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macroeconomics principles

Principles of Macroeconomics 12th edition Karl E. Case, Ray C. Fair, Sharon E. Oster - Solutions

Is national defense a large fraction of government spending?
What is the largest expenditure component of GDP?
What are two difficulties in the measurement of aggregate output using GDP?
Is GDP a good measure of economic welfare? Why or why not?
Why is the income–expenditure identity important?
Explain the concept of value added.
What are the three approaches to measuring GDP?
Is it a bad idea for a country to run a current account deficit? Why or why not?
What role did credit market imperfections play in the recent financial crisis?
When did the five most recent recessions occur in the United States?
What is the cause of inflation in the long run?
Why might a decrease in taxes have no effect?
What is the principal effect of an increase in government spending?
Why might the vacancy rate rise without a commensurate reduction in the unemployment rate?
Why was productivity growth low from 2010–2015?
What are the two key threads in modern business cycle theory?
In a graph of the natural logarithm of an economic time series, what does the slope of the graph represent?
Explain why a macroeconomic model should be built from microeconomic principles.
Why can macroeconomic models be useful? How do we determine whether or not they are useful?
What are the five elements that make up the basic structure of a macroeconomic model?
Should a macroeconomic model be an exact description of the world? Explain why or why not.
Why should a macroeconomic model be simple?
Explain why experimentation is difficult in macroeconomics.
What is the difference between the trend and the business cycle component of an economic time series?
What are two striking business cycle events in the United States during the last 112 years?
What are two striking business cycle events in the United States during the last 112 years?
How much richer was the average American in 2014 than in 1900?
What makes macroeconomics different from microeconomics? What do they have in common?
What are the primary defining characteristics of macroeconomics?
Suppose you are appointed the international economic adviser to a small developing country. The country is deciding what kind of exchange rate and monetary policy regime to adopt. Provide your advice in a one-page policy memo, outlining the pros and cons of your position.
Suppose some shock occurs to the U.S. economy that makes foreign investors more reluctant to hold U.S. assets. Use the AS/AD framework to explain the effects of this shock on the U.S. economy.
Suppose Mexico wishes to fix its exchange rate relative to the U.S. dollar.(a) If the Federal Reserve raises interest rates, what would happen to the peso-dollar exchange rate in the absence of any change in Mexican interest rates?(b) Suppose Mexico wants to keep its interest rate fixed no matter
Suppose you are the economic adviser to a candidate running for the U.S. Congress. The candidate’s district is historically a major producer of steel, and several steel mills have been shut down in recent years because of foreign competition. Hundreds of workers have lost their jobs. Draft a
Suppose there are two goods in the world, beer and chips. The world consists of four economies: Elbonia, Genovia, Kinakuta, and Sodor. Labor is the only input into production, and one unit of labor can produce beer and chips in each of these economies according to the following table: (a) Prices
Look around your dorm room and consider your daily life. About what fraction of goods and services that you come into contact with is produced domestically as opposed to abroad? How does this fraction compare with the fraction for the economy overall? If there is a difference, what do you think
This exercise allows you to use the government budget constraint to study how the debt-GDP ratio changes over time. Suppose a government has an initial debt of $5 trillion, and the nominal interest rate is 5%.(a) If the government keeps its primary budget in balance, what is the growth rate of its
Suppose the initial dividend paid by a stock is $10 per year. Let the interest rate and the growth rate of dividends be given by the table below: (a) For each case, compute the value of the stock according to the simple theory developed in the chapter.(b) What happens as the growth rate of
Consider the basic formula for the user cost of capital in the presence of a corporate income tax. Suppose the baseline case features an interest rate of 2 percent, a rate of depreciation of 6 percent, a price of capital that rises at 1 percent per year, and a 0 percent corporate tax rate.
An important feature of DSGE models is that they explicitly incorporate the fact that people’s expectations about the future affect their behavior today. We can illustrate this feature in our simplified framework by considering the arrival of some “good news.” Imagine, for example, that
Based on what you’ve learned, pick one policy action undertaken by the U.S. government in response to the financial crisis. In a half-page essay, explain the policy action and the rationale behind the policy. Also, discuss briefly a possible criticism of the policy action.
