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Modern Principles Macroeconomics 2nd Edition Tyler Cowen ,Alex Tabarrok - Solutions
1.6. How big is the tax break from the $3,650 per child income tax deduction for:a. Families in the 10% tax bracket?b. Families in the 25% tax bracket?(Hint: This is worked out in the chapter.)c. Families in the 35% tax bracket?The Federal Budget: Taxes and Spending • CHAPTER 1 7 • 391
1.5. Calculating taxes on capital gains takes a little work, but if you buy and sell stocks, bonds, works of art, or homes, you'll probably have to do this at some point. Let's practice. In a few cases below, the price will fall-just record that as a negative rise (a "capital loss," in tax jargon).
1.4. Under current law, homeowners get a big tax break: The details of the tax break really don't matter as much as the mere fact that if you make mortgage payments on a home that you live in, your taxes will be lower than otherwise.a. Suppose that Congress eliminated the tax break for homeowners.
1.3. Social Security is primarily a pay-as-you-go program, which means that the government pays retirees their promised benefits by taxing today's workers. Imagine that Social Security moved to a fully funded program in which today's workers (or the government on their behalf) invested in assets,
1.2. It easy to confuse the "federal deficit" with the'federal debt." We'll work out an example to make the differences clear. To keep the math simple, we'll falsely assume that in this land of Barrovia, the government can borrow from the public at an interest rate of Oo/o-so there is no interest
1.1. By U.S. law, your employer pays half of the payroll tax and you, the worker pay the other half We mentioned that according to the basic of supply and demand, the part of the tax paid by the employer i likely to cut the worker's take-home pay. Let's see why. We'll start off in a land without
1.8. Pundits and commentator often tate (correctly)that entitlement spending (spending on Medicare, Medicaid, and Social Security) is going to explode in the future. But by lumping all three together, we obscure the ource of the explosion. Review Figure 17.7.a. Which of the three really won't
1.7. There are a lot of ways to slice up the U.S.budget. With this in mind, which of the following tatements are true, according to Figure 17.3?Most of the federal budget i pent on welfare and foreign aid.11.About half of the federal budget goes toward Medicare, Medicaid, and Social Security
1.6. Based on the infom1ation in thi chapter, let'see who gets a better deal, a greater net-benefit from Social Security. In each pairing, choose one, or write "unclear."Women or men?1.Married couples or singles?People born in 1910 or people born in 1965?High-income earner or low-income earners?
1.5.a. According to Table 17 .2, which generation gets the best deal from Social Security: the one turning 65 in 1975 in 2010, or in 2030?b. Out of the nine categories in Table 17 .2, which kind of worker gets the best deal overall from Social Security?
1.4.a. Do most federal government transfers of cash go to the elderly or to the poor?The Federal Budget: Taxes and Spending • CHAPTER 1 7 • 389b. Do most federal government purcha e of health-care go to the elderly or to the poor?
1.3.a. Let's explore the difference between the average income tax rate and the marginal income tax rate. In the simple land of Rabushka, there is only one tax rate, 20%, but workers don't have to pay tax on the first $10,000 of their income. For every dollar they earn above $10,000, they pay 20
1.2. In 2010, corporate income taxes were about 7.2% of total federal revenue. Use Figure 17.5 to help estimate what fraction of GDP represents corporate income taxes.
1.11.The top 80% of taxpayers pay over 98%of federal taxes.iii. The top 40% of taxpayers pay less than 60% of federal taxes.
1.1.a. Consider Table 17 .1. We can use these data to find out what percentage of federal taxes is paid from the "top down" by the top 40%, top 60%, or top 80% of income earners. Likewise, we can count from the"bottom up" by the bottom 40%, 60%, or 80% of income earners. Fill in the table
1.10. In response to the housing bust and its fallout discussed at the end of this chapter, the U.S.economy entered into recession in December of 2007. That recession officially ended in June of 2009, but more than two years later at the end of 2011, many people still felt that the "recession"was
1.9.a. Central bankers must manage expectations. Suppose that inflation is running at 10 % and the central banker would like to lower inflation to 2 %without reducing real growth. What should the central banker tell the public?And at what level should the central banker set money growth? Assume
1.In this question, the central bank tries to follow nominal GDP targeting so that AD grows at 7% per year. In other words, the central banks tries to set the money growth rate so that velocity growth plus money growth equals 7%. Each year, it responds to that year's velocity growth, but the
1.8. The previous question assumed that the central bank can really control money growth and velocity growth within a reasonable period of time. Instead, let's work with the more realistic assumption that it takes about a year for a change in monetary policy to actually influence money growth: Even
1.7. We mentioned Milton Friedman's advice that central bankers should follow a "fixed money growth rule," where the broad money supply(M 1 or M2) grows the same rate every year.Other economists have instead recommended that central bankers follow "nominal GDP targeting," which is similar to a
1.6. Central bankers are reluctant to try to pop alleged bubbles. Which topics covered in this chapter might explain why they are reluctant to do so?
