Assume that a country has pegged the value of its currency to another country’s currency and that the anchor country increases its interest rate. Describe the effects on the following: a) The export sector of the pegging country b) Households’ net worth if the pegging country is forced to devalue its currency and most debts are denominated in the foreign (anchor) currency
> Immediately after the central bank of New Zealand adopted inflation targeting in 1989, economic growth was low and unemployment increased for some time (until 1992), but later, economic growth resumed and unemployment decreased. Comment on the relationsh
> Suppose the statistical office of a country does a poor job of measuring inflation and reports an annualized inflation rate of 4% for a few months, while the true increase in the price level has been around 2.5%. What will happen to the central bank’s cr
> As part of its response to the global financial crisis, the Fed lowered the federal funds rate target to nearly zero by December 2008, a considerable easing of monetary policy. However, survey-based measures of five-to-ten-year inflation expectations rem
> Central banks that engage in inflation targeting usually announce the inflation target and the time period for which that target will be relevant. In addition, central bank officials are held accountable for their actions (e.g., they could be fired if th
> In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the implications of such a situation for the conduct of mone
> What are the benefits and costs of sticking to a set of rules in each of the following cases? How do each of these situations relate to the conduct of economic policy? a) Going on a diet b) Raising children
> Go to the St. Louis Federal Reserve FRED database, and find data on Real Private Domestic Investment (GPDIC1); a measure of the real interest rate, the 10-year Treasury Inflation-Indexed Security, TIIS (FII10); and a measure of financial frictions, the S
> Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Federal Reserve increases the federal funds rate. Assume that the Federal Reserve is considering an increase in the federal funds rate target to fig
> Consider two individuals forming expectations about mortgage rates. Mark forms adaptive expectations, and looks only at past mortgage rates to form expectations about future rates. Gloria forms rational expectations. Suppose an individual who is well kno
> Comment on the impact on the Fed’s credibility of the appointment of a majority of governors who are reluctant to increase interest rates to fight inflation for fears of causing too much unemployment in the short run.
> Suppose that during the last ten years, Nicole tried to forecast future inflation rates to negotiate her salary. Every year, she used all available information and even incorporated news about the conduct of monetary policy. However, her forecasts were s
> 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. Real Wage Rate, w ($ per worke
> 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 the most recent values for Personal Income (PINCOME), Disposable Personal Income (DPI), and Personal Consumption Expenditures (PCEC). a) For the most recent quarter available, compute th
> 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. Change in Private Inventories (bill
> 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 Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption Expenditures: Nondurable Goods (PCND), and Personal Consumption Ex
> 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
> For each of the following situations, explain how current consumption will change according to the random walk hypothesis: a) The government increases taxes to close the budget deficit, but the size of the tax increase is smaller than expected. b) You re
> In May 2010, the size of Greece’s budget deficit increased its probability of default and triggered a crisis across the Eurozone. To decrease the budget deficit, the Greek government proposed many measures. A few of them involved decreasing pension and/
> What does the Keynesian consumption function imply about the average propensity to consume of a rich versus a poor country? Which country should have a higher average propensity to consume? How can you explain the relatively low levels of saving of rich
> 6. Suppose Nicole’s yearly income is $5,000 when she is fifteen, $35,000 when she is twenty-five, and $70,000 when she is fifty (these are all present value measures of future income). Assume that Nicole’s autonomous consumption expenditure is $20,000 an
> Describe the effects of a decrease in the interest rate on present and next period’s consumption if the individual is a net lender (i.e., has savings) after period 1 and the substitution effect is larger than the income effect. Show your answer graphical
> The following figure represents the optimization problem for a homeowner whose home is currently valued at $250,000. a) Identify the optimum consumption point (i.e., what are the values of C1 and C2 at which this individual’s happin
> Assume that Maria does not have a preference for smooth consumption. In particular, the average of two consumption points on the same indifference curve yields the same utility to Maria as either point (i.e., the average consumption point is on the same
> Previous policies to increase saving in the United States have included fiscal policy measures to exempt a part of individuals’ savings from income taxes (e.g., the creation of IRAs). According to the precepts of behavioral economics, do you think these
> Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1) and the GDP deflator price index (GDPDEF). Using the units setting, choose “Percent Change from Year Ago” to convert each measure into real GDP growth and the inflation
> Suppose Prakash has an income today of $30,000, an expected income in period 2 of $35,000, and initial wealth of $5,000. Prakash faces an interest rate of 5%. a) Graph Prakash’s intertemporal budget line. Denote the values of C1 and C2 at the intersectio
> Explain why a central bank might want to intervene in the foreign exchange market to prevent an excessive appreciation of its currency, even if it previously stated that it would allow its currency to respond to supply and demand conditions in the foreig
> The following T-account (in billions of dollars) depicts an intervention by the Federal Reserve in the foreign exchange market: a) Did the Federal Reserve buy or sell U.S. dollars? b) What is the effect of this intervention on the exchange rate? As