The “Roaring Twenties” led to an enormous run-up in stock prices. By 1928–1929, policymakers at the Federal Reserve had become concerned that there was a bubble in the stock market. In response, they tightened monetary policy by raising interest rates sharply. Answer the following
Suppose your job is to explain Federal Reserve policy to the CEO of a corporation. Look at a speech by the Fed chair on www.federalreserve.gov/newsevents/. Write a brief memo to your CEO explaining one of the key points of the speech. Use the diagrams of the AS/AD framework if you like; your CEO is
The Japanese economy at the end of the 1990s and into the 2000s experienced several years of deflation (see Figure 13.19). Again, recall the monetary policy rule used in the chapter: Rt ? r? = m?(?t ? ??), where r? = 2%, m? = 1/2, and ?? = 2%. (a) Compute the level of the (nominal) interest rate
John Taylor of Stanford University proposed the following monetary policy rule:Rt – r̅ = m̅(πt – π̅) + n̅Ỹt.That is, Taylor suggests that monetary policy should increase the real interest rate whenever output exceeds potential.(a) What is the economic justification for such a
Using the IS-MP diagram and the Phillips curve, explain how the productivity slowdown of the 1970s may have contributed to the Great Inflation. In particular, answer the following:(a) Suppose growth in actual output is slowing down, as shown in Figure 12.13. Policymakers believe this is occurring
Suppose the classical dichotomy holds in the short run as well as in the long run. That is, suppose inflation is not sticky but rather adjusts immediately to changes in the money supply.(a) What effect would changes in the nominal interest rate (or the money supply) have on the economy?(b) What
Consider the following changes in the macro economy. Show how to think about them using the IS curve, and explain how and why GDP is affected in the short run.(a) The Federal Reserve undertakes policy actions that have the effect of lowering the real interest rate below the marginal product of
Suppose the economy today is producing output at its potential level and the inflation rate is equal to its long-run level, with π̅ = 2%. What happens if policymakers try to stimulate the economy to keep output above potential by 3% every year? How does your answer depend on the slope of the
Using the “Country Snapshots” data file, plot per capita GDP over time for two countries. Drawing upon Wikipedia and/or other data sources, write a paragraph for each country, discussing the general causes of the major fluctuations in per capita GDP. What shocks appear to be most important in
Suppose you are the head of the central bank and your mandate is to maintain the price level at a constant value. Explain what you would do to the money supply in response to each of the following events:(a) Real GDP increases by 4% during a boom.(b) Real GDP declines by 1% during a recession.(c)
Compute inflation rates in the following cases. (a)?Suppose the consumer price index in the future takes the following values: P2020 = 110, P2021 = 113, P2022?= 118, P2023 = 120, P2024?= 125. Viewing these price levels as prevailing at the end of each year, calculate the inflation rate for the
As shown in Figure 7.8, the college wage premium declined in the 1970s. Using a supply-and-demand graph, explain why this decline might have occurred. FIGURE 7.8 College versus High School Wages and Employment Percent Percent 60 100 Fraction of hours worked by college-educated workers (left scale)
Compute the present discounted value of the following income streams. Assume the interest rate is 3%.(a) $50,000, received 1 year from now.(b) $50,000, received 10 years from now.(c) $100 every year, forever, starting immediately.(d) $100 every year, forever, starting 1 year from now.(e) $100 every
Suppose the parameters of the Romer model take the following values:A̅ 0 = 100, l̅ = 0.10, z̅ = 1 /500, and L̅ = 100.(a) What is the growth rate of output per person in this economy?(b) What is the initial level of output per person? What is the level of output per
Consider the data in the table below. (You may find it easier to answer these questions using a spreadsheet program.) (a) Assuming no differences in TFP (ignore the last column) or the rate of depreciation across countries, use the data in the table to predict the ratio of per capita GDP in each
Consider a Solow economy that begins in steady state. Then a strong earthquake destroys half the capital stock. Use a Solow diagram to explain how the economy behaves over time. Draw a graph showing how output evolves over time, and explain what happens to the level and growth rate of per capita
In the middle of the fourteenth century, an epidemic known as the Black Death killed about a third of Europe’s population, about 34 million people. While this was an enormous tragedy, the macroeconomic consequences might surprise you: over the next century, wages are estimated to have been higher
In addition to the benefits of economic growth, there are also potentially costs. What are some of these costs? Write a paragraph arguing that the benefits exceed the costs. Write a paragraph arguing the opposite, that the costs exceed the benefits. Which argument do you find more convincing, and
Suppose your bank account has a balance today of $100. Consider the following time periods: t = 0, t = 1, t = 2, t = 12, t = 24, t = 48, and t = 60. Assume there are no deposits or withdrawals in this account other than the interest that accumulates. (If you like, use a spreadsheet program to help
What is the difference between real and nominal GDP? How do you compare GDPs over time within an economy? How do you compare GDPs across different economies?
