As a Case Study in the chapter discusses, the money supply fell from 1929 to 1933 because both the currency–deposit ratio and the reserve–deposit ratio increased. Use the model of the money supply and the data in Table 4-2 to answer the following hypothetical questions about this episode. a. What would have happened to the money supply if the currency–deposit ratio had risen but the reserve–deposit ratio had remained the same? b. What would have happened to the money supply if the reserve–deposit ratio had risen but the currency–deposit ratio had remained the same? c. Which of the two changes was more responsible for the fall in the money supply?
> According to the IS–LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph. a. The central bank increases the money supply. b.
> Suppose China exports TVs and uses the yuan as its currency, whereas Russia exports vodka and uses the ruble. China has a stable money supply and slow, steady technological progress in TV production, while Russia has very rapid growth in the money supply
> Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. (The discoveries of 1896 are an example.) Why might this be true?
> Give an example of a bank balance sheet with a leverage ratio of 20. If the value of the bank’s assets rises by 2 percent, what happens to the value of the owners’ equity in this bank? How large a decline in the value of bank assets would it take to redu
> Explain what happens to consumption, investment, and the interest rate when the government increases taxes.
> The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving b. Private saving c. National saving d. Investment
> Consider an economy that produces and consumes hot dogs and hamburgers. In the following table are data for two different years. a. Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit pric
> What are the pros and cons of using public funds to prop up a financial system in crisis?
> Give three reasons that a budget deficit might be a good policy choice.
> U.S. tax laws encourage investment in housing (such as through the deductibility of mortgage interest for purposes of computing taxable income) and discourage investment in business capital (such as through the corporate income tax). What are the long-ru
> A Case Study in the chapter indicates that the elderly do not dissave as much as the life-cycle model predicts. a. Describe the two possible explanations for this phenomenon. b. One study found that the elderly who do not have children dissave at about t
> Use the Keynesian cross to explain why fiscal policy has a multiplied effect on national income.
> The text assumes that the natural rate of interest r is a constant parameter. Suppose instead that it varies over time, so now it has to be written as rt. a. How would this change affect the equations for dynamic aggregate demand and dynamic aggregate s
> Suppose that an economy has the Phillips curve π = π-1 - 0.5(u - un) and that the natural rate of unemployment is given by an average of the past two years’ unemployment: un = 0.5(u-1 + u-2). a. Why might the natural rate of unemployment depend on recen
> Suppose that money demand depends on disposable income, so that the equation for the money market becomes M/P = L(r, Y - T ). Analyze the short-run impact of a tax cut in a small open economy on the exchange rate and income under both floating and fixed
> Use the IS–LM diagram to describe both the short-run effects and the long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. a. An increase in the money supply b.
> This question asks you to analyze in more detail the two-sector endogenous growth model presented in the text. a. Rewrite the production function for manufactured goods in terms of output per effective worker and capital per effective worker. b. In this
> In the Solow model, population growth leads to steady-state growth in total output, but not in output per worker. Do you think this would still be true if the production function exhibited increasing or decreasing r turns to scale? Explain. (For the defi
> Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations: Lm = 200 -6W m Ls = 100 - 4Ws where L is labor (in number of workers), W is the wage (in dollars), and the
> Here is a table similar to Table 6-2 (but in alphabetical order) for the currencies of four imaginary nations. Use the theory of purchasing-power parity to fill in the blanks with a number or “NA” if the figure is not
> Define the terms real variable and nominal variable, and give an example of each.
> In each of the following scenarios, explain and categorize the cost of inflation. a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than quarterly. b. Grandpa buys an annuity for $100,000 from an i
> Use the Keynesian cross model to predict the impact on equilibrium GDP of the following. In each case, state the direction of the change and give a formula for the size of the impact. a. An increase in government purchases b. An increase in taxes c. Equa
> To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on checks written on bank account deposits. (In today’s dollars, this tax would amount to about 34 cents per check.) a. How do you think the check tax affected the currency–deposit
> What makes the demand for the economy’s output of goods and services equal the supply?
> (This problem requires the use of calculus.) Consider a Cobb–Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers
> Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns. TLM’s equipment depreciates in value by $125,000. TLM pays $600,000 to its workers, who pay $140,000 in taxes on thi
> What does it mean for a central bank to act as lender of last resort?
> Do you find the traditional or the Ricardian view of government debt more credible? Why?
> List three policy rules that the Fed might follow. Which of these would you advocate? Why?
> The United States experienced a large increase in the number of births in the 1950s. People in this baby-boom generation reached adulthood and started forming their own households in the 1970s. a. Use the model of residential investment to predict the im
> Give an example in which someone might exhibit time-inconsistent preferences.
> Demographers predict that the fraction of the population that is elderly will increase over the next 20 years. What does the life-cycle model predict for the influence of this demographic change on the national saving rate?
