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Macroeconomics 8th Global Edition Olivier Blanchard - Solutions

Growth accounting The appendix to this chapter shows how data on output, capital, and labor can be used to construct estimates of the rate of growth of technological progress. We modify that approach in this problem to examine the growth of capital per worker. Y = K1>3 1AN22>3 The function gives a
Discuss the potential role of each of the factors listed in parts a through g on the steady-state level of output per worker. In each case, indicate whether the effect is through A, through K, through H, or through some combination of A, K, and H. A is the level of technology, K is the level of
Suppose that the economy’s production function is Y = 2K 2AN that the saving rate, s, is equal to 16%, and that the rate of depreciation,d, is equal to 10%. Suppose further that the number of workers grows at 2% per year and that the rate of technological progress is 4% per year.a. Find the
Measurement error, inflation, and productivity growth Suppose that there are only two goods produced in an economy: haircuts and banking services. Prices, quantities, and the number of workers occupied in the production of each good for year 1 and for year 2 are given in the table: Year Year 1
For each of the economic changes listed in parts a andb, assess the likely impact on the growth rate and the level of output over the next five years and over the next five decades.a. A permanent reduction in the rate of technological progress.b. A permanent reduction in the saving rate.
Sources of technological progress: leaders versus followersa. Where does technological progress come from for the economic leaders of the world?b. Do developing countries have other alternatives to the sources of technological progress you mentioned in part (a)?c. Examples of developing countries
R&D and growtha. Why is the amount of R&D spending important for growth? How do the appropriability and fertility of research affect the amount of R&D spending? How do each of the policy proposals listed in (b) through (e) affect the appropriability and fertility of research, R&D spending in the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Writing the production function in terms of capital and effective labor implies that as the level of technology increases by 10%, the number of workers required to achieve the
Global saving and government deficitsa. The World Bank reports gross domestic saving rate by country and year. Go to the World Bank website (https://data. worldbank.org/indicator/NY.GNS.ICTR.ZS) and find the most recent saving rates for Indonesia, India, South Korea (the Republic of Korea),
The saving rate and changes in the capital stock Suppose that in your country, the saving rate slowly declines from 12% in year t to 11% in year t+1 and 10% in year t+2. Suppose, moreover, that the depreciation rate,d, is 10%.a. Using the production function given in the chapter, what happens to
c. What will be the new steady-state levels of capital per worker and output per worker?d. Compute the path of capital per worker and output per worker over the first three periods after the change in the depreciation rate.
a. What is the steady-state level of capital per worker?b. What is the steady-state level of output per worker?Suppose that the economy is in steady state and that, in period t, the depreciation rate increases permanently from 0.10 to
Continuing with the logic from Problem 7, suppose that the economy’s production function is given by Y = K1>3N2>3 and that the saving rate, s, and the depreciation rate, d are equal to
What is the new steady-state output per worker?
h. Suppose that the depreciation rate remains constant at d = 0.08, while the saving rate is reduced by half, to s =
The Cobb-Douglas production function and the steady state. This problem is based on the material in the chapter appendix. Suppose that the economy’s production function is given by Y = KaN1 - a and assume that a = 1>3a. Is this production function characterized by constant returns to scale?
With your favorite spreadsheet software, compute steady-state consumption per worker and steady-state output per worker when s = 0; s = 0.1; s = 0.2; and s = 1. What do you observe?d. Using your favorite spreadsheet software, plot your results on a graph showing the relationship between the saving
Suppose that an economy is characterized by the following production function Y = 32K2Na. Derive the steady-state level of output per worker, and the steady-state level of capital per worker in terms of the saving rate, s, and the depreciation rate,d. b. Derive the equation for the steady-state
Suppose that in a given economy, both the saving rate and the depreciation rate increase. What would the effect of this dual movement be on the economy’s capital per worker and output per worker, in the short and the long run?
Discuss how the level of output per person in the long run would likely be affected by each of the following changes:a. The right to exclude saving from income when paying income taxes.b. A higher rate of female participation in the labor market (but constant population).