> Brazil has announced the discovery of huge oil reserves that could potentially transform the country into a big exporter of oil. a) What would be the effect of the increase in revenues from oil exports on Brazil’s exchange rate? b) How would this affect
> Suppose the Federal Reserve cannot convince the public of its commitment to fighting inflation in the United States in the near future. a) What would be the effect on the expected appreciation of the U.S. dollar? b) What would be the effect on the spot
> The following table shows the nominal exchange rate between the U.S. dollar and the euro (U.S. dollars per euro) at different points in time. a) Plot the nominal exchange rate, and determine whether the U.S. dollar has been appreciating or depreciating
> On June 19, 2013, following the FOMC’s regular policy meeting, the Chair of the FOMC made remarks during a press conference that were widely interpreted in financial markets to mean that the Fed might begin reducing the size of its $85 billion in monthly
> In each of the following examples, the law of one price does not hold (i.e., at current nominal exchange rates, the prices of these goods or services are not the same). For each case, explain what prevents the law of one price from holding. a) A ton of s
> A Starbucks coffee sells for 10 yuan in Beijing, China, and for $2 in Chicago. a) Calculate the nominal exchange rate if the law of one price holds. b) Assume that the nominal exchange rate is currently 7 yuan per dollar. What would the purchasing power
> Go to the St. Louis Federal Reserve FRED database, and find data on recession dating (USREC), consumer sentiment (UMCSENT), industrial production (INDPRO), and real retail and food service sales (RRSFS). a) Using the recession dating series (USREC), when
> Suppose a bottle of wine sells for $16 in California and for €10 in France. Assuming a nominal exchange rate of 0.75 euro per dollar, a) calculate the real exchange rate between U.S. wine and French wine. b) calculate the real exchange rate between U.S.
> 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
> 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
> Go to the St. Louis Federal Reserve FRED database, and find data on recession dating (USREC), the unemployment rate (UNRATE), nonfarm payroll employment (PAYEMS), and the mean duration of unemployment (UEMPMEAN). a) Using the recession dating series (USR
> 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
> You have been appointed secretary of a student group which has an annual programme of invited speakers from the business world. The group has suffered from a membership decline over the last few years and you are keen to reverse this trend by planning a
> Table 3.23 shows per capita income in the UK and consumers expenditure on a number of categories. For each category, analyze the relationship between income expenditure using scatter plots. Table 3.23 UK per capita income and per capita consumers' e
> A local authority operates a leisure centre for its citizens, offering a swimming pool, squash courts, badminton and other facilities on a single site. Last year the authority was concerned about the relatively low number of people using the facilities o
> Table 3.20 shows data on the distribution of incomes before and after tax in the UK in 2012/13. Using Lorenz curves analyse the data shown. Table 3.20: Table 3.20 Incomes before and after tax UK 2012/13 All Males Females Range Total Total Total of t
> Table 3.19 shows data on employment rates and unemployment rates for EU countries and for selected other countries for 2013–2014. Analyze the data using appropriate diagrams. Employment rate is the number of people in paid employment as
> Table 3.18 shows selected labour market statistics for spring 2014 for each region of the UK. Draft a report highlighting key patterns. Table 3.18: Table 3.18 UK labour markot statistics Spring 2014 Economically active In Employment Unemployed Econo
> Table 3.17 shows motor vehicle production from 2000 to 2013 for selected countries and the global total. Using appropriate diagrams and any additional calculated statistics, comment on the trends in production over this period. Table 3.17: Table 3.1
> Table 3.16 shows the UK expenditure on bilateral aid from 2009 to 2013 by geographical region of the recipient country. Using appropriate diagrams, draft a short report highlighting key patterns and trends Table 3.16 UK total expenditure on bilatera
> You also obtained supplementary information about the financial costs typically involved in providing health care for people of different ages. On a per capita basis the costs are as shown in Table 3.15. Age group……………………..Estimated spending
> Like many countries, Scotland is facing challenges in terms of providing health care to a demographically changing population. Health care provision and planning is organised largely on a regional basis. Two of the regions have commissioned a short repor
> The company you work for is considering acquiring several of the latest generation desktop computers for use in an office. The company expects the equipment to have a useful life of three years. The finance director has asked you to recommend whether the
> The data below shows quartile and median income for UK taxpayers before and after paying income tax for selected years. Analyze and comment on the data. Total income before tax Total income before tax Lower Upper quartile Lower Upper quartile quart
> A retail organization has recently been investigating customer spending patterns at two of its stores, Store A and Store B, and has obtained the following data: Using these statistics, and any others you can derive, draft a short management report summ
> The data shown in Table 4.15 shows average weekly earnings for all adults, weekly rate of unemployment benefit for single adults and the retail price index for the UK for the period 2000–2014. Using this data comment on any trends in
> The leisure services committee of a local authority has seen its budget decline over the last few years and is currently having to consider closing a number of its leisure facilities – sports halls, small parks, museums and so on. One closure being consi
> Table 4.14 shows the age distribution of males and females in England and Wales at the time of their marriage, from 1981–2011. Using the data calculate for each gender: (a) the mean (b) the median (c) the standard deviation (d) the lowe
> In the Laspeyres index in this chapter we used 2010 as the base year. Choose 2014 as the base year instead and recalculate the Laspeyres series for 2010, 2014 and 2015. Comment on these values compared with the index base 2010.
