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Macroeconomics 8th Global Edition Olivier Blanchard - Solutions

The maximum loan-to-value ratio Most home-buyers purchase their home with a combination of a cash down payment and a mortgage. The loan-to-value ratio is a rule that establishes the maximum mortgage loan allowed on a home purchase.a. If a home costs $300,000 and the maximum loan-tovalue ratio is
Unwinding unconventional monetary policy It was noted in the text that the Federal Reserve purchased, in addition to Treasury bills, large amounts of mortgage-backed securities and long-term government bonds as part of quantitative easing. Figure 23-2 shows that in 2015, there were about $4
Indexed bonds and inflation uncertainty In Chapter 14, in the Focus Box titled “The Vocabulary of Bond Markets,” the concept of an inflation-indexed bond was introduced. Although such bonds are typically long in maturity, the example that follows compares a standard one-year Treasury bill with
The inflation target: Nearly every major central bank has chosen an inflation target of 2%.a. Why might a central bank choose a lower inflation target, for example, zero inflation?b. Why might a central bank choose a higher inflation target, for example, 4% inflation?
Breaking the link between money growth and inflation in the medium run The money demand relationship in Chapter 4 is used implicitly in Figure 23-1. That relation is M P = YL1i2 The central bank in conjunction with the political authorities chooses an inflation target p*.a. Derive the target
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The most important argument in favor of a positive rate of inflation in OECD countries is seignorage.b. Fighting inflation should be the Fed’s only purpose.c. Inflation and
The Congressional Budget Office (CBO) is required to produce a forecast of the federal fiscal situation each year. This question uses the version published in January 2019. There is a document entitled “A Visual Summary of The Budget and Economic Outlook 2019 to 2029.” Find the relevant figures
The fiscal situation in the United States and in other countries From the FRED economic database at the Federal Reserve Bank of St. Louis, you can retrieve two series: General Government Gross Debt of the United States (GGGDTAUSA188N) and a measure of the primary deficit (USAGGXONLBGDP). Both are
Consider an economy characterized by the following facts: i. The debt-to-GDP ratio is 40%. ii. The primary deficit is 4% of GDP. iii. The normal growth rate is 3%. iv. The real interest rate is 3%.a. Using your favorite spreadsheet software, compute the debt-to-GDP ratio in 10 years, assuming that
Ricardian equivalence and fiscal policy First consider an economy in which Ricardian equivalence does not hold.a. Suppose the government starts with a balanced budget. Then, there is an increase in government spending, but there is no change in taxes. Show in an IS-LM diagram the effect of this
Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, EQ. Suppose that financial investors worry that the level of debt is too high and that the government may devalue to stimulate output (and therefore tax revenues) to help pay down the debt. Financial
a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, ∆M>M, listed.a. 25%b. 50%c. 75%b. In the medium run, pe = p = ∆M>M. Compute the amount of seignorage associated with the three rates of annual money growth
Assume that money demand takes the form M P = Y31 - 1r + pe 24 where Y = 1,000 and r =
High debt in a low-level context Consider an economy characterized by the following facts i. The official budget deficit is 7.8% of GDP ii. The debt-to-GDP ratio is 123% iii. The inflation rate is 0.4% iv. The nominal interest rate is 0.25%a. What is the primary deficit/surplus ratio to GDP?b. What
Consider the following statement: A deficit during a war can be a good thing. First, the deficit is temporary, so after the war is over, the government can go right back to its old level of spending and taxes. Second, given that the evidence supports the Ricardian equivalence proposition, the
Using information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The deficit is the difference between real government spending and taxes net of transfers.b. The primary deficit is the difference between government spending on goods and
A specific model: The European Central Bank Created by the Maastricht Treaty on European Union (EU) of 1992, the European Central Bank (ECB) was set up on June 1, 1998.a. In your opinion, does the following excerpt from the statute make the policy goals of the ECB clear enough? Article 2
Games, pre-commitment, and time inconsistency in the news Current events offer abundant examples of disputes in which the parties are involved in a game, try to commit themselves to lines of action in advance, and face issues of time inconsistency. Examples arise in the domestic political process,
Social stability versus economic modernization as a prisoner’s dilemma game This exercise tries to illustrate a debate in a centralized economy, which is in the process of being modernized, with a single political party. Social stability is the main concern of the government, but it faces two
Political expectations, inflation, and unemployment Consider a country with two political parties, Party A and Party B. Party A cares more about unemployment than Party B, and Party B cares more about inflation than Party A. When Party A is in power, they choose an inflation rate of px, and when
In 2018 New Zealand rewrote the charter of its central bank to include high employment as well as low inflation as its goals. Why would New Zealand want to do this?