1.5. Central bankers often believe that their hands are tied by the public. Arthur Burns, the Fed chairman under President Nixon, reportedly said in the November 1970 Federal Reserve board meeting that "he did not believe the country was willing to accept for any long period an unemployment rate in
1.4. We explained how a central bank has an important role in maintaining confidence:"High confidence" keeps velocity growth and the money multiplier from falling. But as we've seen, sometimes one has to be cruel to be kind.President Franklin Roosevelt followed this "tough love" approach during the
1.3. One of the reasons it's difficult to be a monetary policymaker is because it's so hard to tell what's actually going on in the economy. It's a lot like being a doctor in a world before X-rays, MRis, and inexpensive blood tests: When the patient complains about a stomach ache, you don't know if
1.The question is quite simple: If monetary lags are shorter than the shock duration-if the Fed has "fair warning" -then a shift in AD will be stabilizing. If not, then a shift in AD will be like mailing a birthday card to your mother the day before her birthday: possibly destabilizing.So, in which
1.In each case from the previous question, the Fed predicts how long the velocity shock itself will last: We call this "shock duration" in the table below. Mter that time, velocity growth will go back to its old level. Additionally, in each case, the Fed's staff of PhD economists estimates how many
1.2. Milton Friedman famously said that changes in money growth affect the economy with"long and variable lags." That means that if the government increases growth in the monetary base this month, the money multiplier takes a few months to turn this into growth in checking and savings deposits, and
1.1. Practice with the best case: You are the central banker, and you have to decide how fast the money supply should grow. Your economy gets hit by the following AD shocks and your job is simply to neutralize them: Just push money growth in the opposite direction of the shock.In all of the cases
1.8. One argument for giving discretion to central bankers is that sometimes emergencies come along that a simple rule can't solve. Suppose there's a massive, permanent negative shock to velocity. Naturally, if the central bank has discretion, it will immediately respond by boosting money growth.
1.7. We saw that real shocks and AD shocks often occur simultaneously. When this happens, unless we know the exact size of each shock, we can't be sure of the effect on both inflation and real growth: We'll only know one or the other for sure.In each case below, we can be sure that one of the four
1.6. Milton Friedman and Anna Schwartz argued in the last chapter of their Monetary History of the United States that a shift in money growth will usually cause velocity to shift in the same direction: So higher money growth causes optimism, and slower growth causes pessimism.They believed that
1.5. We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock.Alan Blinder, a former vice chairman of the Federal Reserve, noticed that this was a major problem. In his book Central Banking in Theory and Practice, he argued that this was a good reason for the
1.4. In the United States, the government's data on real growth improve over time. For instance, we now know that in the early 1970s, the economy was actually growing 4% fa ter than people believed. At the time, the Fed thought the economy was in a deep recession, so it mistakenly boosted money
1.3. The Fed plays an important role in maintaining market confidence. As former Chairman Alan Greenspan put it in a 1997 address: "In[financial crises] the Federal Reserve stands ready to provide liquidity, if necessary .... The objectives of the central bank in crisis management are to ...
1.2. Now, let's reenact the V olcker disinflation in an alternate universe where wages are more flexible and workers are much more willing to accept slower-growing wages when the inflation rate falls. This will make the SRAS steeper, as we saw in our original discussion of short-run aggregate
1.1. Let's reenact a simplified version of the 1981-1982 V olcker disinflation. Expected inflation and actual inflation are both 10%, real growth is 3%, and to keep it simple, assume that velocity growth is zero. (Historical note: In fact, velocity growth shifted quite a lot during this period,
1.10. Central banks and voters alike usually want higher real growth and lower inflation. What kind of shock makes that happen? (Note: This is similar to the type of shock that causes higher quantity and lower price in a simple supply and-demand model.)
1.9.a. When a financial bubble collapses, is that more like a fall in aggregate demand or a fall in the Solow growth rate?b. When a financial bubble collapses, what is more likely to happen as a result: a fall in inflation or a rise in inflation?
