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Macroeconomics 3rd Canadian edition Paul Krugman, Robin Wells, Iris Au, Jack Parkinson - Solutions

Answer the following questions about the (real) inflation tax, assuming that the price level starts at 1.a. Maria Moneybags keeps $1,000 in her sock drawer for a year. Over the year, the inflation rate is 10%. What is the real inflation tax paid by Maria for this year?b. Maria continues to keep the
a. Go to http://www.statcan.gc.ca/eng/start. Scroll down the page to find the "Consumer Price Index" link on the left side of the page. What is the annual percentage change in the CPI for the most recent month available? Click on the link and scroll down the page and click on the link to open
The following table provides approximate statistics on per capita income levels and growth rates for regions defined by income levels. According to the Rule of 70, starting in 2015 the high-income countries are projected to double their per capita GDP in approximately 70 years, in 2085. Throughout
This question uses the algebraic method of determining equilibrium from Appendix 3A. In Canada, producers of milk, poultry, and eggs are protected by government-imposed supply management rules. This supply management system is made up of a combination of import controls, production planning quotas,
For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries.a. Canada exports software to Venezuela, and Venezuela exports oil to Canada.b. Canada exports airplanes to China, and China exports clothing to Canada.c. Canada
The accompanying table shows the Canadian domestic demand schedule and domestic supply schedule for apples. Suppose that the world price of apples is $0.30 per apple.a. Draw the Canadian domestic supply curve and domestic demand curve.b. With free trade, how many apples will Canada import or
University tuition in most of Canada has risen significantly in the last decade. For the sake of this problem, we note that over the last 10 years the average tuition cost for full-time undergraduate students enrolled in a social science program went from $4,165 to $5,566, a 34% price increase.
Each month Statistics Canada releases the Consumer Price Index (CPI) estimates for the previous month. Go to StatCan’s home page at www.statcan.gc.ca. Choose English or French. Click on the “CPI annual inflation” link under the “Key Indicators” heading. This will open the latest CPI
Statistics Canada regularly releases data on the country’s labour productivity and labour cost. Go to StatCan’s home page at www.statcan.gc.ca. Pick English or French. Go to the middle section of the home page and click on “Economic accounts” under “Browse by subject.” Then click
The accompanying table shows data from the World Bank, World Development Indicators for real GDP per capita (2010 U.S. dollars) for Argentina, Ghana, South Korea, and Canada in 1960 and 2015. Complete the table. Have these countries converged economically?
Most macro-economists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that the change in government purchases of goods and services, government transfers, or taxes necessary to close an inflationary or
In which of the following cases does the size of the government's debt and the size of the budget deficit indicate potential problems for the economy?a. The government's debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the
How did or would each action affect the current public debt and implicit liabilities of the Canadian government?a. In Budget 2016, the federal government created the Canada Child Benefit (CCB) to replace a number of older federal benefits targeted to families with young children. This new benefit
Unlike households, governments are often able to sustain large debts. For example, as of March 31, 2017, the Canadian government's gross debt was $716.3 billion, about 35.4% of GDP. The government paid an average interest rate of 3.4% on its debt. However, running budget deficits becomes hard when
a. What measures does the government have at its disposal to undertake fiscal policy?b. What is meant by expansionary fiscal policy? How would the government undertake expansionary fiscal policy?c. What is meant by contractionary fiscal policy? How would the government undertake contractionary
The accompanying table shows how consumers€™ marginal propensities to consume in a particular economy are related to their level of income.a. Suppose the government engages in increased purchases of goods and services. For each of the income groups in the table, what is the value of the
For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2? On M2+?a. You sell a few shares of stock and put the proceeds into your savings account in a chartered bank.b. You sell a few shares of stock and put the proceeds into your chequing account in a
There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations?a. Bottles of rum were used to pay for goods in colonial Australia.b. Salt was used in many European countries as a medium of exchange.c. For a
The table that follows shows the components of M1+, M2, and M2+ in billions of dollars from January 2016 to March 2017 as published in the Bank of Canada's Banking and Financial Statistics published in June 2017. Complete the table by calculating M1+, M2, M2+, currency in circulation as a
Indicate whether each of the following is part of M1+, M2+, or none of them:a. $95 on your campus meal cardb. $0.55 in the change cup of your carc. $1663 in your savings account in a credit uniond. $459 in your chequing account in a chartered banke. 100 shares of stock worth $4000f. A $1000 line of
Tracy Williams deposits $500 that was in her sock drawer into a chequing account at the local bank.a. How does the deposit initially change the T-account of the local bank? How does it change the money supply?b. If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?c.