In Chapter 3 we saw that an increase in the saving rate can lead to a recession in the short run (i.e., the paradox of saving). We examined the issue in the medium run in Problem 5 at the end of Chapter 7. We can now examine the long-run effects of an increase in saving. Using the model presented
Suppose that the head of the Finance Ministry in your country were to go on the record advocating an effort to restrain current consumption, arguing that lower consumption now means higher saving; and higher saving now means a permanent higher level of consumption in the future. Explain why you
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The saving rate is always equal to the investment rate.b. A higher investment rate can sustain higher growth of output forever.c. If capital never depreciated, growth could go
Your institution may have a subscription to The Economist news magazine, or you may be able to find this graphic on the web. The March 23, 2019 issue, in a section entitled “Graphic Detail: Happiness Economics,” makes the same point as Figure 1.a. Does happiness rise with the level of real GDP
Growth successes and failures Using the Penn World Tables, find the data on real GDP per person (chained series) for 1970 for all available countries. Do the same for a recent year of data where the data are available for most countries (it takes more time to produce this measure in some countries
Convergence in two sets of countries Consider three rich countries: France, Belgium, and Italy, and four poor countries, Ethiopia, Kenya, Nigeria, and Uganda. Define for each country the ratio of its real GDP per person to that of the United States in 1970 and in the latest year available (2014 in
Convergence between China and the euro area since 1960 Go to the World Bank’s website (http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD), find the data on GDP per capita (in constant 2010 US$) for China and the euro area for the years 1960, 1980, 2000, and the latest year available. The euro
Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological advances of that period were made in the United States. How can this be?
The growth rates of capital and output Consider the production function given in Problem 3. Assume that N is constant and equal to 1. Note that if z = xa , then gz ≈ a gx, where gz and gx are the growth rates of z and x (See Appendix 2 at the end of the book).a. Given the growth approximation
Consider the production function: Y = K + 2Na. Compute output when K = 10 and N = 20.b. If both capital and labor triple, what happens to output?c. How would you qualify the returns to scale for this production function?d. Write this production function as a relation between output per worker and
Assume that every month the average student in Japan and the average student in China buy the quantities and pay the prices indicated in the following table: Food Transportation Services Price Quantity Price Quantity Japan ¥600 60 ¥170 80 China RMB15 50 RMB3 100a. Compute the Japanese
b. The price of food is higher in poor countries than it is in rich countries.c. Evidence suggests that happiness in rich countries increases with output per person.d. In virtually all the countries of the world, output per person is converging to the level of output per person in the United
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. On a logarithmic scale, a variable that increases at 5% per year will move along an upward-sloping line with a slope of
The Great Depression in Europe Answer the following questions based on information found in the table belowa. Is there evidence that the depression originating in the US diffused to every European country? Explain.b. Compare the relationship between production, price, and unemployment for the
Consider the data in the Focus Box, “Deflation in the Great Depression.”a. Do you believe that output had returned to its potential level in 1933?b. Which years suggest a deflation spiral as described in Figure 9-3?c. Make the argument that if the expected level of inflation had remained
Fiscal consolidation at the Zero Lower Bound Suppose the economy is operating at the zero lower bound for the nominal policy rate; the initial equilibrium is at the positive target rate of inflation and the economy is resting at potential output but there is a large government deficit in period t.
Okun’s Law is written as u - u(-1) = -0.4 (gY - 3%)a. What is the sign of u - u(-1) in a recession? What is the sign of u - u(-1) in a recovery?b. Explain where the 3% number comes from?c. Explain why the coefficient on the term (gY - 3%) is -0.4 and not -1.d. Suppose the number of immigrants per
A shock to aggregate supply will also have different outcomes when there are different assumptions about the formation of the level of expected inflation. As in Question 4, one assumption is that the level of expected inflation equals lagged inflation. The level of expected inflation changes over
This chapter assumes that expected inflation remains equal to the central bank’s target rate of inflation. In Chapter 8, in the discussion of the Phillips curve, it was noted that expected inflation was,for some time, equal to lagged inflation and was not anchored by the central bank’s target
The medium-run equilibrium is characterized by four conditions: Output is equal to potential output Y = Yn and the real policy rate rn must be chosen by the central bank so: The unemployment rate is equal to the natural rate u = un. The real policy interest rate is equal to the natural rate of
Identifying if an economy is in medium run equilibrium and the necessary central bank action to return the economy to medium run equilibrium Here are values for a hypothetical economy Yn = 1000; un = 5%; rn = 2%; x = 1%; pe = 2% and a table describing this economy in various situations: Situation
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The IS curve shifts to the right with an increase in G, to the right with an increase in T, and to the right with an increase in x.b. If (u - un) is greater than zero, then (Y
The rate of inflation and expected inflation in different decades Fill in the values in the table below for inflation and expected inflation using the 1960s. The data will come from FRED as they did in the last question. You will have the most success using a spreadsheet.Year pt Actual inflation pt