1.8. A monetary policy is said to be credible if the central bank will have an incentive to do tomorrow what it says today that it will do tomorrow. Other policies may be credible or noncredible. Which of the following policies are credible?a. A student promises to study for the final after going
1.7. When talking about the economy, people often make a distinction between policies that work"only in theory" compared to those that work"in practice." In theory, a fall in money growth slows down the economy in the short run. In the six episodes since World War II when, as we discussed, the Fed
1.6. Which of the following would be methods that the Fed could use to "maintain market confidence" when a negative AD shock hits?a. Slow the growth rate of the monetary base.b. Raise the interest rate on "discount window" loans.c. Promise to increase the growth rate of money if the economy worsens
1.5. Let's consider a case that has some similarities to Figure 16.2. We mentioned that it's difficult for the Fed to know what's really happening to the economy in real time. This is similar to the well-known "fog of war," where wartime news accounts often turn out to be exaggerations of the real
1.4. All of the following are called "rules." Which of the following so-called rules are actually like"rules" and which are more like "discretion"?How can you tell the difference?a. Congress passes a law providing automatic cost of living increases to Social Security every year. (Note: This is
1.3. Let's look at the Federal Reserve's dilemma when there's a positive shock to the Solow growth rate. We'll consider the reverse of Figures 16.3 and 16.4.a. In the following figure, illustrate the effect of this positive Solow growth shock, ignor ing the possible effect of sticky wages and
1.2. We've just reviewed the quantity theory of money, which is a theory that shows how the economy fixes itself in the long run. But as economist John Maynard Keynes famously said,"In the long run we are all dead." Let's bring SRAS back into the model, and play the role of a central banker
1.1. This chapter is concerned mostly with how monetary policy might be able to return an economy quickly to the Solow growth rate after a shock. But as we aw in Chapter 12's discussion of the quantity theory of money, a market economy has a correction mechanism to return itself slowly to the Solow
1.1. This chapter is concerned mostly with how monetary policy might be able to return an economy quickly to the Solow growth rate after a shock. But as we aw in Chapter 12's discussion of the quantity theory of money, a market economy has a correction mechanism to return itself slowly to the Solow
1.3. Economist Bennett McCallum says that in order to push interest rates down in the long run, the central bank needs to raise interest rates in the short run. How can this be true?
1.2. In the past, the Federal Reserve didn't pay interest on reserves kept in Federal Reserve banks: For an ordinary U.S. bank, money kept at the Fed earned zero interest, just like money stored in a vault or in an A TM machine. In 2008, the Fed started paying interest on deposits kept at the
1.Let's apply this fact to the following cases mentioned in the chapter. In all cases, the Federal Reserve is trying to boost AD by~~raising MB. But if there's a fall in MM or a fall in v at the same time, the Fed's actions might do nothing to AD. In each case b~w, what are we concerned about: a
1.1. We mentioned how difficult it can be for the Federal Reserve to actually control aggregate demand: Its control over the broader money supply (M1 and M2) is weak and indirect, plus it can't control velocity very much at all. Let's translate the following bullet points from the chapter into an
1.7. Does the House of Representatives get to vote on who becomes the chairperson of the Federal Reserve Board? If not, who does get to vote?
1.6. We mentioned that banks are reluctant to borrow from the Fed's discount window because it'looked down on by other banks: Other banks think that if a bank needs to use the discount window, it's probably not very healthy. So where you get your loans is a signal about what kind ofbank you are.