Ryan Cozzens withdraws $400 from his chequing account at the local bank and keeps it in his wallet.a. How will the withdrawal change the T-account of the local bank and the money supply?b. If the bank maintains a reserve ratio of 10%, how will it respond to the withdrawal? Assume that the bank
The government of Eastlandia uses measures of monetary aggregates similar to those used by Canada, and the central bank of Eastlandia imposes a desired reserve ratio of 10%. Given the following information, answer the questions below.Bank deposits at the central bank = $200 millionCurrency held by
What will happen to the money supply under the following circumstances in a chequable-deposits-only system?a. The desired reserve ratio is 25%, and a depositor withdraws $700 from his chequable bank deposit.b. The desired reserve ratio is 5%, and a depositor withdraws $700 from his chequable bank
Although the Bank of Canada doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in reserves and $1000 million in chequable deposits; the initial required reserve ratio is 10%. The commercial
Show the changes to the T-accounts for the Bank of Canada and for commercial banks when the Bank of Canada buys $50 million in treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is
Show the changes to the T-accounts for the Bank of Canada and for commercial banks when the Bank of Canada sells $30 million in treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of chequeable deposits in the banking system) and the minimum
In 2016, the Bank of Canada estimated that at least $894,000 of counterfeit Canadian banknotes were in circulation (down from about $6 million in 2008).a. Why do Canadian taxpayers lose because of these counterfeit notes?b. As of December 2016, the interest rate earned on one-year Canadian treasury
As Figure 14-13 shows, the portion of the Bank of Canada's assets made up of Canadian government treasury bills and bonds declined in late 2008. Go to www. statcan.gc.ca. Under "Search," click on "Specialized search tools" then click on "CANSIM." In the search line enter "Table 176-0010" and click
Go to the schedule of key interest rate announcements page of the Bank of Canada’s website (http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/#schedule) to find the list of the BOC’s eight fixed-interest rate announcement dates for the current year. Now, to find the
Using a figure similar to Figure 15A-1, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.Figure 15A-1. (a) The Liquidity Preference Model of the Interest Rate (b) The Loanable Funds Model of the Interest Rate Interest rate, i
How will the following events affect the demand for money? In each case, specify whether there is a shift of the demand curve or a movement along the demand curve and its direction.a. There is a fall in the interest rate from 12% to 10%.b. Cold weather arrives and, with it, the beginning of the
Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of your
a. Go to www.bankofcanada.ca/rates/interest-rates/t-bill-yields/. Find the part of this page that deals with average yields for recent six-month Government of Canada treasury bill auctions. What is the interest rate for the most recently issued six-month T-bills?b. Go to the website of your
Go to www.bankofcanada.ca/rates/interest-rates/canadian-bonds/. Use the most recent data on the list of benchmark bond yields listed there to answer these questions.a. What are the interest rates on one- to three-year and 10-year Government of Canada bonds?b. How do the interest rates on the
An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as
An economy is facing the inflationary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as
In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant at M1.b. If the central
Suppose that the money market in Westlandia is initially in equilibrium and the central bank decides to decrease the money supply.a. Using a diagram like the one in Problem 7, explain what will happen to the interest rate in the short run.b. What will happen to the interest rate in the long
An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there. How could the central bank achieve this goal in the short run? What would
According to the European Central Bank website, the treaty establishing the European Community "makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment." If price stability
The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve. The economies of Albernia and Brittania have very different money demand
During the Great Depression, business people in the Canada were very pessimistic about the future of economic growth and reluctant to increase investment spending even when interest rates fell. How did this limit the potential for monetary policy to help alleviate the Depression?
In the economy of Scottopia, policy makers want to lower the unemployment rate and raise real GDP by using monetary policy. Using the accompanying diagram, show why this policy will ultimately result in a higher aggregate price level but no change in real GDP. Aggregate price level LRAS SRAS1 E1 P1
In the following examples, would the classical model of the price level be relevant?a. There is a great deal of unemployment in the economy and no history of inflation.b. The economy has just experienced five years of hyperinflation.c. Although the economy experienced inflation in the 10% to 20%
The inflation tax is often used as a significant source of revenue in developing countries where the tax collection and reporting system is not well developed and tax evasion may be high.a. Use the numbers in the accompanying table to calculate the inflation tax in Canada and India (Rp = rupees).b.
Concerned about the crowding-out effects of government borrowing on private investment spending, a candidate for Parliament argues that the Bank of Canada should just print money to cover the government’s budget deficit. What are the advantages and disadvantages of such a plan?