In 1989, New Zealand rewrote the charter of its central bank to make low inflation its only goal. Why would New Zealand want to do this?
Suppose the government amends the constitution to prevent government officials from negotiating with terrorists. What are the advantages of such a policy? What are the disadvantages?
Implementing a political business cycle You are the economic adviser to a newly elected president. In four years he or she will face another election. Voters want a low unemployment rate and a low inflation rate. However, you believe that voting decisions are influenced heavily by the values of
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. There is so much uncertainty about the effects of monetary policy that we would be better off not using it.b. Depending on the model used, a one percentage point reduction in
Real and nominal exchange rates between China and the United Statesa. Download the series EXCHUS from the FRED database. This expresses the exchange rate between the yuan (one of the names for the Chinese currency) as the number of yuan per US dollar. Convert that exchange rate to the number of US
Exchange rates and expectations In this chapter, we emphasized that expectations have an important effect on the exchange rate. In this problem, we use data to get a sense of how large a role expectations play. Using the results in Appendix 2 at the end of this chapter, you can show that the
Real and nominal exchange rates for Canada and Mexico Two of the largest trading partners of the United States are Canada and Mexico. The FRED database at the Federal Reserve Bank of St. Louis maintains four series that are useful to us: A Real Broad Effective Exchange rate for Mexico (RBMXBIS); A
Realignments of exchange rate Look at Figure 1 in the box “The 1992 EMS Crisis.” European nominal exchange rates had been fixed between the major currencies from roughly 1979 to 1992.a. Explain how to read the vertical axis of Figure 1. What country experienced the largest depreciation? What
Modeling the movements in the exchange rate Equation (20.5) provides insight into the movements of nominal exchange rates between a domestic and a foreign country. Remember that the time periods in the equation can refer to any time unit. The equation is: Et = 11 + it211 + i e t + 12g11 + i e t +
Modeling an exchange rate crisis An exchange rate crisis occurs when the peg (the fixed exchange rate) loses its credibility. Bond holders no longer believe that next period’s exchange rate will be this period’s exchange rate. Period it i*t Et Ee t + 1 1 3 0.5 0.5 2 3 0.5 0.45 3 3 0.5 0.45 4 3
Policy choices when the real exchange rate is “too high” and the nominal exchange rate is fixed An overvalued real exchange rate is a rate such that domestic goods are too expensive relative to foreign goods, net exports are too small, and by implication the demand for domestic goods is too
Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1) Y = Ya EQP P* , G, T, i* - pe , Y*b 1-, +,-, - , + 2a. Explain the term (i* - pe ). Why does the foreign nominal interest rate appear in the relation?b. Explain why when pe increases, the IS curve
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. If the nominal exchange rate is fixed, the real exchange rate is fixed.b. When domestic inflation equals foreign inflation, the real exchange rate is fixed.c. A devaluation is
The Trump administration tariffs Use a search engine to find material on the Trump administration tariffs’ impact on the economy. What do economists say about them? You will learn something even by just reading the heading and the first paragraph of three to five articles.
Bond yields and long-run currency movementsa. Go the Web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section “Markets & Data” and then the subsection “Economic and Financial Indicators.” Look at the 10-year interest rates for the United
Demand for assets, currency, and the trade deficit This question explores how an increase in global demand for domestic assets may slow down the depreciation of the domestic currency. Here, we modify the IS-LM-UIP framework to analyze the effects of an increase in the demand for foreign assets.