What are some problems with using GDP as a measure of overall economic welfare?
What are net exports, and how is this concept related to the trade deficit?
What is GDP, and why is it a useful measure? What are the most important components of GDP in the U.S. economy today?
Suppose the following equations characterize supply and demand in the labor market model:labor supply: Ls = 2 × w + 30labor demand: Ld = 60 − wEquilibrium occurs at an employment level L* and a wage w*, so that the labor market clears. That is, supply is equal to demand: Ls = Ld.(a) What are the
Use the snapshots.pdf file, together with its hyperlinks to the underlying spreadsheet data. Use a spreadsheet program of your choice to complete the following.(a) Make a plot of per capita GDP (in dollars) for the years 1950 to 2014 for a country of your choice. Label the x- axis “year” and
Pick a country that you find interesting, and learn some basic facts about its economy. Summarize these facts in a half-page essay. You may find the following resources to be helpful; feel free to explore others on your own.— The CIA World Factbook: www.cia.gov/cia/publications/factbook—
Suppose that in the year 2015, Oceanaire, Inc. planned to produce 500,000 units of its lightweight scuba tanks. Of the 500,000 it planned to produce, a total of 50,000 units would be added to the inventory at its new plant in Arizona. Also assume that these units have been selling at a price of
In 1991, economists Joshua D. Angrist and Alan B. Krueger published a study on the correlation between date of birth and years of schooling. The premise was that the actual amount of time an average person spends in school is tied to the time of year in which people are born. Suppose in the city of
In a randomized one-year trial of 100 elm trees with Dutch Elm Disease, 50 are slated to receive only a fungicide treatment (we will call this Group A), and the other 50 are slated to receive the fungicide treatment and an additional insecticide treatment six months later (we will call this Group
Of the following four scenarios, which survey results are likely to be the most statistically significant and which are likely to be the least statistically significant. Explain your answer.Scenario 1: In a study to see if Yankees’ fans or Astros’ fans spend more on concessions at a baseball
Explain how each of the following can limit the economic growth of developing nations.a. Insufficient capital formationb. A shortage of human resourcesc. A lack of social overhead capital
Some empirical trade economists have noted that for many products, countries are both importers and exporters. For example, the United States both imports and exports shirts. How do you explain this?
When Bill Clinton took office in January 1993, he faced two major economic problems: a large federal budget deficit and high unemployment resulting from a slow recovery from the recession of 1990 to 1991. In his first State of the Union message, the president called for spending cuts and
Lydia Lopokova is 40 years old. She has assets (wealth) of $80,000 and has no debts or liabilities. She knows that she will work for 30 more years and will live 10 years after that, when she will earn nothing. Her salary each year for the rest of her working career is $35,000. (There are no taxes.)
Futurama Medical is a high-tech medical equipment manufacturer that uses custom-designed machinery and a highly skilled, well-trained labor force in its production factory. Gonzo Garments is a mid-level clothing manufacturer that uses mass-produced machinery and readily available labor in its
George Jetson has recently been promoted to inventory control manager at Spacely Sprockets, and he must decide on the optimal level of sprockets to keep in inventory. How should Jetson decide on the optimal level of inventory? How would a change in interest rates affect the optimal level of
How can a firm maintain a smooth production schedule even when sales are fluctuating? What are the benefits of a smooth production schedule? What are the costs?
Why do expectations play such an important role in investment demand? How, if at all, does this explain why investment is so volatile?