The accompanying scatter diagram shows the relationship between the unemployment rate and the output gap in Canada from 1996 to 2016. Draw a straight line through the scatter of dots in the figure. Assume that this line represents Okun€™s law: Unemployment rate = b ˆ’ (m
After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. Yet after six months of strong positive economic growth, the unemployment rate has fallen only slightly below what it was at the end of the recession. How
The accompanying table provides data from Canada on the average annual rates of unemployment and inflation rate. Use the numbers to construct a scatter plot similar to Figure 16-5. Discuss why, in the short run, the unemployment rate rises when inflation falls. Year Unemployment rate Inflation rate
The economy of Brittania has been suffering from high inflation with an unemployment rate equal to its natural rate. Policy makers would like to disinflate the economy with the lowest economic cost possible. Assume that the state of the economy is not the result of a negative supply shock. How can
Who are the winners and losers when a mortgage company lends $100,000 to the Miller family to buy a house worth $105,000 and during the first year prices unexpectedly fall by 10%? What would you expect to happen if the deflation continued over the next few years? How would continuing deflation
Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. In a country such as Japan, which has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to
Since the crash of its stock market in 1989, the Japanese economy has seen little economic growth and some deflation. The accompanying table from the Organization for Economic Cooperation and Development (OECD) shows some key macroeconomic data for Japan for 1991 (a €œnormal€
The C.D. Howe Institute Business Cycle Council is an arbiter of the chronologyof Canadian business cycles. Go to its website at https://www.cdhowe.org/council /business-cycle-councila. How many business cycles have occurred since the end of World War II in 1945?b. What was the average
The fall of its military rival, the Soviet Union, in 1989 allowed the United States to significantly reduce its defense spending in subsequent years. Using the data in the following table from the Economic Report of the President, replicate Figure 17-2 for the 1990€“2000 period. Given the
In the modern world, central banks are free to increase or reduce the money supply as they see fit. However, some people harken back to the “good old days” of the gold standard. Under the gold standard, the money supply could expand only when the amount of available gold increased.a. Under the
The chapter notes that Kenneth Rogoff proclaimed Richard Nixon €œthe all-time hero of political business cycles.€ Using the following table of data from the Economic Report of the President, explain why Nixon may have earned that title. Nixon entered office in January 1969 and
The economy of Albernia is facing a recessionary gap, and the leader of that nation calls together its best economists representing the classical, Keynesian, monetarist, real business cycle, Great Moderation consensus, expansionary austerity, and secular stagnationist views of the macro economy.
Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, Great Moderation consensus, expansionary austerity, and secular stagnationist views of the macro economy?a. Since the long-run growth of GDP is 2%, the money supply should grow at 2%. b.
Using a graph like Figure 17-3, show how a monetarist can argue that a contractionary fiscal policy need not lead to a fall in real GDP given a fixed money supply. Explain.Figure 17-3 (a) The Increase in Aggregate Demand from an Expansionary Fiscal Policy Is Limited When the Money Supply Is
Monetarists believed for a period of time that the velocity of money was stable within a country. However, with financial innovation, the velocity began shifting around erratically after 1980. As would be expected, the velocity of money is different across countries depending upon the
In response to the Great Recession, the Federal Reserve took drastic and largely untested measures to stabilize both the financial system and macro economy. These measures caused the monetary base to increase from approximately $850 billion to over $4 trillion. What would an economist from each of
How would the following transactions be categorized in the Canadian balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale of assets to or purchase of assets from a foreigner)? How will the balance of
The accompanying diagram shows Canadian-owned assets abroad and foreign-owned assets in Canada, both as a percentage of Canada€™s GDP. As you can see from the diagram, both have trended upward from 1981 to 2011, especially Canadian-owned assets abroad.a. Since Canadian-owned assets abroad
In the economy of Scottopia in 2016, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for
In the economy of Popania in 2016, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled $400 billion, and Popania exported goods and services equal to $350 billion. What was Popania’s balance of payments on
Suppose that Northlandia and Southlandia are the only two trading countries in the world, that each nation runs a balance of payments on both current and financial accounts equal to zero, and that each nation sees the other€™s assets as identical to its own. Using the accompanying
Based on the exchange rates for the trading days of 2016 and 2017, as shown in the accompanying table, did the Canadian dollar appreciate or depreciate over the year? Did the movement in the value of the Canadian dollar make Canadian goods and services more or less attractive to foreigners? April
Go to http://fx.sauder.ebc.ca. Using the table labelled €œThe Most Recent Cross-Rates of Major Currencies€ to determine whether the British pound (GBP), the Canadian dollar (CAD), the Japanese yen (JPY), the euro (EUR), and the Swiss franc (CHF) have appreciated or depreciated
In January 2001, the Canadian target for the overnight interest rate was 5.75%, falling to 2.5% in November 2004. During the same period, the marginal lending rate at the European Central Bank fell from 5.75% to 3%.a. Considering the change in interest rates over the period and using the loanable
In each of the following scenarios, suppose that the two nations are the only trading nations in the world. Given inflation and the change in the nominal exchange rate, which nation’s goods become more attractive?a. Inflation is 10% in Canada and 5% in Japan; the Canadian dollar–Japanese yen
Starting from a position of equilibrium in the foreign exchange market under a fixed exchange rate regime, how must a government react to an increase in the demand for the nation’s goods and services by the rest of the world to keep the exchange rate at its fixed value?