> For the data in Table 4.11, plot the real and money values over time on the same graph. Comment on the potential for misleading the user of money values. Table 4.11: Table 4.11 Hourly rates and hours worked: Part-time staff 2010 2014 Hourly pay Hour
> A local residential community has been complaining to the chief of police about speeding traffic through their area. Residents have complained that vehicles driving through the community have not been observing the speed limit, which officially is 50 kil
> For the two data sets shown below calculate the mean and standard deviation and comment on the relationship. Set 1………………………………Set 2 10……………………………………….100 20………………………………………200 30……………………………………..300 40…………………………………….400 50…………………………………….500
> A firm is involved in manufacturing high-quality electrical equipment. Each item produced costs £6000 and total annual output is 500 items. At the end of the production process each item is individually tested for quality and safety. If the item is defec
> You have the choice of investing a sum of money in four alternative schemes: (a) one which will pay 10 per cent per annum interest compounded daily; (b) one which will pay 10.25 per cent per annum interest compounded monthly; (c) one which will pay 10.5
> A supermarket sells one particular item in its store on a regular basis. It currently has 750 units of this item in stock and no deliveries are expected until next week. The manager knows that average weekly sales of this item are 625, standard deviation
> An enterprising MBA graduate who has been unable to find gainful employment has taken to visiting an office block in town each lunch time with an array of freshly made sandwiches for sale. The graduate reckons that he has a 90 per cent chance of selling
> An auditor is checking invoices that have been paid to see if they contain any errors. Historically around 7 per cent of all invoices are expected to contain some error. The auditor takes a random batch of ten invoices. Calculate the probability distribu
> On average last year a local leisure centre had 230 customers per day, standard deviation 27, and the distribution of customers was found to be Normal. Determine the probability that on any one day the centre has: (a) more than 270 customers (b) less tha
> A small firm has recently purchased a new PC system comprising a colour monitor, a CPU, a laser printer and a keyboard. The supplier of the equipment states that the chance of any one of the components developing a fault in the first year is 1 per cent.
> A large retail store buys an item from a supplier in batches of 100. Because of the delicate nature of the item some are inevitably damaged in transit between the supplier and the store and the price the store pays to the supplier reflects this. Over the
> The finance department of a large organization has responsibility for monitoring costs in other departments of the organization. A photocopier facility is available for one department’s use and data has been collected which reveals that the number of pho
> Return to the Worked Example in this chapter. After conducting market research we have found that the possibility of a customer in the top 5 per cent group switching to a competitor is 0.85 if we do not offer a price discount and 0.15 if we do. Consider
> Return to the example used in the chapter of two machines filling bottles of shampoo. One machine had a mean of 500 ml, SD 10 ml, the other a mean of 750 ml, SD 15 ml. For each machine calculate the lower and upper amounts (in ml) between which: (a) 90 p
> Return to the example of Machine 2 in the shampoo bottle problem. Assume that management likewise wishes to ensure that the advertised contents satisfy some specific criteria. Determine what the advertised contents should be if management: (a) require no
> Return to the worked example data shown in Table 2.2. (a) Calculate the percentage of total transactions split between credit cards and debit cards and show the results in a suitable diagram. Comment on what you see. How many significant figures do you t
> A small company finds itself in the position of having to complete a contract for a large customer or pay high financial penalties for failing to deliver. The firm finds itself with a problem. The stocks of one particular component used to assemble the p
> A small engineering firm is under increasing pressure from foreign competitors and is considering a number of strategic options. One of these relates to changing over from the existing production process to one which is completely automated. The firm has
> A large multinational oil company is considering its strategy in the North Sea. The UK government has announced that a new drilling site in the North Sea will be offered for sale on a competitive tender basis, the site going to the company making the hig
> A manufacturing firm has decided to capitalize on its existing success by building an extension to its production plant to come on stream by 2018. The firm has evaluated the decision and calculated that its profitability will improve by £650 000 if the e
> Consider the pay-off in Table 6.3 without the probability information. How could you now evaluate suitable decisions? Table 6.3: Table 6.3 Pay-off table: Eastern Europe (£000s) Market growth Zero Low High Pilot programme 10 50 150 Major product lau