Using the rate of unemployment to predict inflation between 1996 and 2018 The estimated Phillips curve from Figure 8.5 is pt = 2.8% - 0.16 ut Fill in the table below using the Phillips curve above after collecting the data from the FRED database. The monthly Year Inflation Unemployment Predicted
Consider each table below. Is the data presented consistent with the Phillips curve model of wage determination? Each table has a point A and a point B. Start your answer with true/false/uncertain.a. The natural rate of unemployment is 5%. Point Unemployment rate Expected inflation (percent)
Exploring the natural rate of unemploymenta. The equation of the Phillips curve from 1970 to 1995 is pt - pt - 1 = 7.4% - 1.2ut. Calculate and define the natural rate of unemployment using this curve.b. The equation of the Phillips curve from 1996 to 2018 is pt = 2.8% - 0.16ut. Here the natural
The macroeconomic effects of the indexation of wages Suppose that the Phillips curve is given by pt - pe t = 0.1 - 2ut where pe t = pt - 1 Suppose that inflation in year t + 1 is zero. In year t, the central bank decides to keep the unemployment rate at 4% forever.a. Compute the rate of inflation
Mutations of the Phillips curve Suppose that the Phillips curve is given by pt = pe t + 0.1 - 2ut and expected inflation is given by pe t = 11 - u2 p + upt - 1 and suppose that u is initially equal to 0, and that p is given and does not change. It could be zero or any positive value. Suppose that
The formation of expected inflation The text proposes the following model of expected inflation pe t = 11 - u2 p + upt - 1a. Describe the process of the formation of expected inflation when u = 0b. Describe the process of the formation of expected inflation when u = 0.c. How do you form your own
The natural rate of unemploymenta. The Phillips curve is pt = pe t + (m + z) - aut. Rewrite this relation as a relation between the deviation of the unemployment rate from the natural rate, inflation, and expected inflation.b. In the previous chapter, we derived the natural rate of unemployment.
Discuss the following statements.a. The Phillips curve implies that when an economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in unemployment and an increase in inflation.b. Monetary policy is quite important in determining the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kingdom.b. The original Phillips curve relation
A closer look at changes in state labor markets There is a lot of discussion of the decline of the “Rust Belt” and the differences between labor markets at the state level. The table below is a snapshot of the labor market in California, Ohio, and Texas in 2003 before the Great Financial
The typical dynamics of unemployment over a recession Go to IMF data mapper (http://www.imf.org/external/ datamapper/datasets). Select the following countries—France, Germany, the UK, Spain, Japan, and the US. Build a table to compare each country’s GDP annual growth and the unemployment rate
Go to the website maintained by the International Labour Organization (ILO). Select a labor overview report that provides the international definition of unemploymenta. Does this definition differ from the one used by policy makers in your country? Explain the differences, if any.b. Look at the
Unemployment durations and long-term unemployment According to the data presented in this chapter, about 44% of unemployed workers leave unemployment each month.a. Assume that the probability of leaving unemployment is the same for all unemployed persons, independent of how long they have been
The informal labor market You learned in Chapter 2 that informal work at home (e.g., preparing meals and taking care of children) is not counted as part of GDP. This constitutes the informal, shadow, or grey labor market. According to World Bank reports, the size of informal labor markets varies
The existence of unemploymenta. Why does the wage-setting relation in Figure 1 have an upward slope? As N approaches L, what happens to the unemployment rate?b. The price-setting relation is horizontal. How would an increase in the mark-up affect the position of the price-setting relation in Figure
Bargaining power and wage determination Even in the absence of collective bargaining, workers do have some bargaining power that allows them to receive wages higher than their reservation wage. Each worker’s bargaining power depends both on the nature of the job and on the economywide labor
Reservation wages In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than $10,000 (presumably per day).a. What is your own reservation wage?b. Did your first job pay more than your reservation wage at the time?c. Relative to your reservation wage at the time
The natural rate of unemployment Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W = P(1 - u), where u is the unemployment rate.a. What is the real wage, as determined by the price-setting equation?b. What is the natural rate of
Answer the following questions using the information provided in this chapter.a. As a percentage of employed workers, what is the size of the flows into and out of employment (i.e., hires and separations) each month?b. As a percentage of unemployed workers, what is the size of the flows from
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Since 1950, the participation rate in the United States has remained roughly constant at 60%.b. Each month, the flows into and out of employment are very small compared to the
Inflation-indexed bonds In the face of a slowdown in economic growth and an increase in current account deficit and inflation, the Indian government decided to implement inflation indexed bonds (IIB) in 2013. When presenting this measure, the Ministry of Finance stated that “the household sector
The spread between riskless and risky bonds Immediately after the British voted for Brexit, two major credit rating agencies, S&P Global (Standard & Poor’s) and Fitch, downgraded the United Kingdom’s sovereign credit rating by two notches, from AAA to AA. The spreads fluctuate between riskless
Unconventional monetary policy: financial policy and quantitative easing We have written the IS-LM model in the following terms: IS relation: Y = C1Y - T2 + I1Y, r + x2 + G (6.5) LM relation: r = r (6.6) Interpret the real policy rate as the federal funds rate adjusted for expected inflation.