1.5. You are a bank regulator working for the Federal Reserve. It is your job to see whether banks are solvent or insolvent, liquid or illiquid.Fit each bank below into one of the following four categories:Liquid and solvent (best)flliquid but solvent (probably needs short-term loans from other
1.4. Let's watch a bank create money. Last Wednesday, the Bank of N umenor opened for business. The first customer, Edith, walked in the door with 100 silver coins called Thaler to deposit in a new checking account. The second customer, Max, walks in the door a few minutes later, asking to borrow
1.3.a. In the short run, if the Fed wants to cut short-term, nominal intere t rates, what does it do: Does it increase the growth rate of money or decrease the growth rate of money? Why? Will this tend to lower the real rate or will it tend to lower inflation?b. In the long run, if the Fed wants to
1.2.a. Who is more likely to take bigger risks:a trapeze artist with a safety net beneath or a trapeze artist without a safety net?b. Who is more likely to take bigger risks with his deposits: a bank CEO in a country where there is a lender oflast resort or a bank CEO in a country where there is no
1.1. Whether an asset is "liquid" often depends on what situation you are in. For each of the pairs of assets below, which is more liquid in the particular setting?You want to buy a sofa:A savings account or currency You want to trade for a bologna sandwich in elementary school:A peanut butter and
1.9. We mentioned that the central bank can influence a short-run real interest rate-this is because in the short run the inflation rate is relatively constant but the central bank can adjust the nominal rate on short-term loans.Recall that after investing in a T -bill, the real rate that investors
1.8. Let's use the model of the supply and demand for bank reserves to explain how the Federal Reserve can change aggregate demand in the short run. Remember that the Federal Reserve controls the supply of bank reserves, but private banks create demand for bank reserves.a. After a meeting, the
1.7. The main interest rate that the Federal Reserve tries to control is the Federal Funds rate, the interest rate that banks charge on short-term(usually overnight) loans to other banks. Let's see how much interest a bank can earn if it lends money at the Federal Funds rate.Virginia Community Bank
1.6. In the previous question, one example assumed that banks kept a 100% reserve ratio. Some economists have recommended that all banks be required by law to keep 100% of their deposits in the bank vault, at the Federal Reserve, or invested in ultrasafe investments such as short term U.S. Treasury
1.5. Practice with money multipliers. Think of the"money supply" (MS) as equal to either M1 orM2.a. RR = 5%, Change in reserves =$10 billion. MM = ?; Change in MS = ?b. RR = ?, Change in reserves = $1,000, MM = 5; Change in MS =?c. RR = 100%, Change in reserves =$10 billion. MM =?;Change in MS =?
1.4. If the Federal Reserve wants to lower interest rates via open market operations, should it buy bonds or should it sell bonds?
1.3.a. Suppose that banks have decided they need to keep a reserve ratio of 1 0%-this guarantees that they'll have enough cash in ATM machines to keep depositors happy, and enough electronic deposits at the Federal Reserve so that they can redeem checks presented by other banks. What is the money
1.2. Define the following:a. The monetary base, MBb. M1c. M2
1.1. Let's find out what counts as money. In this chapter, we used a typical definition of money:"a widely accepted means of payment." Under this definition, are people using "money" in the following transactions? If not, why not?a. Lucy sells her Saab to Karen for $1,000 in cash.b. Lucy sells her
1.5.a. If Solow growth rate shocks do largely explain business fluctuation, while the aggregate demand curve mostly stays fixed, then should prices be higher than usual or lower than usual during a recession?a. Joe and Julie married, saved, and bought a modest home several years ago when housing
1.6. In the context of this chapter, identify what each of the following scenarios has in common and explain how they will affect an economy suffering from a recession.0. 00% L__JL._....l___L__I...----l...---'---'------'---'---'---'---'---.l...-.I..-'-----I---L----L--L-'---'------'---'---'-1 2 3 4
1.How much would wages have to rise to raise employment by 1% or 2%, according to these estimates? (Note: This is roughly how much employment rises during a boom.) Is this"wage-channel" effect large enough to explain most of the job fluctuations we see during real world business cycles?Change in
1.4. Do workers choose to work more because wages are temporarily high and do workers choose to work less because wages are temporarily low? This is key to the"intertemporal substitution" story of this chapter. The following chart shows how much wages change in the short run: Except in the 1970s,
1.3. How is the previous question similar to this question: Should the government encourage people to move from the East and West coasts to the Midwest and Rocky Mountain states, where the population is less crowded?
1.2. For the sake of the economy, should the government ban Christmas, and instead encourage people to give gifts throughout the year? Why or why not?
1.1. In 1971, Intel invented the first computer microprocessor. In early 1993, the National Center for Supercomputing Applications released the first Web browser, Mosaic (which later became Netscape). Both inventions seem like good news, and both inventions created great uncertainty about which
1.10. Consider the following economic events. Which of them will have the effect of amplifying a negative real shock and which are intended to offset a shock?a. Several large financial institutions become insolvent as a housing bubble bursts and subprime mortgages begin to default in large
1.9. Can you think of some reasons why the following examples of time bunching and intertemporal substitution might be true?(Yes, you'll notice that there's a blurry line between the two.)a. People who work outside work more when the weather is good.b. People work when others are also working.c.
