Although Okun’s law holds for different countries, those with more flexible labor markets experience a higher response of unemployment to changes in GDP. During the recent financial crisis, real GDP decreased in the United States, Germany, and France. Considering that the U.S. labor market is more flexible than European labor markets, would you expect the same increase in unemployment in these three countries?
> Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
> Using Table 8.1 (NBER business cycles), identify the longest and shortest expansion and contraction in the United States from Table 8.1:
> How does the policy rate hitting a floor of zero lead to an upward-sloping aggregate demand curve?
> Explain the processes of cost-push and demand-pull inflation. How do macroeconomists distinguish between the two?
> How can the monetary authorities target any inflation rate they want?
> Would it be a good idea for monetary policy makers to set the federal funds rate solely using the Taylor rule?
> How does the Taylor rule relate to the monetary policy curve?
> Describe the five time lags involved in implementing stabilization policy.
> Why do activists believe the economy’s self-correcting mechanism is slow?
> Summarize the main points of disagreement in the debate between activists and non activists.
> Why does the divine coincidence simplify the job of policy making? In what situations will it prevail? Why?
> What specific procedures do financial intermediaries use to reduce asymmetric information problems in lending?
> Consider the following variables: real GDP, consumer spending, investment, unemployment, inflation, stock prices, interest rates, and credit spreads. Classify each as pro cyclical, countercyclical, or a cyclical, and as leading, lagging, or coincident.
> What is the equilibrium real interest rate? How does it influence the interest rate decisions of Federal Reserve policy makers?
> Distinguish between hierarchical and dual mandates. Which best describes the policy making environment in the United States?
> Should policy makers strive to achieve zero rates of unemployment and inflation? Why or why not?
> Describe the two primary objectives of macroeconomic stabilization policy.
> The following graph represents the labor market of a given country. Assuming the prevailing real wage is w1, a) measure unemployment using the graph. b) list three factors that might prevent this market from clearing.
> Suppose a country is rapidly making the transition from an agricultural-based economy to an economy in which most of GDP comes from manufacturing. a) How do you think structural unemployment will be affected? b) Can you think of any measure the governmen
> Discuss the effects of the Internet on frictional unemployment. How do you think websites that allow employees to search for job opportunities more efficiently impact frictional unemployment?
> During recessions, it becomes increasingly difficult to find a job. How do you think the number of “discouraged workers” would be affected by a recession?
> For each of the following situations, explain how the labor force and the unemployment rate change. a) An individual quits his or her job and does not look for a job anymore. b) An individual who was not in the labor force now decides to look for a job.
> Using a graph, analyze the effect of a recession and an increase in day care costs on the real wage and employment.
> Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1) and the GDP deflator (GDPDEF). Convert the deflator to the inflation rate by setting the Units setting to “Percent Change from Year Ago,” and download the data. a) Based
> Using a graph, analyze the effect of technological advances that have increased workers’ productivity in the last few decades (e.g., the Internet) on the labor market. What will be the effect on the real wage and employment if the supply curve does not s
> Anthony currently earns $25 an hour and works forty hours a week. When his boss offers to pay him $28 per hour, Anthony decides to accept the offer and also decides to keep working forty hours. What is the effect of Anthony’s decision on the labor supply
> The natural rate of unemployment is higher in France than in the United States. Suppose you are a recent college graduate and you are eager to find a job. Which country’s labor market seems more promising to you? Can you identify the trade-off between a
> Assume that the marginal product of labor is MPL = 0.65 * $13>L, where output is measured in trillions and L is the number of workers (in millions). a) Draw the MPL curve. b) Find the quantity of workers demanded if the real wage is $50,000 per worker.
> A relatively recent trend in most developed countries, including the United States, is the creation of single-person households. Discuss the short- and long-run consequences of this trend on residential investment.
> From 2009 to 2013, stock prices doubled in the United States. What was the likely effect of this stock market rise on business investment in the United States? Explain using Tobin’s q theory.
> The following graph shows the quarterly change in private inventories in the United States from 2007 to 2010. (Figures are billions of 2005 dollars.) Explain the changes in private inventories during this period.
> Oil leaks from offshore drilling platforms in the Gulf of Mexico have resulted in stricter regulations on this type of oil extraction. a) Discuss the effects of such regulations on the user cost of capital. b) Explain the effect of such regulations on th
> One common feature of developing countries is their relatively less-developed financial systems. What are the implications of a less efficient financial system for the level of investment in developing countries?
> Discuss the effect of the investment tax credit implemented in the United States after the global financial crisis. What does empirical evidence suggest about the link between taxes and investment?
