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business
microeconomics principles

Macroeconomics 1st Edition Paul Krugman, Robin Wells - Solutions

The chapter explains that Kenneth Rogoff proclaimed Richard Nixon “the all-time hero of political business cycles.” Using the accompanying table of data from the Economic Report of the President, explain why Nixon may have earned that title.(Note: Nixon entered office in January 1969 and was
In the modern world, central banks are free to increase or reduce the money supply as they see fit. However, some people harken back to the “good old days” of the gold standard.Under the gold standard, the money supply could only expand when the amount of available gold increased.a. Under the
The fall of the Soviet Union in 1989 and the subsequent reduction in U.S. defense spending helped ease some of the inflationary pressure in the United States that could have occurred during the strong economic growth of the late 1990s. Using the data in the accompanying table from the Economic
The National Bureau of Economic Research (NBER) maintains the official chronology of past U.S. business cycles. Go to its website at http://www.nber.org/cycles/cyclesmain.html to answer the following questions.a. How many business cycles have occurred since the end of World War II in1945?b. What
Since the crash of its stock market in 1989, the Japanese economy has seen little economic growth and some deflation.The accompanying table from the Organization for Economic Cooperation and Development (OECD) shows some key macroeconomic data for Japan for 1991 (a “normal” year)and
The elements of the modern consensus, and the main remaining disputes
The ideas behind new classical macroeconomics
How challenges led to a revision of Keynesian ideas
The core ideas of Keynesian economics
Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression
Who are the winners and losers when a mortgage company lends $100,000 to the Miller family to buy a house worth$105,000 and during the first year prices unexpectedly fall by 10%? What would you expect to happen if the deflation continued over the next few years? How would continuing deflation
The economy of Brittania has been suffering from high inflation with an unemployment rate equal to its natural rate. Policy makers would like to disinflate the economy with the lowest economic cost possible. Assume that the state of the economy is not the result of a negative supply shock. How can
The accompanying diagram shows data for the short-term(three-month) nominal interest rate as reported by the European Central Bank and inflation for the euro area for 1996 through mid-2005. How would you describe the relationship between the two? How does the pattern compare to that of the United
The accompanying diagram shows mortgage interest rates and inflation during 1990–2005 in the economy of Albernia. When would home mortgages have been especially attractive and why?
In the following examples, is inflation creating winners and losers at no net cost to the economy or is inflation imposing a net cost on the economy? If a net cost is being imposed, which type of cost is involved?a. When inflation is expected to be high, workers get paid more frequently and make
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?
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
Concerned about the crowding-out effects of government borrowing on private investment spending, a candidate for president argues that the United States should just print money to cover the government’s budget deficit. What are the advantages and disadvantages of such a plan?
Answer the following questions about the (real) inflation tax, assuming that the price level starts at 1.a. Maria Moneybags keeps $1,000 in her sock drawer for a year. Over the year, the inflation rate is 10%. What is the real inflation tax for this year?b. Maria continues to keep the $1,000 in her
The Federal Reserve regularly releases data on the U.S. monetary base. You can access that data at various websites, including the website for the Federal Reserve Bank of St. Louis. Go to http://research.stlouisfed.org/fred2/ and click on “Reserves and Monetary Base” and then on “Board of
In the following examples, would the classical model of the price level be relevant?a. There is a great deal of unemployment in the economy and no history of inflation.b. The economy has just experienced five years of hyperinflation.c. Although the economy experienced inflation in the 10% to 20%
In the economy of Scottopia, policy makers want to lower the unemployment rate and raise real GDP by using monetary policy. Using the accompanying diagram, show why this policy will ultimately result in a higher aggregate price level but no change in real GDP.
