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Macroeconomics 3rd Canadian Edition Paul Krugman, Robin Wells, Iris Au, Jack Parkinson - Solutions
6. When currency is deposited in a bank, it starts a multiplier process in which banks lend out excess reserves, leading to an increase in the money supply—so private banks create money. If the entire money supply consisted of chequable bank deposits, the money supply would be equal to the value
5. Banks have sometimes been subject to bank runs, most notably in the early 1930s in the United States and briefly just before World War I in Canada. To avert this danger, depositors are now protected by deposit insurance. Although Canadian banks are no longer required to meet minimum reserve
4. Banks allow depositors immediate access to their funds, but they also lend out most of the funds deposited in their care. To meet demands for cash, they maintain desired (or voluntary) reserve ratios composed of both currency held in their vaults and deposits at the Bank of Canada. Excess
3. The Bank of Canada calculates a number of measures of the money supply. In the past, M1 was the narrowest definition of the money supply: it contains the most liquid assets, namely currency in circulation and demand deposits at chartered banks. However, the Bank of Canada no longer measures M1,
2. Over time, commodity money, which consists of goods possessing value aside from their role as money, such as gold and silver coins, was replaced by commodity-backed money, such as paper currency backed by gold. Today the dollar is pure fiat money, whose value derives solely from its official
1. Money is any asset that can be used to purchase goods and services easily. Currency in circulation and chequable (or demand) deposits are both considered part of the money supply. Money plays three roles: it is a medium of exchange used for transactions, a store of value that holds purchasing
How does the Bank of Canada use open-market operations to change the monetary base?
How do the actions of chartered banks and the Bank of Canada determine the money supply?
Why is the level of the money supply so important to the state of the economy?
What are the various roles that money plays and what forms does it take?
2. 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
1. 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
18. The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of income. Income range Marginal propensity to consume $0–$20,000 0.9 $20,001–$40,000 0.8 $40,001–$60,000 0.7 $60,001–$80,000 0.6 Above $80,000 0.5a. Suppose
17.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
16. Unlike households, governments are often able to sustain large debts. For example, as of March 31, 2017, the federal government of Canada’s net 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
15. 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
14. 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
13. Access the Discovering Data exercise for Chapter 13 online to answer these questions.a. Which of these six countries—the United States, Canada, France, Italy, Greece, and the United Kingdom—has the largest amount of government debt as a percent of GDP as of 2015? Which had the smallest?b.
12. 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
11. In 2016, the policy makers of the economy of Eastlandia projected the debt-to-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
10. 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?
9. 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
8. 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
7. Most macroeconomists 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 needed to close an inflationary or
6. 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
5. 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
4. During an interview in 2008, the German Finance Minister Peer Steinbrück 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
3. 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
2. 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
1. 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 policy—expansionary
Why can a large public debt be a cause for concern and implicit liabilities of the government be a cause for concern?
Why do governments calculate the cyclically adjusted budget balance?
Why does fiscal policy have a multiplier effect and how is this effect influenced by automatic stabilizers?
Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy?
What is fiscal policy and why it is an essential tool in managing economic fluctuations?
16. 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 dollar in relation to other currencies,
15. The late 1990s in Canada were 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.
14. In the accompanying diagram, the economy is in long-run macroeconomic equilibrium at point E1 when 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
13. The economy is in short-run macroeconomic equilibrium at point E1 in 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
12. 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
11. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another.Illustrate with diagrams. In each case, what are the
10. The Canadian economy suffered two major shocks in 2008, leading to the severe recession of 2008–2009. One shock was related to oil prices; the other was the slump in both consumer and business confidence. This question analyzes the effect of these two shocks on GDP using the AD–AS model.a.