> Go to the St. Louis Federal Reserve FRED database, and find data on civilian employment (CE16OV) and the personal consumption expenditure price index (PCEPI). For both series, change the Units setting to “Percent Change from Year Ago.” a) Report the infl
> Explain the consequences of each of the following events on the desired level of capital stock for the next period according to the neoclassical theory of investment: a) An autonomous easing of monetary policy b) Increase in the depreciation rate of capi
> Using the expression for the expected marginal product of capital, MPKe = 3.6>Kt+1, plot the MPKe curve and determine the desired level of capital for the next period (measured in trillions) if the user cost equals 0.30 (assume the price of capital is no
> Use an IS graph, an MP graph, and an AD/AS graph to show the effects of a decrease in taxes on short-run output in the two cases described in parts (a) and (b). Assume that the tax decrease is the same size in both cases and that the economy starts out a
> A government committed to long-run fiscal discipline (i.e., low or zero budget deficits) usually conducts contractionary fiscal policy at some point to reduce the government deficit. If that action is interpreted as a commitment to long-run fiscal discip
> Assume that the expenditure and tax multipliers can be estimated at 0.75 and 0.5, respectively. a) Would you recommend expansionary fiscal policy based on tax cuts or increased government expenditures? b) Suppose there is substantial evidence that supp
> Concerns about the ability of the U.S. government to finance its own budget deficit might lead to higher interest rates on U.S Treasury securities. a) Explain the effect of higher interest rates on Treasury securities on the government deficit. b) What w
> As announced by the Obama administration, part of the 2009 fiscal stimulus package was directed to making broadband Internet access available to most Americans. a) Should this plan be considered government consumption or government investment? b) Describ
> In recent years, the United States has experienced a sharp increase in obesity rates (in particular amongst teenagers), which is considered to increase the probability of chronic diseases like diabetes. Even if the dependency ratio is constant, what woul
> The definition of the government deficit is a matter of debate. What would be the effect on the measurement of the government deficit if one considered Social Security taxes a “forced loan to the government” and benefit payments (e.g., Medicare, Social S
> Assume that Social Security tax rates remain constant but the number of employed people in the United States declines over time. a) Explain the effect of such a scenario on the size of contributions for social insurance and the government deficit in the
> Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1), the labor force (CLF16OV), and a measure of the capital stock, real consumption of fixed capital (A262RX1Q020SBEA). Download all of the data onto a spreadsheet. For (CL
> Consider the effect of a tax cut (if government spending remains the same) in a country with an underdeveloped financial system. a) Assuming individuals are forward- looking (i.e., the Ricardian equivalence argument holds), what do you think might happen
> What would happen to revenue from seignorage if the inflation rate was very high? Hint: check Equation 8 and assume a quickly rising price level.
> Internet sites that allow people to post their resumes online reduce the costs of job searches and create opportunities for individuals looking for jobs to be matched with potential employers more quickly. Assume that these advantages of Internet job hun
> Using the expression for the short-run aggregate supply curve obtained in Problem 6, draw a new short-run aggregate supply curve on the same graph if there is a price shock such that ρ = 2. Calculate inflation when output is $8, $10, and $12 trillion, re
> Assuming that Okun’s law is given by U - Un = -0.75 *1Y - YP2 and that the Phillips curve is given by π = πe - 0.6 * 1U - Un2+ ρ, a) Obtain the short-run aggregate supply curve if expectations are adaptive, inflation was 3% last year, and potential outpu
> Suppose Okun’s law can be expressed according to the following formula: U - Un = -0.75 *1Y - YP. Assuming that potential output grows at a steady rate of 2.5% and that the natural rate of unemployment remains unchanged, a) Calculate by how much unemploym
> During 2007, the U.S. economy was hit by a price shock when the price of oil increased from around $60 per barrel to around $130 per barrel by June 2008. While inflation increased during the fall of 2007 (from around 2.5% to 4.0%), unemployment did not c
> Suppose that the expectations-augmented Phillips curve is given by π = πe 0.51U - Un2. If expected inflation is 3% and the natural rate of unemployment is 5%, complete the following: a) Calculate the inflation rate according to the Phillips curve if unem
> The following graph shows inflation and unemployment rates for Canada for the period between 1970 and 2012. Does this graph show evidence in favor of the Phillips curve?
> Go to the St. Louis Federal Reserve FRED database, and find data on the GDP deflator (GDPDEF) and the price of a barrel of oil (OILPRICE). For the GDP deflator, convert the Units setting to “Percent Change from Year Ago” and download the data. a) Calcul
> Some Federal Reserve officials have discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the
> Plot the Phillips curve for Canada using the following data. Do you find evidence in favor of the Phillips curve in your plot? Explain.
> Consider the money market. Suppose the U.S. economy begins to boom and aggregate output increases. Describe the effect on the interest rate if the Federal Reserve decides to increase the money supply at the same time that aggregate output increases.
> Assume the demand for real money balances is given by Md = Y - 150i. P 6 a) Find the equilibrium interest rate if the money supply is $1,700 billion and output equals $12,900 billion. b) Find the new equilibrium interest rate if the money supply is
> Suppose the economy experiences a contraction in aggregate output. How would this event affect the demand curve for real money balances? On the graph from part (b) of Problem 6, draw the original and the new demand curve, if necessary.