Why deflation is a problem for economic policy and leads policy makers to prefer a low but positive inflation rate
Why even moderate levels of inflation can be hard to end
The economy-wide costs of inflation and disinflation, and the debate over the optimal rate of inflation
How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax
Why efforts to collect an inflation tax by printing money can lead to high rates of inflation
The accompanying table shows data for the average annual rates of unemployment and inflation for the economy of Britannia from 1995 to 2004. Use it to construct a scatterplot similar to Figure 15-9.Are the data consistent with a short-run Phillips curve? If the government pursues expansionary
Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. In a country such as Japan that has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to be
After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. Yet after six months of positive economic growth, the unemployment rate remains the same as it was at the end of the recession. How can you explain why the
The accompanying scatter diagram shows the relationship between the unemployment rate and the output gap in the United States from 1990 to 2004. Draw a straight line through the scatter of dots in the figure. Assume that this line represents Okun’s law:Unemployment rate = b − (m × Output
With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of the United States; from 1960 to 1995, the unemployment rate in Japan exceeded 3% only once. However, since the crash of its stock market in 1989 and slow economic growth in the 1990s,
How will the following changes affect the natural rate of unemployment?a. The government reduces the time during which an unemployed worker can receive benefits.b. More teenagers focus on their studies and do not look for jobs until after college.c. Greater access to the Internet leads both
In which of the following cases is it more likely for efficiency wages to exist? Why?a. Jane and her boss work as a team selling ice cream.b. Jane sells ice cream without any direct supervision by her boss.c. Jane speaks Korean and sells ice cream in a neighborhood in which Korean is the primary
In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different
There is only one labor market in Profunctia. All workers have the same skills and all firms hire workers with these skills. Use the accompanying diagram, which shows the supply of and demand for labor, to answer the following questions.a. What is the equilibrium wage rate in Profunctia? At this
Each month, usually on the first Friday of the month, the Bureau of Labor Statistics releases the Employment Situation Summary for the previous month. Part of the information released concerns how long individuals have been unemployed.Go to www.bls.gov to find the latest report. On the Bureau of
In each of the following situations, what type of unemployment is Melanie facing?a. After completing a complex programming project, Melanie is laid off. Her prospects for a new job requiring similar skills are good, and she has signed up with a programmer placement service. She has passed up
Why the NAIRU, the nonaccelerating inflation rate of unemployment, is an important measure for policy-making
The existence of a short-run trade-off between unemployment and inflation, called the shortrun Phillips curve, that disappears in the long run
The reasons that the unemployment rate can be higher or lower than the natural rate for extended periods
How factors such as minimum wages and efficiency wages can lead to structural unemployment
Why cyclical unemployment changes over the business cycle
The meaning of the natural rate of unemployment, and why it isn’t zero
Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of your
Using a figure similar to Figure 14-11, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.
The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve. The economies of Albernia and Brittania have very different money demand
According to the European Central Bank website, the treaty establishing the European Community “makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.” If price
An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there. How could the central bank achieve this goal in the short run? What would
In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant at M1.b. If the central
An economy is facing the inflationary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy?How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as the
An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy?How will the interest rate, investment spending, consumer spending, real GDP, and the aggregate price level change as the
The accompanying table shows the annual growth of M1 and nominal GDP in Japan during the early 2000s. What must have been happening to velocity during this time?
The table on page 366 shows nominal GDP, M1, and M2 in billions of dollars in five-year increments from 1960 to 2000 as published in the 2005 Economic Report of the President.Complete the table by calculating the velocity of money using both M1 and M2. What trends or patterns in the velocity of
How will the following events affect the nominal demand for money as defined by M1? In each case, specify whether there is a shift of the money demand curve or a movement along the money demand curve and its direction.a. There is a fall in the interest rate from 12% to 10%.b. Thanksgiving arrives
Go to the FOMC page of the Federal Reserve Board’s website(http://www.federalreserve.gov/FOMC/) to find the statement issued after the most recent FOMC meeting. (Go to the bottom of the web page and click on the most recent statement listed in the calendar.)a. What is the target federal funds
Suppose the economy is currently suffering from a recessionary gap and the Federal Reserve uses an expansionary monetary policy to close that gap. Describe the short-run effect of this policy on the following:a. The money supply curveb. The equilibrium interest ratec. Investment spendingd. Consumer
Now assume that the Fed is following a policy of targeting the federal funds rate. What will the Fed do in the situation described in Question 1 to keep the federal funds rate unchanged? Illustrate with a diagram.