9. The Conference Board of Canada publishes the monthly Index of Consumer Confidence based on a survey posed to a sample of Canadian households. It is used by many economists to track the state of the economy. A press release by the Board on May 30, 2017, stated: “The Conference Board of
8. In Wageland, all workers sign annual wage contracts each year on January 1. In late January, a new computer operating system is introduced that increases labour productivity dramatically. Explain how Wageland will move from one short-run macroeconomic equilibrium to another. Illustrate with a
7. Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve and how.a. The government reduces the minimum nominal wage.b. The government increases the Canada Child Benefit (CCB), a tax-free monthly payment to eligible families to
6. Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply
5. Suppose that all households hold all their wealth in assets that automatically rise in value when the aggregate price level rises (an example of this is what is called an “inflation-indexed bond”—a bond whose interest rate, among other things, changes one-for-one with the inflation rate).
4. The economy is at point A in the accompanying diagram. Suppose that the aggregate price level rises from P1 to P2 . How will aggregate supply adjust in the short run and in the long run to the increase in the aggregate price level? Illustrate with a diagram.
3. Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly
2. Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this?
1. A fall in the value of the dollar against other currencies makes Canadian final goods and services cheaper to foreigners even though the Canadian aggregate price level stays the same. As a result, foreigners demand more Canadian aggregate output. Your study partner says that this represents a
How is the AD–AS model used to analyze economic fluctuations? How can monetary policy and fiscal policy stabilize the economy?
Why is the aggregate supply curve different in the short run compared to the long run?
How does the aggregate supply curve illustrate the relationship between the aggregate price level and the quantity of aggregate output supplied?
How does the aggregate demand curve illustrate the relationship between the aggregate price level and the quantity of aggregate output demanded?
13.a. The accompanying table shows gross domestic product (GDP), disposable income (YD), consumer spending (C), and planned investment spending (IPlanned ) in an economy. Assume there is no government or foreign sector in this economy. Complete the table by calculating planned aggregate expenditure
12. The Canadian economy slowed significantly in 2008, and policy makers were extremely concerned about lack of growth. To boost the economy, the House of Commons adopted the Economic Action Plan in January 2009. This plan delivered about $64 billion in additional government spending into the
11. Although Ontario has the highest GDP by province in Canada, it also has one of the largest provincial debt in Canada. We often hear that the problem is the province’s low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the province. What effect
10. An economy has a marginal propensity to consume of 0.5, and Y*, income– expenditure equilibrium GDP, equals $500 billion. Given an autonomous increase in planned investment of $10 billion, show the rounds of increased spending that take place by completing the accompanying table. The first
9. In an economy with no government and no foreign sectors, autonomous consumer spending is $250 billion, planned investment spending is $350 billion, and the marginal propensity to consume is 2/3.a. Plot the aggregate consumption function and planned aggregate expenditure.b. What is unplanned
8. Explain how each of the following actions will affect the level of planned investment spending and unplanned inventory investment. Assume the economy is initially in income–expenditure equilibrium.a. The Bank of Canada raises the interest rate.b. There is a rise in the expected growth rate of
7. 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. Environment Canada decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide.c. Baby boomers
6. 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 10 months. Meanwhile, the stock market experienced similar ups
5. Statistics Canada reported that, in real terms, overall consumer spending increased by $11.3 billion in the first quarter of 2017.a. If the marginal propensity to consume is 0.50, by how much will real GDP change in response?b. If there are no other changes to autonomous spending other than the
4. 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
3. 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.
2. 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 $25 billion; the marginal propensity to consume is
1. Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade,
Why is investment spending considered a leading indicator of the future state of the economy?
How does the inventory adjustment process move the economy to a new equilibrium after a change in demand?
What determines investment spending and why do we need to distinguish between planned investment spending and unplanned inventory investment?
How do expected future income and aggregate wealth affect consumer spending?
What is the aggregate consumption function?
