ranging from 8,200 to 9,000. b. Show the determination of short-run equilibrium output for this economy using the
3. An economy is described by the following equations: (LO2) C = 1,800 + 0.6(Y − T) I p = 900 G = 1,500 NX = 100 T = 1,500 Y* = 9,000 a. Find a numerical equation linking planned aggregate expenditure to output. b. Find autonomous expenditure and induced expenditure in this economy.
2. Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below: (LO2) Before-tax income ($) Taxes paid ($) Consumption spending ($) 25,000 3,000 20,000 27,000 3,500 21,350 28,000 3,700 22,070 30,000 4,000 23,600a. Graph the Simpsons’
1. Acme Manufacturing is producing $4,000,000 worth of goods this year and expects to sell its entire production. It also is planning to purchase $1,500,000 in new equipment during the year. At the beginning of the year, the company has $500,000 in inventory in its warehouse. Find actual
9. Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model. (LO6)
8. The government is considering two alternative policies, one involving increased government purchases of 50 units, the other involving a tax cut of 50 units. Which policy will stimulate planned aggregate expenditure by more? Why? (LO5)
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