1.8. In the chapter, we discussed how intertemporal substitution can amplifY a boom by causing people to work more and by causing more people to work (while the reverse is true in a recession). Capital is also subject to intertemporal substitution. For example, it's possible to run a factory at
1.7. As we note in the chapter, an oil price shock will probably increase the size of an oil-centered city like Houston, Texas. During the time that people are moving to Houston, looking for jobs, and switching jobs to find the best job possible, do you think GDP will be lower than usual or higher
1.6. People sometimes use the expression, "Kicking the can down the road." It refers to putting a big decision off until later- it's almost (but not quite!) a synonym for procrastinating, and it's usually used in a negative sense. "Fred graduated and decided to spend a year waiting tables in New
1.5.a. Who would you be more likely to hire at your company: someone who has stayed in the same career for years, or someone who tries an entirely new career every time he or she becomes unhappy with their job?b. How does this help explain why workers are reluctant to quickly move on to a new
1.4. How is marriage like a decision to build a new factory? Which decision is easier to reverse?
1.3. When would a restaurant owner prefer to open a new restaurant: one year after an oil shock hits or two years after the oil shock hits?
1.2.a. According to Figure 13.10, about how long does it take for an oil price shock to have its biggest impact on the economy? How long does it take before the oil shock's effects completely go away?b. What might be happening in the labor market that might explain why it takes so long for an oil
1.1. In India, the economy grows faster when there's a lot of rain and grows more slowly when there is a drought. This creates big fluctuations in the economy. If the government wrote laws to smooth out these fluctuations by paying people to work more in the dry years and by taxing people so that
1.7. Office buildings have a boom-bust cycle every day. At what hours of the weekday do grocery stores have an economic boom? What days of the week do shopping malls have an economic boom?THINKING AND PROBLEM SOLVING
1.6. If the Solow growth curve increased because of a sudden fall in the price of oil, what would happen to inflation? Assume that spending growth (aggregate demand) does not change only the growth curve shifts. Draw the shift in the following figure. (Note: In the real world, this happens fairly
1.5. When do you want to study for a test: when your friends are studying for the same test or when they are not? How can this help explain seasonal business fluctuations?
1.4. When an investment is irreversible, are you likely to make that decision in a hurry or wait until more information comes in?
1.3. Do you know anyone who "intertemporally substitutes" their labor? In other words, what are some careers where someone might choose to
1.2. When oil price shocks force people to switch jobs, how much GDP are they producing when they are out of work?
1.1. Take a look at Figure 13.9. In the last few decades, what has usually happened to the price of oil just before or during a recession?
1.9. Following the productivity slowdown discussed in question 8, the U.S. economy experienced a relatively quick transition to the electronic age of computers and the Internet, and many of the Business Fluctuations: Aggregate Demand and Supply • CHAPTER 1 3 • 303 outward effects of the 1970s
1.8. A significant productivity slowdown occurred during the 1970s and 1980s. A large part of it occurred in industries closely related to the energy crises of the 1970s. (Besides the "Oil Shocks" section in this chapter, you can read a brief summary about these developments in the NBER Digest,
1.7. Continuing from your short-run results in the previous problem, what do you believe will happen in the long run as these adjustments work their way through the economy?
1.6. Use Figure 13.11 as a starting point for this problem and consider the initial impact of the following circumstances on the aggregate demand, Solow growth, and short-run aggregate supply curves.a. A war in the Middle East rapidly increases the price of oil.b. More and more consumers develop a
1.5. Often, more than one kind of shock hits the economy at once. When this happens, the different shocks could push inflation (or real growth) in different directions in the short run, leaving the final short-run result ambiguous.What is most likely to happen to inflation and real output growth in
1.4.a. If aggregate demand shocks are the most important drivers of business fluctuations, then should we expect real wages to be procyclical (rising when GDP growth is high) or countercyclical (rising when GDP growth is low)?b. If real shocks are the most important drivers of business
1.3. Reconsider your answer to Facts and Tools question 3. If you wanted to draw the Solow growth curve accurately, taking into account the idea that very high rates of inflation are likely to reduce real growth, how would you draw the Solow growth curve?a. Would you draw a perfectly vertical
1.2. Some companies raise their workers' pay by giving raises, but others prefer to give one-time bonuses instead. Think about two steel mills facing a big two-year drop in steel demand: In one steel mill, workers have received pay raises every year for five years. In the second mill, 302 • PART
1.1. Here is a puzzle. A country with a relatively small positive aggregate demand shock (a shift outward in the AD curve) may have a substantial economic boom, but sometimes countries that have massive increases in the AD curve (hyperinflation countries like Germany before W odd War II , e.g.)
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