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business
macroeconomics principles
Questions and Answers of
Macroeconomics Principles
Explain what happens when the economy is on the bad side of the Laffer curve and the income tax rate falls.
How are the incentive effects of income taxation important for the Laffer curve?
Why does a distorting tax on labor income lead to an inefficient economic outcome?
Explain why employment may rise or fall in response to an increase in total factor productivity.
What are the equilibrium effects of an increase in total factor productivity?
Why does government spending crowd out government purchases?
What are the effects of an increase in government purchases?
Give three reasons that an equilibrium might not be Pareto optimal.
Explain the difference between the first and second welfare theorems. Why is each useful?
Why is the competitive equilibrium in this model Pareto optimal?
What is the economic significance of the slope of the production possibilities frontier?
What are the four conditions that a competitive equilibrium must satisfy for closed-economy model?
What are the exogenous variables in the model?
What are the endogenous variables in the model?
Can the government run a deficit in the one-period model? Why or why not?
What is the role of the government in the one-period, closed-economy model?
Why is it useful to study a closed-economy model?
Explain why the marginal product of labor curve is the firm’s labor demand curve.
What are the effects on the production function of an increase in total factor productivity?
Why is the marginal product of labor diminishing?
What is the representative firm’s goal?
Why might hours worked by the representative consumer decrease when the real wage increases?
How is the representative consumer’s behavior affected by an increase in real taxes?
How is the representative consumer’s behavior affected by an increase in real dividend income?
When the consumer chooses his or her optimal consumption bundle while respecting his or her budget constraint, what condition is satisfied?
What is the representative consumer’s goal?
What two properties do indifference curves have? How are these properties associated with the properties of the consumer’s preferences?
What three properties do the preferences of the representative consumer have? Explain the importance of each.
How are a consumer’s preferences over goods represented?
What goods do consumers consume in this model?
What are the key business cycle regularities in the labor market?
What are the key business cycle regularities with respect to the price level and inflation?
Describe the key business cycle regularities in consumption and investment expenditures.
What are the three features of comovement that macroeconomists are interested in?
Why is the index of leading economic indicators useful for forecasting GDP?
Give a noneconomic example of two variables that are positively correlated and an example of two variables that are negatively correlated.
How can we discern positive and negative correlation in a time series plot? In a scatter plot?
What did Robert Lucas say about the comovements among economic variables?
Why are the comovements in aggregate economic variables important?
Explain why forecasting GDP over the long term is difficult.
Besides persistence, what are three important features of the deviations from trend in GDP?
What is the primary defining feature of business cycles?
Give two reasons that the unemployment rate may not measure correctly what we want it to measure.
What are the two ways in which national wealth is accumulated?
What are the differences and similarities among private sector saving, government saving, and national saving?
Explain three problems in the measurement of real GDP.
Why does the base year matter in calculating real GDP?
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
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
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
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
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
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
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
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
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
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 “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
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
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
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
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
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
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
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
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
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
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
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
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,
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