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microeconomics principles
Modern Principles Macroeconomics 2nd Edition Tyler Cowen ,Alex Tabarrok - Solutions
1.10. During the Great Depression, which of the following were mostly aggregate demand shocks and which were mostly negative real shocks?The fall in the growth rate of money The fall in farm productivity The Smoot-Hawley Tariff Act
1.9. In the aggregate demand and supply model, what is "sticky"? More than one may be true: wages, real growth, prices, velocity, money growth, unemployment.
1.8. Let's have some practice with the dynamic aggregate demand curve. If you want to draw it in your familiar y = b + mx format, you can think of it this way:Inflation = (Growth in money + Growth in velocity) - Real growtha. When you look at a fixed dynamic aggregate demand curve, like the one in
1.7. Real-world economies get hit with lots of shocks to aggregate demand and real shocks. Some shocks clearly fit into the first category, some into the second, and some include a generous mix of both. Let's categorize the following shocks. Only one is a clear case of "both."Steelworkers go on
1.6. What happens when bad aggregate demand shocks hit the economy? Consider the following graph.Inflation rate(1r)5%a. Suppose labor demand falls, shifting to the left, as in the figure above. What does the short-run supply curve for labor look like if workers refuse to take pay cuts even if it
1.5. After a monetary shock hits aggregate demand, which curve will shift to bring output growth back to the Solow growth rate: the short-run aggregate supply curve or the aggregate demand curve? (Hint: Which curve is more like a microeconomic story about prices adjusting in order to bring supply
1.4.a. If newspapers and magazines report a lot of good news about the economy, what is likely to happen to velocity?b. If the Federal Reserve wants to keep aggregate demand (i.e., spending growth)stable, what will it do to the growth rate of the money supply when a lot of good news comes out about
1.3. To keep things simple, let's put this into a familiar supply-and-demand story and assume that in the long run, workers offer a fixed supply of labor: In other words, while they may be picky about jobs in the short run, in the long run they'll work regardless of the going wage.Nominal wage
1.2.a. In the 1970s, the United States had slow growth and high inflation. Which kind of shock better fits these facts?Negative real shock Positive real shock Negative aggregate demand shock Positive aggregate demand shock 300 • PART 3 • Business Fluctuationsb. Using the same categories,
1.1. Complete the following sentences:With a real shock, when real growth is worse than usual, inflation is than usual.With an aggregate demand shock, when real growth is worse than usual, inflation is -----than usual.
1.12. From the equation of exchan~, MV = PY, we know that spending growth (M + v) equals nominal GDP growth (P + Y R) or that M + -- ~v = 7r + YR. Recall from the chapter that in the long run (1) the inflation rate is found where the AD curve intersects the Solow growth curve (reading off the
1.11.a. The short-run aggregate supply (SRAS)curve is very predictable. When inflation is greater than people expect, SRAS eventually shifts (choose one: up, down) over the next year or so, and when inflation is less than people expect, SRAS eventually shifts (up, down) over the next year or so.b.
1.10. Consider the figure below. In this relatively unsuccessful economy, the Solow growth rate is 1% per year:Inflation rate('TT)Solow growth rate (1%)Real GOP growth ratea. Calculate the inflation rate at X in this economy. (Hint: Use the quantity theory.)b. If spending growth were 15% in this
1.9. In the following cases, will real growth rise, fall, or remain unchanged?Expected inflation = 5%, Actual inflation = 7%Expected inflation = 3%, Actual inflation = 1%Expected inflation = 6%, Actual inflation = 6%Expected inflation = 7%, Actual inflation = - 10%Expected inflation = -1%, Actual
1.8.a. What does a negative real shock do to inflation: Does it rise, fall, or remain unchanged?b. What does a negative real shock do to spending growth: Does it rise, fall, or remain unchanged?c. What does a fall in spending growth, that is, a shift inward of the AD curve, do to real growth: Does
1.7. As Figure 13.1 implies, for the United States, the Solow growth curve has, on average, been approximately 3% real growth per year. If a negative real shock hits, shifting it by 2 percentage points, what will happen to real growth: Will it be positive or negative? Would you call the resulting
1.6. When negative real shocks hit, what typically happens to the aggregate demand curve? Does it shift left, shift right, or stay in the same place?