Calculating the risk premium on bonds 11 + i2 = 11 - p211 + i + x2 + p 102 p is the probability that the bond does not pay at all (the bond issuer is bankrupt) and has a zero return. i is the nominal policy interest rate. x is the risk premium.a. If the probability of bankruptcy is zero, what is
The Troubled Asset Relief Program (TARP) Consider a bank that has assets of 100, capital of 20, and short-term credit of 80. Among the bank’s assets are securitized assets whose value depends on the price of houses. These assets have a value of 50.a. Set up the bank’s balance sheet. Suppose
Nominal and real interest rates around the world Since the Great Financial Crisis and the difficulty to recover growth, a negative interest policy has been implemented by some central banks. Some may or may not be in place as you read this book. As of January 2018, the following central banks held
The IS-LM view of the world with more complex financial markets Consider an economy described by Figure 6-6 in the text.a. What are the units on the vertical axis of Figure 6-6?b. If the nominal policy interest rate is 5% and the expected rate of inflation is 3%, what is the value for the vertical
Modern bank runs Consider a simple bank that has assets of 100, capital of 20, and checking deposits of 80. Recall from Chapter 4 that checking deposits are liabilities of a bank.a. Set up the bank’s balance sheet.b. Now suppose that the perceived value of the bank’s assets falls by 10. What is
Fill in the table below and answer the questions that relate to the data in the table. Situation Nominal policy interest rate Expected inflation Real policy interest rate Risk premium Nominal borrowing interest rate Real borrowing interest rate A 3 0 0 B 4 2 1 C 0 2 4 D 2 6 3 E 0 –2 5a. Which
Assume that the interest rate, i, for France and Switzerland is 1.7%, and the expected rate of inflation, πe , in France is 0.8% and for Switzerland it is 0.5%.a. Compute the real interest rates for both countries using the exact formula.b. Compute the real interest rates for both countries using
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money.b. As long as expected inflation remains roughly constant, the
Consumption, investment, and GDP in China To answer this question, examine the changes in the components of GDP over this period and the movements of investment and consumption in China during the last two or three decades and its relative slowdown since the Great Financial Crisis. Along with
The Clinton-Greenspan policy mix As described in this chapter, during the Clinton administration the policy mix changed toward more contractionary fiscal policy and more expansionary monetary policy. This question explores the implications of this policy mix, in both theory and fact.a. What must
Fiscal policy and investment. Read Focus Box “Deficit Reduction: Good or Bad for Investment?” In each case below, there is a fiscal consolidation. Remember that equilibrium condition in good markets can also be written I = S + 1T - G2a. How does this fiscal consolidation increase public saving?
The (less paradoxical) paradox of saving A chapter problem at the end of Chapter 3 considered the effect of a drop in consumer confidence on private saving and investment, when investment depended on output but not on the interest rate. Here, we consider the same experiment in the context of the
What mix of monetary and fiscal policy is needed to meet the following objectives?a. Increase Y while keeping i constant. Would investment (I) change?b. Decrease a fiscal deficit while keeping Y constant. Why must i also change?