The exchange rate as a policy tool The effectiveness of monetary policy in an open economy is enhanced when the central bank has the flexibility to change the exchange rate and the willingness to change interest rates. Suppose that there is a decrease in consumer confidence in Tunisia, given the
Fixed exchange rates and foreign macroeconomic policy Consider a fixed exchange rate system, in which a group of countries (called follower countries) peg their currencies to the currency of one country (called the leader country). Because the currency of the leader country is not fixed against
Flexible exchange rates and the responses to changes in foreign macroeconomic policy Suppose there is an expansionary fiscal policy in the foreign country that increases Y* and i* at the same time.a. In an IS-LM–UIP diagram, such as Figure 19-2, show the effect of the increase in foreign output,
Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.a. In an IS-LM–UIP diagram, such as Figure 19-2, show the effect of an increase in foreign output, Y*, on domestic output (Y)
In this chapter, we showed that a reduction in the interest rate in an economy operating under flexible exchange rates leads to an increase in output and a depreciation of the domestic currency.a. How does the reduction in interest rates in an economy with flexible exchange rates affect consumption
Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of output at its natural level. What is the appropriate fiscal and monetary policy mix?
India’s trade deficit, current account deficit, and investmenta. National saving is defined as private saving plus government surplus, that is, S + T - G. Now, using equation (18.5), describe the relation among current account deficit, net investment income, and the difference between national
Policy coordination and the world economy Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by C = 10 + 0.81Y - T2, I = 10, G = 10, and T = 10 Imports and exports are given by IM = 0.3 Y and X = 0.3
d. Suppose one of the economies is much larger than the other. Which economy do you expect to have the larger value of m1? Explain.e. Calculate your answers to parts b and c for each economy by substituting the appropriate parameter values.f. In which economy will fiscal policy have a larger effect
Each economy is characterized by 1c1 + d12 =
Multipliers, openness, and fiscal policy Consider an open economy characterized by the following equations: C = c0 + c11Y - T2 I = d0 + d1Y IM = m1Y X = x1Y* The parameters m1 and x1 are the propensities to import and export. Assume that the real exchange rate is fixed at a value of 1 and treat
Eliminating a trade deficita. Consider an economy with a trade deficit (NX < 0) and with output equal to its natural level. Suppose that, even though output may deviate from its natural level in the short run, it returns to its natural level in the medium run. Assume that the natural level is
Net exports and foreign demanda. Suppose there is an increase in foreign output. Show the effect on the domestic economy (i.e., replicate Figure 18-4). What is the effect on domestic output? On domestic net exports?b. If the interest rate remains constant, what will happen to domestic investment?
A further look at Table 18-1 Table 18-1 has four entries. Using Figure 18-5 as a guide, draw the situations illustrated in each of the four entries in Table 18-1. Be sure you understand why the direction of change in government spending and the real exchange rate is labeled as ambiguous in each
A European recession and the US economya. In 2017, European Union spending on US goods accounted for 19% of US exports (see Table 17-2), and US exports amounted to 12.3% of US GDP (see Table 17-1). What was the share of European Union spending on US goods relative to US GDP?b. Assume that the
Real and nominal exchange rates and inflation Using the definition of the real exchange rate (and Propositions 7 and 8 in Appendix 2 at the end of the book), you can show that 1et - et - 12 et - 1 = 1Et - Et - 12 Et - 1 + pt - pt *In words, the percentage real appreciation equals the percentage
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The reduction in the current account deficit in Greece from 2008 to 2018 means that citizens in Greece are better off.b. The national income identity implies that budget
Retrieve the most recent World Economic Outlook (WEO) from the Web site of the International Monetary Fund (www.imf. org). In the Statistical Appendix, find the table titled “Balances on Current Account,” which lists current account balances around the world. Use the data for the most recent
Retrieve the nominal exchange rates between Japan and the United States from the Federal Reserve Bank of St. Louis FRED data site. It is series AEXJPUS. This exchange rate is written as yen per dollar.a. In the terminology of the chapter, when the exchange rate is written as yen per dollar, which
The exchange rate and the labor market Suppose the domestic currency depreciates (i.e., E falls). Assume that P and P* remain constant.a. How does the nominal depreciation affect the relative price of domestic goods (i.e., the real exchange rate)? Given your answer, what effect would a nominal
Consider a world with three equal-sized economies (A, B, and C) and three goods (clothes, cars, and computers). Assume that consumers in all three economies want to spend an equal amount on all three goods. The value of production of each good in the three economies is given in the table below. A B
Each of the governments of Brazil and Turkey has issued bonds in Brazilian real (BRL) and Turkish lira (TRY), respectively. Assume that both government securities are one-year bonds, i.e., paying the face value of the bond one year from now. Suppose that the exchange rate, E, stands at 1 Brazilian
Consider two fictional economies, one called the domestic country and the other the foreign country. Given the transactions listed in (a) through (g), construct the balance of payments for each country. If necessary, include a statistical discrepancy.a. The domestic country purchased $100 in oil
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows.b. Although the export ratio can be larger than one—as it
Fiscal consolidation After the financial crisis of 2007 as noted in the chapter, almost every country has had to resorb the high fiscal deficit created to fight recession. However, the challenge was to restore a fiscal balance without stopping the growth recovery.a. Go to the OECD data
A new Federal Reserve chairman Suppose, in a hypothetical economy, that the chairman of the Fed unexpectedly announces that he will retire in one year. At the same time, the President announces her nominee to replace the retiring Fed chair. Financial market participants expect the nominee to be
The South Africa Deficit Reduction Refer to the Focus Box “Can a Budget Deficit Reduction Lead to an Output Expansion? The Case of South Africa.” It provides an example of fiscal discipline in a developing country.a. What are the reasons that led the SA government to choose this tight fiscal
A new president, who promised during the campaign that she would cut taxes, has just been elected. People trust that she will keep her promise, but expect that the tax cuts will be implemented only in the future. Determine the impact of the election victory on current output, the current interest
Consider the following statement: “The rational expectations assumption is unrealistic because, essentially, it amounts to the assumption that every consumer has perfect knowledge of the economy.” Discuss.