1.5. When negative real shocks hit, what typically happens to the Solow growth curve: Does it shift left, shift right, or stay in the same place?
1.4. Are "real shocks" negative shocks, by definition?
1.3. Look at Figure 13.5. When inflation rises, does the Solow growth rate rise, fall, or remain unchanged?
1.2. Look at Figure 13.2. Let's sum up some basic facts about the link between unemployment rates and recessions. Notice that the shaded bars indicate periods of recession, and wider bars mean longer recessions.a. How many recessions have there been since World War II?b. Since World War II, how
1.1. Sort the following shocks into real shocks or aggregate demand shocks. Remember that"shocks" include both good and bad events.A fall in the price of oil A rise in consumer optimism A hurricane that destroys factories in Florida Good weather that creates a bumper crop of California oranges A
1.4. Let's see just how much high expected inflation can hurt incentives to save for the long run.Let's assume the government takes about one third of every extra dollar of nominal interest you earn (a reasonable approximation for recent college graduates in the United States). You must pay taxes
1.3. Who gets hurt most in the following cases:banks, mortgage holders (i.e., homeowners), or neither?E7r 4%10% -3%3%10%7i'10%4%0%6%10%Who gets hurt?
1.2. Why is it so painful to get rid of inflation? W hy can't the government just stop printing so much money?270 • PART 3 • Business Fluctuations
1.1. If I get more money, does that typically make me richer? If society gets more money, does it make society richer? W hat's the contradiction?
1.8. The Fisher effect says that nominal interest rates will equal expected inflation plus the real equilibrium rate of return:i = ETI + requilibrium i = Nominal interest rate ETI = Expected inflation rate r.1 .b.eqw 1 num= Equilibrium real rate of return Economists and Wall Street experts often
1.7. In countries with hyperinflation, the government prints money and uses it to pay government workers. How is this similar to counterfeiting? How is it different?
1.6. Nobel laureate Milton Friedman often said that"inflation is the cruelest tax." Who is it a tax on? More than one may be correct:a. People who hold currency and coins in their wallet, purse, or at homeb. Businesses that hold currency and coins in their cash registersc. People or businesses who
1.In some years, there will be long-lasting shocks to v and Y, so your job as a policymaker is to offset those shocks by changing the supply of money in the economy. Some of these changes might not make you popular with the citizens, but they are part of keeping P equal to the price-level target.
1.5. It's time to take control of the Federal Reserve(which controls the U.S. money supply). In this chapter, we're thinking only about the Inflation and the Quantity Theory of Money • CHA PTE R 1 2 • 269"long run," so Y (real GDP) is out of the Fed's control, as is v. The Fed's only goal is to
1.4. Much of the economic news we read about can be reinterpreted into our "Mv = PY'framework. Turn each of the following news headlines into a precise statement about M , v, P, or Y:a. "Deposits in U.S. banks fell in 2015."b. "American businesses are spending faster than ever."c. "Prices of most
1.3. In the long run, according to the quantity theory of money, if the money supply doubles, what happens to the price level? What happens to real GDP? In both cases, state the percentage change in either the price level or real GDP.
1.2. What does the quantity theory of money predict will happen in the long run in these cases?According to the quantity theory, a rise in the money supply can't change v or Yin the long run, so it must affect P. Let's use that fact to see how changes in the money supply affect the price level.
1.1. Calculate inflation in the following cases:Price Level Last Year 100 250 4,000 Price Level This Year 110 300 4,040 Inflation Rate
1.8. If everyone expects inflation to rise by 10%over the next few years, where, according to the Fisher effect, will the biggest effect be:on nominal or real interest rates?
1.7. Which tells me more about how many more goods and services I can buy next year if I save my money today: the nominal interest rate or the real interest rate? Which interest rate gets talked about more in the media?
1.6. Consider the interaction between inflation and the tax system (assume the inflation is expected).Does high inflation encourage people to save more or discourage saving? If a government wants to raise more tax revenue in the short run, should it push for higher or lower inflation?
1.5. Who is more likely to lobby the government for fast money growth: people who have mortgages or people who own banks that lent money for those mortgages?
1.4. Who gets helped by a surprise inflation: people who owe money or people who lend money?
1.3. When is the inflation rate more likely to have a big change either up or down: when inflation is high or when it is low?