Suppose that Albernia€™s central bank has fixed the value of its currency, the bern, to the Canadian dollar (at a rate of C$1.50 to 1 bern) and is committed to that exchange rate. Initially, the foreign exchange market for the bern is also in equilibrium, as shown in the accompanying
Your study partner asks you, “If central banks lose the ability to use discretionary monetary policy under fixed exchange rates, why would nations agree to a fixed exchange rate system?” How do you respond?
Suppose Canada and the Japan are the only two trading countries in the world. What will happen to the value of the Canadian dollar if the following occur, other things equal?a. Japan relaxes some of its import restrictions.b. Canada imposes import tariffs on Japanese goods.c. Interest rates in
Your study partner argues that the distinction between the government's budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you have large budget deficits, you must have a large debt. In what ways is your study partner correct and in
In 2016, the policy makers of the economy of Eastlandia projected the debt-GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios for growth in the government's deficit. Real GDP is currently $1,000 billion per year and is expected to
You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced-budget rule for the federal government and for your recommendation on whether she should support such a rule. How do you respond?
Figure 13-10 shows the actual budget deficit and the cyclically adjusted budget deficit as a percentage of GDP in Canada from 1980-1981 to 2015-2016. Assuming that potential output was unchanged, use this figure to determine in which years from 1980-1981 to 2015-2016 the government used
The government’s budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. One argues that a rising budget surplus indicates a growing economy; the other argues that it shows that the government is using
In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in
Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a $10 billion reduction in government transfers by completing the accompanying table for an economy with a marginal propensity to consume (MPC) of 0.6. The first and second rows
During an interview in 2008, the German Finance Minister Peer SteinbrÃ¼ck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be
An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary— will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? How would
The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP.a. Is Brittania facing a recessionary or inflationary
Calculate the change in government purchases of goods and services necessary to close the recessionary or inflationary gaps in the following cases. Assume that the short-run aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve
The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, YP.a. Is Albernia facing a recessionary or inflationary gap?b. Which type of fiscal
An economy has a marginal propensity to consume of 0.6, real GDP equals $500 billion, and the government collects 20% of GDP in taxes. If government purchases increase by $10 billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second
In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change.a. As a result of an increase in the value of the Canadian dollar in relation to other currencies,
The late 1990s in Canada was characterized by substantial economic growth with low inflation; that is, real GDP increased with little, if any, increase in the aggregate price level. Explain this experience using aggregate demand and aggregate supply curves. Illustrate with a diagram.
In the accompanying diagram, the economy is in long-run macroeconomic equilibrium at point E1when an oil shock shifts the short-run aggregate supply curve to SRAS2. Based on the diagram, answer the following questions.a. How do the aggregate price level and aggregate output change in the short run
The economy is in short-run macroeconomic equilibrium at point E1in the accompanying diagram. Based on the diagram, answer the following questions.a. Is the economy facing an inflationary or a recessionary gap?b. What policies can the government implement that might bring the economy back to
Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one long-run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the
How will planned investment spending change as the following events occur?a. The interest rate falls as a result of Bank of Canada policy.b. Environmental Canada decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. c. Baby
During the early 2000s, the Canadian Real Estate Association (CREA) MLS Home Price Index, a measure of average home prices, rose continuously until it peaked in May 2008. From May 2008 to March 2009, the index lost 8% of its value in ten months. Meanwhile, the stock market experienced similar ups
From 2009 to 2014, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income in
Economists observed the only five residents of a very small economy and estimated each one€™s consumer spending at various levels of current disposable income. The accompanying table shows each resident€™s consumer spending at three income levels.a. What is each
Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes and no foreign trade, what will be the change in GDP if the following events occur?a. There is an autonomous increase in consumer spending of $2.5 billion; the marginal propensity to consume is
In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment expenditure is $250 billion, and the marginal propensity to consume is 0.5.a. Write the expression for planned aggregate

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