For each of the changes in expectations in parts a throughd, determine whether there is a shift in the IS curve, the LM curve, both curves, or neither. In each case assume that no other exogenous variable is changing.a. a decrease in the expected future real interest rateb. an increase in the
The European Central Bank (ECB) conducts a press conference each month where the president of the ECB presents the measures decided by the Bank Council and answers public questions.a. What do you think is the purpose of such press conferences?b. According to The Economist, at the “bankers
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Changes in the current one-year real interest rate are likely to have a much larger effect on spending than changes in expected future one-year real interest rates.b. The
Consumer and business confidence The OECD built a consumer confidence and a business confidence index that you may find at https://data.oecd.org/searchresults/?r=+f/ type/indicators. Extract this index for all 19 member countries in the euro area and for China for the period 2008–2017 (which is
The movements of consumption and investment Go to the World Bank database and select the historical series for gross capital formation (annual % growth) and household final consumption expenditure (annual % growth) for Argentina and Brazil for the period 1995–2016. You may find the data series
Saving with uncertain future income Consider a consumer across three periods: youth, middle age, and old age. In her youth, the consumer earns €20,000 in labor income. Earnings during middle age are uncertain; there is a 50% chance that the consumer will earn €40,000 and a 50% chance that the
Borrowing constraints and aggregate capital accumulation Refer to Problem 5. Suppose now that there are certain borrowing constraints for consumers in their youth. Given that sum of income and total financial wealth is cash in hand, the borrowing constraints mean that consumers cannot consume more
Individual saving and aggregate capital accumulation Suppose that every consumer is born with zero financial wealth and lives for three periods—youth, middle age, and old age. Consumers work in the first two periods and retire in the last one. Their income is €5 in the first period, €25 in
The South Korean won ( or KRW) is the official currency of the Republic of Korea. Suppose that you have just finished college and have been offered a job as a photographer with a famous KPop company (like BigHit) with a starting salary of 1.5 million KRW (a little over $1,250). Your salary will
A private hospital in Europe is deciding on its next investments. Purchasing the latest medical equipment would cost the hospital €1 million and is expected to earn an annual revenue of €150,000. The real interest rate is 8% this year and is expected to be constant. The depreciation rate for
Lucy and Adam are university graduates who start working at the same time. Lucy is a computer programmer earning an annual salary of €70,000, and Adam is a teacher with an annual salary of €45,000. Both expect their annual salary to increase by 2% in real terms each year for the next three
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. For a typical college student, human wealth and nonhuman wealth are approximately equal.b. Natural experiments, such as retirement, do not suggest that expectations of future
Bond prices and the yield curve Go to the Web site of the Japanese Ministry of Finance and get the historical data about government bond yields. The data categorizes government bonds according to their maturity.a. Construct the yield curve for the latest available data. What do you observe? Does
House prices around the world The Economist annually publishes The Economist House Price Index. It attempts to assess which housing markets, by country, are the most overvalued or undervalued relative to fundamentals. Find the most recent version of this data on the Web.a. One index of
House prices and bubbles Houses can be thought of as assets with a fundamental value equal to the expected present discounted value of their future real rents.a. Would you prefer to use real payments and real interest rates to value a house or nominal payments and nominal interest rates?b. The rent
Risk premium Suppose that an investor has a choice between buying a threeyear bond with a face value of $60 and a stock paying a constant dividend of $20 per year, which the investor plans to hold for three years. The real interest rate on the stock and the bond is the same, 5%. In addition, the
Monetary policy and the stock market Assume the short term real policy rate, current and expected, had been 2% until now. Suppose the Fed decides to tighten monetary policy and increase the short-term policy rate (r1t) from 2% to 3%.a. What happens to stock prices if the change in r1t is expected