1.2. What are some forces that could cause shocks to v, the velocity of money?
1.1. What is a "price level"? If the "price level" is higher in one country than another, what does that tell us, if anything, about the standard of living in that country?
1.5. Even though most Americans who become unemployed are only unemployed for a short period of time, when you look at who is unemployed at a given moment in time, you'll find that most of the unemployed have been without a job for quite a while. Let's imagine a simple economy to see how to resolve
1.4. Take a look at Figure 11 .3. In that figure, we're holding "job quality" or "working conditions"constant, and looking at how changes in wages impact the quantity of labor supplied and demanded. In many union negotiations, the union and its workers don't push for higher wages. Instead, they
1.3. When are workers more likely to get a job:six weeks before their unemployment benefits run out, or a week before their unemployment benefits run out? (Note: The correct answer to this question is solidly backed up by U .S. job data.)Unemployment and Labor Force Participation • CHAPTER 11 •
1.2.a.If European governments set rules for marriage the same way they set rules for employment-with tough, preset rules that make it hard to end the relationship- would you expect rates of divorce to rise, fall, or can't you tell with the information given?b. Would the·length ofmarriages rise,
1.1. Long-term, structural unemployment is higher in Europe than in the United States, but some European countries have it worse than others.Take a look at Table 11.1. Spain has a lower fraction oflong-term unemployment than the other European countries, but a higher rate of unemployment than the
1.11. "The unemployment rate also fails to capture all of the people who have given up looking for work," reports the New York Times. This is one of many complaints about how the U.S. government measures the unemployment rate.But as hinted at in the chapter, the U.S. government actually does count
1.10. It' been said that "once you reach the top of the ladder of opportunity, the first thing to do is pull up the ladder behind you." Let's consider the implications of this adage for labor market outcomes.a. When doctors, schoolteachers, and beauti cians encourage the government to make it more
1.9. Between 1984 and 2001, the U.S. government made it much easier to get disability payments and the number of disabled people more than doubled from 3.8 million to 7.7 million. Most of the people who try to qualify for disability payments have a tough time finding jobs, and spend a lot of time
1.8. Here's a story economists tell one another: A Nobel Prize-winning economist flew to New York City for a conference. He got into a cab, and started talking with the cab driver. The cab driver said, "Oh, you're an economist?Let me tell you, this economy is terrible. I'm an unemployed architect."
1.7. Goldin and Katz looked for the link between birth control and women's labor force participation by examining the difference between states that acted early to make birth control legal and states that waited until later.Which states do you think had the biggest jump in women joining the labor
1.6. Calculate the unemployment rate and the labor force participation rate in the following cases:a. Employed: 100 million. Population: 200 million. In labor force: 110 million.b. Unemployed: 10 million. Population: 200 million. Employed: 90 million.c. In labor force: 30 million. Population: 80
1.5. Let's see how GDP per person can be affected by changes in the fraction of citizens who work. This fraction is better known as the employment-population ratio. To keep things simple, let's assume that every employed worker produces $50,000 worth of output. If the employment-population ratio is
1.4. When a government raises the minimum wage by $2.00 per hour, where would we expect more jobs to be lost: in the fast-food industry or in city government? Why?
1.3. Take a look at Table 11.2. If you have to pick a country to lose your job in, and you know you're going to be out of work for one year, which country offers the highest one-year average replacement rate? Which offers the highest two-year average replacement rate? If you're going to be out of
1.2. Let's see how many jobs have to be destroyed for one net job to be created. As noted in the text, millions of jobs are created and destroyed every month. Suppose that 5 millions jobs are destroyed every month and about 5.25 million jobs are created. What is net job creation?What is total job
1.1. When the following events happen, does the unemployment rate rise, fall, or stay the same?a. Workers are laid off and start looking for work.b. People without jobs who are looking for work find work.c. People without jobs and looking for work give up and stop looking.d. People without jobs and
1.10. Based on the ideas in this chapter, name three labor market policy changes that would be likely to decrease the rate of structural unemployment. There are many more than three possible answers.
1.9. Take a look at Figure 11.10. About how big is the difference in labor force participation rates between countries with the highest implicit tax rate on older men compared with countries with the lowest implicit tax rate? Round to the nearest 10%.