The fiscal-monetary policy mix in the aftermath of the Great Financial Crisis The Great Financial Crisis left many nations with slow GDP growth rates and high levels of public debt. While most nations pursued a monetary policy, some nations simply lowered income taxes through expansionary fiscal
Investment and the interest rate The chapter argues that investment depends negatively on the interest rate because an increase in the cost of borrowing discourages investment. However, firms often finance their investment projects using their own funds. If a firm is considering using its own
Consider the following numerical example of the IS-LM model: C = 100 + 0.3YD I = 150 + 0.2Y - 1000i G = 200 T = 100 i = 0.03a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.)b. The central bank sets an interest rate of 3%. How is that
Consider the money market to better understand the horizontal LM curve in this chapter. The LM relation (equation 5.3) is M P = Y L(i)a. What is on the left-hand side of equation (5.3)?b. What is on the right-hand side of equation (5.3)?c. Go back to Figure 4-2 in the previous chapter. How is the
The response of the economy to fiscal policya. Use an IS-LM diagram to show the effects on output of a decrease in government spending. Can you tell what happens to investment? Why? Now consider the following IS-LM model: C = c0 + c1(Y - T) I = b0 + b1Y - b2i Z = C + I + G i = ib. Solve for
Consider first the goods market model with constant investment that we saw in Chapter 3. Consumption is given by C = c0 + c1(Y - T) and I, G, and T are given.a. Solve for equilibrium output. What is the value of the multiplier for a change in autonomous spending? Now let investment depend on both
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The main determinants of investment are the level of sales and the interest rate.b. If all the exogenous variables in the IS relation are constant, then a higher level of
Current monetary policy The central bank of the Federal Republic of Germany is the Deutsche Bundesbank, also known as BUBA. It is the most influential member of the European Central Bank and the European System of Central Banks. Go to the Web site for BUBA (www.bundesbank.de) and check the monetary
Monetary policy in a liquidity trap Suppose that money demand is given by Md = $Y10.25 - i2 as long as interest rates are positive. The questions below then refer to situations where the interest rate is zero.a. What is the demand for money when interest rates are zero and $Y = 80?b. If $Y = 80,
Choosing the quantity of money or the interest rate Suppose the money demand is given by Md = €Y(0.08 - 0.4i) where €Y is €5,000 billion.a. If the money demand is €100 billion, what is the interest rate?b. If a central bank wants to increase money supply to €300 billion, what is the
Understanding the Fed’s actions that are needed to stabilize the interest rate The diagram below shows three different money demand curves and a target interest rate i*
iii. The demand for money is given by Md = $Y10.8 - 4i2 Initially, the supply of central bank money is $100 billion, and nominal income is $5 trillion.a. What is the demand for central bank money?b. Find the equilibrium interest rate by setting the demand for central bank money equal to the supply
Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following: i. The public holds no currency. ii. The ratio of reserves to deposits is
ATMs and credit cards This problem examines the effect of the introduction of ATMs and credit cards on money demand. For simplicity, let’s examine a person’s demand for money over a period of four days. Suppose that before ATMs and credit cards, this person goes to the bank once at the
The demand for money and bonds In this chapter, you have learned that the interest rate affects both the prices of bonds and the demand for money.a. What is the relationship between interest rates and bond prices?b. Does the relationship hold when interest rates are negative? Why do you think
Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000. Also suppose that her money demand function is given by Md = $Y10.35 - i2a. Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?b. What
Suppose the money demand of an economy is given by Md = €Y(0.25 - i) where €Y is €40,000. Also, suppose that the supply of money is €8,000.a. What is the equilibrium interest rate?b. Suppose the central bank increases the value of equilibrium interest rate, i, in part a to 10%, will there
Consider a bond that promises to pay $100 in one year.a. What is the interest rate on the bond if its price today is $75? $85? $95?b. What is the relation between the price of the bond and the interest rate?c. If the interest rate is 8%, what is the price of the bond today?
Suppose that the household nominal income for a country is €50,000 billion. The money demand function is given by Md = €Y(0.2 - 0.8i)a. What is the demand for money when the interest rate is 1%? 5%?b. What is the relationship between money demand and income? Money demand and the interest
Using the information in this chapter, label each of the following statements true, false, or uncertain.a. Income is a flow variable while financial wealth is a stock variable.b. The term investment, as used by economists, refers to the purchase of bonds and shares of stock.c. The demand for money
Fiscal policy and the boom of 2018 in the simplest model The Tax Cut and Jobs Act was passed by Congress in December 2017. GDP grew from $18,000 billion (2012 dollars) in 2017 to $18,500 billion (2012 dollars) in 2018.a. By what percentage did real GDP grow from 2017 to 2018?b. Estimates from the

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