3. Suppose that a major city’s main thoroughfare, which is also a highway, will be completely closed to traffic for two years, from January 2014 to December 2015, for reconstruction at a cost of $535 million. If the construction company were to keep the highway open for traffic during
2. The drug company Pfizer Canada is considering whether to invest in the development of a new cancer drug. Development will require an initial investment of $10 million now; beginning one year from now, the drug will generate annual profits of $4 million for three years.a. If the interest rate is
1. You have won the provincial lottery. There are two ways in which you can receive your prize. You can either have $1 million in cash now, or you can have $1.2 million that is paid out as follows: $300,000 now, $300,000 in one year’s time, $300,000 in two years’ time, and $300,000 in three
17. Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the interest rate if each of the following events occur. Assume that there are no capital inflows or outflows.a. The government reduces the size of
16. Suppose CIBC were to package individual car loans into pools of loans and then sell shares of these pools to investors as CIBC car loan bonds.a. What is this process called? What effect will it have on investors who previously could only buy and sell individual car loans?b. What effect do you
15. Explain the effect on a company’s stock price today of each of the following events, other things held constant.a. The interest rate on bonds falls.b. Several companies in the same sector announce surprisingly higher sales.c. A change in the tax law passed last year reduces this year’s
14. What are the important types of financial intermediaries in the Canadian economy? What are the primary assets of these intermediaries, and how do they facilitate investment spending and saving?
13. Explain how a well-functioning financial system increases savings and investment spending, holding the budget balance and any capital flows fixed.
12. For each of the following, is it an example of investment spending, investing in financial assets, or investing in physical assets?a. Rupert Moneybucks buys 100 shares of existing Coca-Cola stock.b. Rhonda Moviestar spends $10 million to buy a mansion built in the 1970s.c. Ronald Basketballstar
11 The accompanying diagram shows data for the interest rate on 10-year euro area government bonds and inflation rate for the euro area for 1996 through 2016, as reported by the European Central Bank. How would you describe the relationship between the two? How does the pattern compare to that of
10. Using the accompanying diagram, explain what will happen to the market for loanable funds when there is a fall of 2 percentage points in the expected future inflation rate. How will the change in the expected future inflation rate affect the equilibrium quantity of loanable funds?
9. Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next
8. How would you respond to a friend who claims that the government should eliminate all purchases that are financed by borrowing because such borrowing crowds out private investment spending?
7. Explain why equilibrium in the loanable funds market maximizes efficiency.
6. Suppose a national early childhood education program for all preschool-aged children has been proposed. The federal government estimates that the program would cost $15 billion to implement. Assume this program would be paid for entirely by the government and financed by government borrowing,
5. The government is running a budget balance of zero when it decides to increase education spending by $200 billion and finance the spending by selling bonds. The accompanying diagram shows the market for loanable funds before the government sells the bonds. Assume that there are no capital
4. Assume the economy is open to capital inflows and outflows and therefore net capital inflow equals imports (IM) minus exports (X). Calculate each of the following.a. X=$125 millionIM=$80 millionBudget balance=−$200 millionI=$350 millionCalculate private savings.b. X=$85 millionIM=$135
3. The accompanying table shows the percentage of GDP accounted for by private savings, investment spending, and net capital inflow in the economies of Capsland and Marsalia. Capsland is currently experiencing a positive net capital inflow and Marsalia, a negative net capital inflow. What is the
2. Given the following information about the international economy of Regalia, what is the level of investment spending and private savings, and what are the budget balance and net capital inflow? What is the relationship among the four? There are no government transfers. [Hint: Net capital inflow
1. Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is the budget balance? What is the relationship among the three? Is national savings equal to investment spending? There are no government transfers. GDP
What are the competing views about how asset prices are determined and why asset market fluctuations can be a source of macroeconomic instability?
What are the purposes of the four principal types of financial assets: loans, bonds, stocks, and bank deposits? How do financial intermediaries help investors achieve diversification?
How does the loanable funds market match savers with borrowers?
What is the relationship between savings and investment spending?
14. You are hired as an economic consultant to the countries of Albernia and Brittania. Each country’s current relationship between physical capital per worker and output per worker is given by the curve labeled “Productivity1 ” in the accompanying diagram. Albernia is at point A and
. The accompanying table shows the annual growth rate for the years 2000–2014 in per capita emissions of carbon dioxide (CO2 ) and the annual growth rate in real GDP per capita for selected countries.Country 2000–2014 Average annual growth rate Real GDP per capita CO2 emissions per capita
. Why would you expect real GDP per capita in Alberta and Saskatchewan to exhibit convergence but not in Alberta and Nova Scotia? What changes would allow Alberta and Nova Scotia to converge?
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