Why economists believe in monetary neutrality—that monetary policy affects only the price level, not aggregate output, in the long run
A deeper understanding of the adjustment process behind the savings–investment spending identity
How monetary policy affects aggregate output in the short run
How the Federal Reserve can move interest rates
Why the liquidity preference model determines the interest rate in the short run
What the money demand curve is
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells $30 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of checkable bank deposits in the banking system)and
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve
Using Figure 13-5, find the Federal Reserve district in which you live. Go to http://www.federalreserve.gov/bios/pres.htm and identify the president of that Federal Reserve Bank. Go to http://www.federalreserve.gov/fomc/and determine if the president of the Fed is currently a voting member of the
Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have$100 million in reserves and $1,000 million in checkable deposits; the initial required reserve ratio is 10%. The
What will happen to the money supply under the following circumstances?a. The required reserve ratio is 25%, and a depositor withdraws $700 from his checkable bank deposit.b. The required reserve ratio is 5%, and a depositor withdraws$700 from his checkable bank deposit.c. The required reserve
The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%.Given the following information, answer the questions below.Bank deposits at the central bank = $200 million
Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet.a. How will the withdrawal change the T-account of the local bank and the money supply?b. If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal?c. If every time the
There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations?a. Mother-of-pearl seashells were used to pay for goods in ancient China.b. Salt was used in many European countries as a medium of exchange.c.
For each of the following transactions, what is the effect (increase or decrease) on M1? On M2?a. You sell a few shares of stock and put the proceeds into your savings account.b. You sell a few shares of stock and put the proceeds into your checking account.c. You transfer money from your savings
How the Federal Reserve uses open-market operations to Erik Dreyer/Stone/Getty change the monetary base
How the actions of private banks and the Federal Reserve determine the money supply
The various roles money plays and the many forms it takes in the economy
The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of income:a. What is the “bang for the buck” in terms of the increase in real GDP for an additional $1 of income for consumers in each income range?b. If the
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 necessary to close an inflationary or
However, the $10 billion reduction in transfers has no effect on real GDP in round 1 but does lower YD by $10 billion, resulting in a decrease in consumer spending of $6 billion in round 2.a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10
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?a. A stock
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.AD1 SRAS P1 Y1 YP Real GDP Aggregate price level E1
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 or
Explain why a $500 million reduction in government purchases of goods and services will generate a larger shift in the aggregate demand curve than a $500 million reduction in government transfers.
Explain why a $500 million increase in government purchases of goods and services will generate a larger shift in the aggregate demand curve than a $500 million increase in government transfers.
Why implicit liabilities of the government are also a cause for concern
Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy
Complete the following table by calculating the value of the multiplier and identifiying the change in Y* due to the change in autonomous spending. How does the value of the multiplier change with the marginal propensity to consume?
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 and
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 spending.b. What is unplanned inventory
The accompanying table shows real 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 spending
How will each of the following actions affect the aggregate consumption function? Explain whether the event will result in a movement along or a shift of the aggregate consumption function and in which direction.a. The government grants an unexpected and one-time tax cut to all households.b. The
Why investment spending is considered a leading indicator of the future state of the economy
The determinants of investment spending, and the distinction between planned investment spending and unplanned inventory investment
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.a. How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon
The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram.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 long-run macroeconomic equilibrium? Illustrate with a
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
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?
Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes and no foreign trade, how much will the aggregate demand curve shift and in what direction if the following events occur?a. An autonomous increase in consumer spending of $25 billion; the
Suppose that local, state, and federal governments were obliged to cut government purchases whenever consumer spending falls. Then suppose that consumer spending falls due to a fall in the stock market. Draw a diagram and explain the full effect of the fall in the stock market on the aggregate
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, American

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