> When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?
> Suppose a central bank does not satisfy the Taylor principle; in particular, assume that up is slightly less than zero, so the nominal interest rate rises less than one-for-one with inflation. Use a graph similar to figure 15-13 to analyze the impact of
> Explain two ways in which a recession might raise the natural rate of unemployment.
> Assume that people have rational expectations and that the economy is described by the sticky price model. Explain why each of the following propositions is true. a. Only unanticipated changes in the money supply affect real GDP. Changes in the money sup
> Suppose that higher income implies higher imports and thus lower net exports. That is, the net-exports function is NX = NX(e, Y ). Examine the effects in a small open economy of a fiscal expansion on income and the trade balance under the following excha
> Monetary policy and fiscal policy often change at the same time. a. Suppose that the government wants to raise investment but keep output constant. In the IS–LM model, what mix of monetary and fiscal policy will achieve this goal? b. In the early 1980s,
> The following equations describe an economy. Y + C + I + G. C = 50 + 0.75 (Y - T ). I = 150 - 10 r. (M/P)d = Y + 50r. G = 250. T = 200. M = 3,000. P = 4 a. Identify each of the variables and briefly explain their meaning. b. From the above list, use the
> How does endogenous growth theory explain persistent growth without the assumption of exogenous technological progress? How does this differ from the Solow model?
> The amount of education the typical person receives varies substantially among countries. Suppose you were to compare a country with a highly educated labor force and a country with a less educated labor force. Assume that education affects only the leve
> Many demographers predict that the United States will have zero population growth in the coming decades, in contrast to the historical average population growth of about 1 percent per year. Use the Solow model to forecast the effect of this slowdown in p
> Suppose that a country experiences a reduction in productivity—that is, an adverse shock to the production function. a. What happens to the labor demand curve? b. How would this change in productivity affect the labor market—that is, employment, unemploy
> An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so thi
> The president is considering placing a tariff on the import of Japanese luxury cars. Using the model presented in this chapter, discuss the economics and politics of such a policy. In particular, how would the policy affect the U.S. trade deficit? How wo
> Explain the roles of monetary and fiscal policy in causing and ending hyperinflations.
> During World War II, both Germany and England had plans for a paper weapon: they each printed the other’s currency, with the intention of dropping large quantities by airplane. Why might this have been an effective weapon?
> Why might a banking crisis lead to a fall in the money supply?
> Explain the difference between government purchases and transfer payments. Give two examples of each
> According to the neoclassical theory of distribution, a worker’s real wage reflects her productivity. Let’s use this insight to examine the incomes of two groups of workers: farmers and barbers. Let Wf and Wb be the nominal wages of farmers and barbers,
> Describe the two ways the BLS measures total employment.
> Find data on GDP and its components, and compute the percentage of GDP for the following components for 1950, 1980, and the most recent year available. a. Personal consumption expenditures b. Gross private domestic investment c. Government purchases d. N
> Explain how a financial crisis reduces the aggregate demand for goods and services.
> In the Solow model, what determines the steady state rate of growth of income per worker?
> Go to the website of the Bureau of Economic Analysis and find the growth rate of real GDP for the most recent quarter. Go to the website of the Bureau of Labor Statistics and find the inflation rate over the past year and the unemployment rate for the mo
> According to the Ricardian view of government debt, how does a debt-financed tax cut affect public saving, private saving, and national saving?
> Find some recent projections for the future path of the U.S. government debt as a percentage of GDP. What assumptions are made about government spending, taxes, and economic growth? Do you think these assumptions are reasonable? If the United States expe
> What is meant by the “time inconsistency” of economic policy? Why might policymakers be tempted to renege on an announcement they made earlier? In this situation, what is the advantage of a policy rule?
> It is an election year, and the economy is in a recession. The opposition candidate campaigns on a platform of passing an investment tax credit, which would be effective next year after she takes office. What impact does this campaign promise have on eco
> Explain why changes in consumption are unpredictable if consumers obey the permanent-income hypothesis and have rational expectations.
> Albert and Franco both follow the life-cycle hypothesis: they smooth consumption as much as possible. They each live for five periods, the last two of which are retirement. Here are their incomes earned during each period: They both die at the beginning
> The text analyzes the case of a temporary shock to the demand for goods and services. Suppose, however, that et were to increase permanently. What would happen to the economy over time? In particular, would the inflation rate return to its target in the
> Under what circumstances might it be possible to reduce inflation without causing a recession?
> Suppose that the economy is initially at a longrun equilibrium. Then the Fed increases the money supply. a. Assuming any resulting inflation to be unexpected, describe any changes in GDP, unemployment, and inflation that are caused by the monetary expans
> Describe the impossible trinity.