> Assume the demand for real money balances is given by Md = Y - 150i (an interest rate of 2% is entered into this formula as 2). Suppose P 6 Y = 12,900 billion, so that Md =12,900
> Suppose U.S. aggregate output is still below potential by 2018, when a new Fed chair is appointed. Suppose his or her approach to monetary policy can be summarized by the following statement: “I care only about increasing employment; inflation has been a
> What would be the effect on the aggregate demand curve of an increase in U.S. net exports? Would an increase in net exports affect the monetary policy curve? Explain why or why not.
> Suppose the monetary policy curve is given by r = 1.5 + 0.75 π, and the IS curve is given by Y = 13 - r. a) Find the expression for the aggregate demand curve. b) Calculate aggregate output when the inflation rate is at 2%, 3%, and 4%. c) Plot the aggreg
> Refer to the monetary policy curve described in Problem 1. Assume now that the monetary policy curve is given by r = 2.5 + 0.75 π. a) Does the new monetary policy curve represent an autonomous tightening or loosening of monetary policy? b) Plot the new m
> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the Units setting to “Percent Change from Year Ago” and download the data. Beginning in January 2012, the Fed formally
> Referring to Problem 8, what is the combined effect of these two events on the IS curve? Data from Problem 8: Suppose you read in the newspaper that prospects for stronger future economic growth will lead the dollar to strengthen and stock prices to inc
> Suppose you read in the newspaper that prospects for stronger future economic growth will lead the dollar to strengthen and stock prices to increase. a) Comment only on the effect of the strengthened dollar on the IS curve. b) Comment only on the effect
> After the press conference that followed the Federal Open Market Committee meeting on June 19, 2013, there were reports in the media that Chairman Bernanke’s comments were a signal that the Fed would raise interest rates sooner than expected. As a result
> Part of the 2009 stimulus package ($93 billion) was paid out in the form of tax credits. However, even though interest rates did not change significantly during that year, aggregate output did not increase. Using the parameters from the numerical example
> Suppose the U.S. Congress declares China to be a “currency manipulator” and therefore legislates a tariff on Chinese goods. Considering only the decrease in imports, a) comment on the effect of such a measure on the IS curve. b) show your answer graphica
> Suppose that Dell Corporation has 20,000 computers in its warehouses on December 31, 2016, ready to be shipped to merchants (each computer is valued at $500). By December 31, 2017, Dell Corporation has 25,000 computers ready to be shipped, each valued at
> Calculate consumption expenditure using the consumption function (as described by Equation 2) and the following estimates: Autonomous consumption: ……………….………. $1,450 billion Income: ……………………………………….………... $14,000 billion Taxes: ……………………………………………………... $
> Assume the following estimates: Autonomous consumption: $1,625 billion Disposable income: $11,500 billion Using the consumption function in Equation 2, calculate consumption expenditure if an increase of $1,000 in disposable income leads to an increase
> Assume the monetary policy curve is given by r = 1.5 + 0.75 π. a) Calculate the real interest rate when the inflation rate is at 2%, 3%, and 4%. b) Plot the monetary policy curve and identify the points from part (a).
> Go to the St. Louis Federal Reserve FRED database, and find data on the three month U.S. Treasury note (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the federal funds rate (FEDFUNDS), and the total volume of assets on the Federa
> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Download the data, then calculate a series for inflation. For each quarter, take the percentage change in the price index from
> Go to the St. Louis Federal Reserve FRED database and find the most currently available data on Currency (CURRNS), Total Checkable Deposits (TCDSL), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ). a) Calculate the value of the currency depo
> How is the quantity theory of money converted into a theory of inflation? According to this theory, what determines the inflation rate?
> What are the classical dichotomy, the quantity theory of money, and the neutrality of money?
> What is the relationship between velocity and the equation of exchange?
> What are the M1 and M2 monetary aggregates?
> What are open market operations? What open market operation can the Federal Reserve conduct to increase the money supply?
> What are the costs of anticipated and unanticipated inflation?
> Describe the three primary functions money performs in an economy.
> What happens in a small open economy if there is an increase in domestic saving?
> What determines whether a small open economy will have a trade surplus or a trade deficit?
> How does a small open economy differ from a large open economy?
> Assume that the marginal product of labor is given by the following expression: MPL = 52 (L is measured in millions). L0.3 a) What is the marginal product of labor when L = 80 million? b) Determine the equilibrium real wage if the labor
> What determines the world real interest rate? Why must the domestic real interest rate be the same as the world rate?
> Distinguish between a closed and an open economy. How do the conditions required for goods market equilibrium differ in the two types of economies?
> What is crowding out?
> What determines the desired amounts of national saving and investment? What relationship between desired saving and desired investment is required for goods market equilibrium, and how is this condition reached?
> How are the effects of changes in domestic saving and investment for large open economies similar to those for small open economies and closed economies?
> Describe the two components of national saving and explain how saving affects national wealth.
> Why do the factor demand and supply curves have their particular slopes?
> What rule do firms follow to determine how much of each input to hire in order to maximize profits?
> Explain each term in the profit function for a firm.
> Explain the two characteristics of the Cobb Douglas production function that make it particularly useful to macroeconomists.