14.5. Approximating the price of long-term bonds The present value of an infinite stream of dollar payments of $z (that starts next year) is $z/i when the nominal interest rate, i, is constant. This formula gives the price of a consol—a bond paying a fixed nominal payment each year, forever. It
Compute the coefficients on $De t + 3 and $De t + 10. Compare the effect of a $1 expected increase in a dividend 3 years from now and 10 years from now. g. Repeat the computation in part f with i1t = i1t + n = 0.08 for all n and x =
The equity premium and the value of stocksa. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and is expected to pay its next dividend in one year.b. Using of equation (14.14), explain the contribution of each component to
Compute the two-year nominal interest rate using the exact formula and the approximation formula for each set of assumptions listed in parts a throughc. a. it = 2%; i e t + 1 = 3%b. it = 2%; i e t + 1 = 10%c. it = 2%; i e t + 1 = 3%. The term premium on a two-year bond is 1%.
For which of the problems listed in parts a through c would you want to use real payments and real interest rates, and for which would you want to use nominal payments and nominal interest rates to compute the expected present discounted value? In each case, explain why.a. Estimating the present
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The present discounted value of a stream of returns can be calculated in real or nominal terms.b. The higher the one-year interest rate, the lower the present discounted value
Carbon emissions and growth There is a great deal of interest in carbon emissions because of global warming. The World Bank produces data on carbon emissions by country in a variety of forms. It is found at https://data.worldbank.org/indicator/en.atm.co2e. pp.gd. One very interesting series is CO2
Income Inequalitya. What evidence is presented in the text that income inequality has increased over time in the United States?b. Use supply and demand of educated workers to explain the increase in income inequality.c. Use supply and demand of less-educated workers to explain the increase in
Real wages In this question, we look at the evolution of real wages. According to the International Labour Office’s (ILO) latest Global Wage Report’s appendix on Asia and the Pacific, available on its website, real wage growth has been very strong in the Asia and Pacific region in the past 10
The churn In 2014, the European Commission (EC) presented a report on the European Vacancy and Recruitment, containing data on occupations with the largest job declines and the largest job growth in the European Union (EU) member states in previous years.a. Find the data concerning the 10
Technology and the labor market In the appendix to Chapter 7, we learned how the wage-setting and price-setting equations could be expressed in terms of labor demand and labor supply. In this problem, we extend the analysis to account for technological change. Consider the wage-setting equation W>P
Technological progress, agriculture, and employment Discuss the following statement: “Those who argue that technological progress does not reduce employment should look at agriculture. At the start of the last century, there were more than 11 million farm workers. Today, there are fewer than 1
Changes in the rate of technological growth In Chapter 12 you computed a residual term representing the growth rate of technology using the expression residual K gY - 3agN + (1 - a)gK4 and the annual growth rates of output, gY; labor input, gN; and capital input, gK. What was the value of that
It is possible to extend the production function so that output is produced with labor input, N; capital input, K; and carbon-intensive energy input, E. If we write a production function as Y = N11>32 K11>32 E11>32a. Using the input values below, does this production function exhibit constant
How might the policy changes in parts a through e affect the wage gap between low-skill and high-skill workers in the United States?a. Increased spending on computers in public schools.b. Restrictions on the number of foreign temporary agricultural workers allowed to enter the United States.c. An
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. It is clear that the rate of technological growth has declined in the last decade.b. The change in employment and output per person in the United States since 1900 lends
Year 2000 Year 2014 Y N K Share of labor Y N K Share of labor China United States Calculate annual growth rates of these variables over the 14 years of available data and answer these questions: Is the ratio of K/N rising or falling in China? In the United States? Which country has the highest

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