1.8. According to Figure 11.8, during which decade was the natural unemployment rate the highest?
1.7. Let's look at how the unemployment rate changes during and after a typical recession. In Figure 11.5, does the unemployment rate tend to reach its peak during the recession, or does it usually reach its peak after the recession?
1.6. Who is more likely to ask politicians for stronger labor unions and laws, making it harder to fire workers: insiders who have jobs or outsiders who don't have jobs?
1.5. Let's connect the minimum wage model back to the supply and demand model of Chapter 5.Is a minimum wage a price ceiling or a price floor? Does it create a surplus or a shortage in the labor market?
1.4. Decide whether each of the following are frictional, structural, or cyclical unemployment:a. The economy gets worse, so General Motors shuts down a factory for four months, laying off workers.b. General Motors lays off 5,000 workers and replaces them with robots. The workers start looking for
1.3. If we count "discouraged workers"as unemployed when calculating the unemployment rate, does the rate more than double, less than double, or remain unchanged?
1.2. According to Figure 11.1, what percent of all Americans are employed? (This number is the"employment-population ratio.") What percent of the labor force is employed?
1.1. Which of the following people are counted as unemployed?A person out of work and actively searching for work A person in prison A person who wants to work but stopped searching six months ago A person who works part time but who wants full-time work
1.1. What is so bad about bubbles? If the price of Internet stocks or housing rises and then falls, is that such a big problem? Mter all, some people say, most of the gains going up are "paper gains" and most of the losses going down are "paper losses." Comment on this view.
1.5. You own shares in a pharmaceutical company, PillCo. Reading the Yahoo! Finance Web site, you see that PillCo was sued this morning by users ofPillCo's new heart drug, Amphlistatin.PillCo's stock has already been trading for a few hours today.a. When the bad news about the lawsuits came out,
1.4. Warren Buffett often says that he doesn't want a lot of diversification in his portfolio. He says that diversification means buying stocks that go up along with stocks that go down; but he only wants to buy the stocks that go up! From the point of view of the typical investor, what is wrong
1.3. How is "stock market diversification" like putting money in a bank account?
1.2. In most of your financial decisions early in life, you'll be a buyer, but let's think about the incentives of people who sell stocks, bonds, bank accounts, and other financial products.a. Walking in the shopping mall one day, you see a new store: the Dollar Store. Of course, you've seen plenty
1.1. Your brother calls you on the phone telling you that Google's share price has fallen by about 25% over the past few days. Now you can own one small slice of Google for only $430 a share(the price on the day this question was written).Your brother says he is pretty sure the stock is going to
1.6.a. If you talk to a broker selling the high-fee mutual fund, what will he or she probably tell you when you ask them, "Am I getting my money's worth when I pay your high fees?"b. According to Figure 10.1, is your broker's answer likely to be right most of the time?
1.5. Let's see how fees can hurt your investment strategy. Let's assume that your mutual fund grows at an average rate of 7% per year-before subtracting off the fees. Using the rule of 70:a. How many years will it take for your money to double if fees are 0.5% per year?b. How many years will it
1.4. In the United States, high-level corporate officials have to publicly state when they buy or sell a large number of shares in their own company. They have to make these statements a few days after their purchase or sale. What do you think probably happens (choose a,b, c or d below) when
1.3. Consider the supply and demand for oranges.Orange crops can be destroyed by below-freezing temperatures.a. If a weather report states that oranges are likely to freeze in a storm later this week, what probably happens to the demand for oranges today, before the storm comes?b. According to a
1.2. Let's do something boring just to drive home a point: Count up the number of years in Figure 10.1 in which more than half of the mutual funds managed to beat the S&P 500 index. (Recall that the Standard and Poor's 500 is just a list of 500 large U.S. corporations-it's a list that overlaps a
1.1. Before we plunge into the world of finance, let's review the rule of70. Suppose your rich aunt hands you a $3,000 check at the end of the school year. She tells you it's for your education. But what should you really do with that extra money? Let's see how much it would be worth if you saved
1.5. Answer the following question using a spreadsheet and the material in the appendix.You would like to buy a house. Assume that given your income, you can afford to pay$12,000 a year to a lender for the next 30 years.If the interest rate is 7% how much can you borrow today based on your ability
1.4. How are houses like bonds? With respect only to their home equity (i.e. ignoring all other assets and investments), would homeowners tend to favor high or low interest rates?