At the end of 2015, the mayor of East Magoo made the following statement: “Even after we increased the energy use tax, average power consumption increased in our town. This proves that the tax increase did not cause our residents to decrease electricity use, and in fact, it appears to have
The neighboring towns of East Magoo and West Magoo are divided by the Quincy River. The towns are similar in geographic size and population. The homes in both towns are powered entirely by electricity provided by Backus County Power and Light, which charges a standardized rate of $0.10 per kilowatt
Which of the following consumption functions best fits the values in the table below?1. C = 6 + 0.8Y2. C = 4 + 0.75Y3. C = 2 + 0.6Y4. C = 3 + 0.5Y Aggregate Income (Y) Aggregate Consumption (C) 5 10 10 14 20 23 40 38
A classic example of selection bias occurred during World War II. During the war, the British were losing many airplanes over enemy territory and therefore decided to add armor plating to their bombers. The armor was not only heavy, but also expensive, so the British decided to only add armor to
The data in the table below was used to estimate the following consumption function: C = 10 + 0.5Y On a graph, draw the consumption function and plot the points from the table. Calculate the €œerror€ for each point in the table, and then calculate the SUM from your
Identify each of the following scenarios as examples of causation, positive correlation, and/or negative correlation, and explain your answers.a. More attorneys own expensive foreign sports cars than do people in any other profession. b. Most cities with an average annual rainfall of more than
Describe the selection bias likely to exist in the following situations:a. A study of 5,000 office workers in Chicago found that those who ate fast food for lunch three or more times per week were 30 percent more likely to suffer from heart disease than those who brought their lunch to work three
You have been hired as an economic consultant for the nation of Ishtar. Ishtar is a developing nation that has recently emerged from a 10-year civil war; as a result, it has experienced appreciable political instability. Ishtar has a serious lack of capital formation, and capital flight has been a
In addition to fewer marriages within extended families, explain what other positive effects are likely to occur in the rural, flood-prone areas of Bangladesh because of increased government spending on infrastructure projects like the building of river embankments and the resulting increase in
Although brain drain is generally associated with developing countries, the recent debt crisis in Greece has generated an exodus of highly educated human capital from this country. In Greece, college education is paid for by the government, and it is estimated that roughly 10 percent of the
The distribution of income in a capitalist economy is likely to be more unequal than it is in a socialist economy. Why is this so? Is there a tension between the goal of limiting inequality and the goal of motivating risk taking and hard work? Explain your answer in detail.
Corruption in a government is often accompanied by inefficiency in the economy. Why should this be true?
Find another example of the use of cell phones as a way to improve market functioning in a developing economy.
An offshoot of microfinance that has grown significantly over the past few years is an idea known as crowdfunding. With crowdfunding, individuals, businesses, and communities seek monetary support for ideas or projects from other individuals, primarily over the Internet. Three of the largest and
In China, rural property is owned collectively by the village while being managed under long-term contracts by individual farmers. Why might this be a problem in terms of optimal land management, use, and allocation?
Poor countries are trapped in a vicious circle of poverty. For output to grow, they must accumulate capital. To accumulate capital, they must save (consume less than they produce). Because they are poor, they have little or no extra output available for savings—it must all go to feed and clothe
The small West African nation of Equatorial Guinea is designated as a high income country by the World Bank, with a GNI per capita of more than $22,000 when measured in U.S. dollars. Equatorial Guinea also has a poverty rate of more than 76%, one of the highest rates in the world. Life expectancy
A paper released by the World Bank in 2014 states that while economic growth is essential for reducing poverty rates, growth by itself is not enough, and efforts to reduce poverty must be complemented with programs that devote more resources to the extreme poor. According to the paper, as extreme
As the text states, investment in human capital is an important ingredient for a nation€™s economic growth. The data in the following table shows the net enrollment rates in primary school as a percentage of the relevant group for 10 developing countries in 1999 and 2013. Go to
The data in the following table represents price level changes and interest rate changes over a one-year period for three countries: Astoria, Borgia, and Calistoga. Based on the data, explain what is likely to happen to the exchange rate for Astorian asters relative to the other two
Do a Web search and find a Website where you can look up historical exchange rates. Find the exchange rates between the U.S. dollar and the euro, the Canadian dollar, the Japanese yen, and the Chinese yuan at the beginning of 2014 and at the end of 2014. Did the U.S. dollar appreciate or depreciate
The exchange rate between the U.S. dollar and the British pound is a floating rate, with no government intervention. If a large trade deficit with Great Britain prompts the United States to impose quotas on certain British imports, resulting in a reduction in the quantity of these imports, what

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