> Suppose an economy described by the Solow model has the following production function: Y= K1/2(LE)1/2. a. For this economy, what is f(k)? b. Use your answer to part (a) to solve for the steady-state value of y as a function of s, n, g, and ᵹ. c. Two neig
> Business executives and policymakers are often concerned about the competitiveness of American industry (the ability of U.S. industries to sell their goods profitably in world markets). a. How would a change in the nominal exchange rate affect competiti
> Determine whether each of the following statements is true or false, and explain why. For each true statement, discuss whether there is anything unusual about the impact of monetary and fiscal policy in that special case. a. If investment does not depend
> Suppose that the money demand function is (M/P)d = 800 - 50r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5. a. Graph the supply and demand for real money balances. b. What is the equilibrium int
> Why is it easier for the Fed to deal with demand shocks than with supply shocks?
> Give an example of an institutional difference between countries that might explain the differences in income per person.
> Two countries, Richland and Poorland, are described by the Solow growth model. They have the same Cobb–Douglas production function, F(K, L)= A K aL1-a, but with different quantities of capital and labor. Richland saves 32 percent of its income, while Poo
> Draw a well-labeled graph that illustrates the steady state of the Solow model with population growth. Use the graph to find what happens to steady-state capital per worker and income per worker in response to each of the following exogenous changes. a.
> Do Europeans work more or fewer hours than Americans? List three hypotheses that have been suggested to explain the difference.
> Consider an economy with the following Cobb–Douglas production function: Y = 5K 1/3L 2/3. a. Derive the equation describing labor demand in this economy as a function of the real wage and the capital stock. (Hint: Review Chapter 3.) b. The economy has 27
> According to the theory of purchasing-power parity, if Japan has low inflation and Mexico has high inflation, what will happen to the exchange rate between the Japanese yen and the Mexican peso?
> In the economy of Solovia, the owners of capital get two-thirds of national income, and the workers receive one-third. a. The men of Solovia stay at home performing household chores, while the women work in factories. If some of the men started working o
> A Case Study in this chapter concludes that if poor nations offered better production efficiency and legal protections, the trade balance in rich nations such as the United States would move toward surplus. Let’s consider why this might be the case. a. I
> List all the costs of inflation you can think of, and rank them according to how important you think they are.
> A newspaper article once reported that the U.S. economy was experiencing a low rate of inflation. It said that “low inflation has a downside: 45 million recipients of Social Security and other benefits will see their checks go up by just 2.8 percent next
> What are the various ways in which the Federal Reserve can influence the money supply?
> In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve. a. What are the reserve–deposit ratio, the currenc
> What determines consumption and investment?
> Figure 3-5 shows that in U.S. data, labor’s share of total income is approximately a constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor productivity. How are these facts related? Could the first fact be
> List the three categories used by the Bureau of Labor Statistics to classify everyone in the economy. How does the BLS compute the unemployment rate?
> How often does the price you pay for a haircut change? What does your answer imply about the usefulness of market-clearing models for analyzing the market for haircuts?
> How does the leverage ratio influence a financial institution’s stability in response to bad economic news?
> In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?
> In recent years, as described in this chapter, both the United States and Greece have experienced increases in government debt and a significant economic downturn. In what ways were the two situations similar? In what ways were they different? Why did th
> According to the traditional view of government debt, how does a debt-financed tax cut affect public saving, private saving, and national saving?
> Some economists have proposed the rule that the cyclically adjusted budget always be balanced. Compare this proposal to a strict balanced-budget rule. Which is preferable? What problems do you see with the rule requiring a balanced cyclically adjusted bu
> How does a person’s interpretation of macroeconomic history affect his view of macroeconomic policy?
> After every policy meeting, the Federal Reserve issues a statement (sometimes called the press release), which you can find on the Fed’s Web site (http://www.federalreserve.gov/monetarypolicy/ fomccalendars.htm). Read the most recent statement. What does
> List four reasons firms might hold inventories.
> When the stock market crashes, what influence does it have on investment, consumption, and aggregate demand? Why? How
> Use Fisher’s model of consumption to analyze an increase in second-period income. Compare the case in which the consumer faces a binding borrowing constraint and the case in which he does not.
> Explain whether borrowing constraints increase or decrease the potency of fiscal policy to influence aggregate demand in each of the following cases. a. A temporary tax cut b. An announced future tax cut
> A central bank has a new head, who decides to increase the response of interest rates to inflation. How does this change in policy alter the response of the economy to a supply shock? Give both a graphical answer and a more intuitive economic explanation
> Country A and country B both have the production function Y = F(K, L) = K1/3L2/3. a. Does this production function have constant returns to scale? Explain. b. What is the per-worker production function, y = f (k)? c. Assume that neither country experienc