1.3. Bank savings accounts typically pay an interest rate well below the inflation rate. As of Spring 2011, for example, the best interest rates on savings accounts were around 1% per year, while the CPI inflation rate was around 2.5%per year. What does this mean about the real interest rate on
1.2. Lenders are more willing to lend if the borrower can put up collateral for the loan.Remember that collateral is something of value that by agreement becomes the property of the lender if the borrower defaults. In the United States, many small business owners borrow money for their business by
1.1. The United States borrows a lot of money from other countries. If you wanted to use the lifecycle theory to explain this, would you say that the United States is acting like a "young"country, an "old" country, or a "middle-aged"country? There's more than one correct way to answer this question.
1.13. Using a spreadsheet and the material in the appendix, answer the following questions.a. Assume the interest rate is 5% (0.05). Calcu late the value of a bond that pays $100 at the 202 • PART 2 • EconomicGrowth end of every year for the next 9 years and then at the end of the 1Oth year
1.12. Rank the following loans in order from low risk/low return, to high risk/high return.a. 30 year fixed rate home loanb. 5 year CD issued by the local FDIC-insured bankc. 13 week US Treasury billd. Capital One credit card held by an unem ployed high school dropout.e. 30 year bond issued by
1.11.Predict the effect of each of the following events on the supply of and demand for loanable funds(increase, decrease, or no effect on supply;increase, decrease, or no effect on demand).What would be the likely effect on interest rates?a. Television newscasters convince most people that the end
1.10.a. If a zero-coupon bond with a face value of$1,000 payable in 1 year sells for $925, what is the interest rate?b. If another bond with the same face value and maturity sells for $900, what is the interest rate on this bond?c. Which bond, that discussed in question a or questionb, would you
1.9. "If the government keeps real interest rates low (either by raising inflation or by decreeing low interest rates), then this encourages extra borrowing by businesses, which leads to more inve tment purchases, a larger stock of capital equipment, and higher productivity. Therefore, an interest
1.8. Consider Figure 9.10. Would a rise in government borrowing make it harder or easier for a new business to sell new stocks in an initial public offering (IPO)? In other words, are government bonds and corporate stocks substitutes for each other or complements to each other?
1.7. Consider your answers to the previous question.When one bond pays a higher interest rate than another bond, is that mostly because savers are less willing to supply loanable funds to the higher-rate bond, or because businesses are more interested in demanding loanable funds for the higher-rate
1.6. In each of the three cases, which bond will usually pay a higher interest rate?a. A bond rated AAA, or a bond rated BBB?b. A U.S. government bond, or a General Motors bond?c. A Citibank bond that gets repaid in 30 years or a Citibank bond that gets repaid in 1 year?
1.5.a. The financial analysts at Lexmark have evaluated five major projects. Each project, if it actually goes forward, will be financed by going to a bank to borrow the money.They've calculated a "break-even interest rate": If they can borrow cash to pay for the project at less than that rate, the
1.4. In many poor countries, the banking system just isn't advanced enough to lend money for many large investments. Based on this single fact, where would you expect to see more entrepreneurs coming from rich families rather than poor families: in the rich countries or the poor countries? Why?
1.3. In this chapter, we focus on three big functions that banks perform:i. They evaluate business ideas to see to whom it's worth lending.ii. They spread an investment's risk among many different projects.iii. They make it easier for people to make payments through checks, ATMs, and wire
1.2. Let's think about how the supply of savings might shift in two different cases.Interest rate Supply of savings Quantity of savingsa. Under current U.S. law, businesses areal lowed to automatically enroll you in a sav ings plan that puts 5% of your salary in a retirement fund. Suppose Congress
1.1. Let's work out a simple example in which a person smooths her consumption over time.Gwen is a real estate agent, and she knows that she will have some good years and some bad years. She figures that half the time she'll earn$90,000 per year, and half the time she'll earn 20,000 per year. These
1.10.a. In a competitive banking system, what tends to happen to banks that make low-interest rate loans to the banker's friends: Do they tend to be more successful or less successful than other, more ruthless banks?b. Given your answer to the previous question, how do you suspect that politicized
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