Compare the traditional Keynesian, new Keynesian, and real business cycle models in terms of expectations, price flexibility, and potential sources of business cycle fluctuations.
> What government policies can be used to promote productivity growth?
> What is the policy trilemma?
> What causes the short-run aggregate supply curve to shift?
> What basic relationship does the short-run Phillips curve describe? What trade-offs does this relationship seem to offer policy makers?
> What has been the general experience of countries that have adopted inflation targeting?
> What is cyclical unemployment?
> Go to the St. Louis Federal Reserve FRED database, and find data on the University of Michigan’s consumer sentiment index (UMCSENT) and real personal consumption expenditures (PCECC96). Convert the consumer sentiment index to “Quarterly” using the freque
> Identify three factors that might cause the exchange rate for a currency to rise.
> The Federal Reserve has promised that at some future date, it will raise interest rates as part of its “exit strategy” from the expansionary monetary policy it pursued in the aftermath of the global financial crisis. What will be the impact of this “exi
> Suppose that in a given economy all goods and services produced are sold in perfectly competitive markets. Would you represent this economy using the classical or Keynesian approach? Explain why.
> Suppose the economy of India can be represented by the following production function: Y = AK1>3L2>3. Assume that during 2014, India’s technological growth (Solow residual) is 4%, and the growth rates of both the capital and labor input stocks are 3%. a)
> How does an increase in financial frictions affect planned investment spending?
> In the Solow growth model, which variables are exogenous and which are endogenous?
> Is stabilization policy more likely to be conducted with monetary policy or fiscal policy? Why?
> Assume that Luke is considering investing in new equipment and computers for his construction company. The real interest rate is 5%, construction equipment is valued at $600,000, and computers are valued at $20,000. Neither type of capital is expected to
> Describe the effect of an increase in next period’s income on the intertemporal budget constraint. If next year’s income increases by $3,000 and the interest rate is 5%, by how much does the intertemporal budget line shift?
> Suppose government purchases amount to $2.5 trillion, transfer payments amount to $1 trillion, net interest payments are $0.5 trillion, and tax revenue is valued at $3 trillion. a) Calculate the government deficit. b) Calculate the primary deficit.
> Go to the St. Louis Federal Reserve FRED database, and find data on the civilian population (CNP16OV) and the civilian population 55 years old and over (LNU00024230). Convert the two population series to “Quarterly” using the frequency setting, and downl
> The Bureau of Economic Analysis valued nominal U.S. gross domestic product (i.e., actual expenditure) at $16,420 billion at the end of 2012. Suppose that consumption expenditure was $12,210 billion, planned investment spending was $1,680 billion, and gov
> Assume that the per-worker production function is yt = 2kt 0.5. The saving and depreciation rates are estimated at 0.2 and 0.04, respectively. a) Calculate the capital-labor ratio steady state for this economy. b) Calculate consumption per worker at the
> Suppose a plot of the values of M2 and nominal GDP for a given country over forty years shows that these two variables are very closely related. In particular, a plot of their ratio (nominal GDP/M2) yields very stable and easy-to predict values. Based on
> According to the portfolio theory approach to money demand, what would be the effect of a stock market crash on the demand for money? (Hint: Consider both the increase in stock price volatility following a market crash and the decrease in the wealth of s
> Consider the portfolio theory of money demand. How do you think the demand for money would be affected by a hyperinflation (i.e., monthly inflation rates in excess of 50%)?
> Suppose a given country experienced low, stable inflation rates for quite some time, but then inflation picked up and has been relatively high and quite unpredictable over the past decade. Explain how this new inflationary environment would affect the de
> Explain how the following events will affect the demand for money according to the portfolio theory approach to money demand: a) The economy experiences a business cycle contraction. b) Brokerage fees decline, making bond transactions cheaper.
> Plot the values of velocity you found in Problem 7, and comment on the volatility (i.e., fluctuations) of velocity. Data from Problem 7: Suppose the liquidity preference function is given by L1i, Y2= Y - 1,000i. For the data given in the table below,
> Suppose the liquidity preference function is given by L1i, Y2= Y - 1,000i. For the data given in the table below, calculate velocity using Equation 2.
> In many countries, people hold money as a cushion against unexpected needs arising from a variety of potential scenarios (e.g., banking crises, natural disasters, health problems, unemployment, etc.) that are usually not covered by insurance markets. Exp
> Go to the St. Louis Federal Reserve FRED database, and find data on disposable personal income (DPI), personal saving (PSAVE), and personal consumption expenditures (PCEC). Download the data onto a spreadsheet. For each quarter, calculate the average pro
> Some payment technologies require infrastructure (e.g., merchants need to have access to credit card swiping machines). In most developing countries, this infrastructure is either nonexistent or very costly. Everything else being the same, would you expe
> Suppose a new payment technology allows individuals to make payments using U.S. Treasury bonds (i.e., U.S. Treasury bonds are immediately cashed when needed to make a payment, and that balance is transferred to the payee). How do you think this payment t
> What evidence is used to assess the stability of the money demand function? What does the evidence suggest about the stability of money demand, and how has this evidence affected monetary policy making?
> According to the portfolio theory of money demand, what are the four factors that determine money demand? What changes in these factors can increase the demand for money?
> What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? Based on these motives, what variables did he think determined the demand for money?
> During the Great Depression years of 1930– 1933, bank panics led to a dramatic rise in the currency and excess reserves ratios, while the monetary base rose by 20%. Explain how banks’ and depositors’ behavior led to the sharp increase in the currency and
> Calculate the money multiplier for the following values of the currency, excess reserves, and required reserves ratios (i.e., complete the following table), and explain why the money multiplier decreases when the currency or excess reserves ratio increas
> Under very particular conditions, banks would like to borrow from the Fed and, rather than use these borrowed funds to make loans, keep them in the form of excess reserves. What would be the effect on the monetary base and the money supply of an increase
> Suppose the Federal Reserve conducts an open market purchase for $100 million. Assuming the required reserves ratio is 10%, what would be the effect on the money supply in each of the following situations? a) There is only one bank, and the bank decides
> The Federal Reserve announced the closing of many lending facilities, like the term auction facility (TAF), that were originally created to extend loans to financial intermediaries during the most difficult years of the recent global financial crisis. Wh
> Go to the St. Louis Federal Reserve FRED database, and find data on real personal consumption expenditures (PCECCA) and a measure of real interest rates, the 10-year treasury inflation-indexed security (FII10). Convert the TIIS rate to “Annual” using th
> Go to the St. Louis Federal Reserve FRED database, and find data on population and GDP per capita for the following countries, with data codes provided in the table below. a) For each country, calculate the average population growth rate per year by ca
> Some developing countries have suffered banking crises in which depositors lost part or all of their deposits (in some countries there is no deposit insurance). This type of crisis decreases depositors’ confidence in the banking system. What would be the
> Use the Fed and the banking system T-accounts to describe the effects of a Fed sale of $200 million worth of government bonds to a bank that pays with part of its reserves held at the Fed. What would be the effect of this transaction on the Fed’s monetar
> Use the following information to determine the Fed’s balance sheet and calculate the Fed’s monetary liabilities: Currency in circulation = $750 billion Reserves of the banking system = $850 billion Securities held by the Fed = $450 billion Discount loans
> Identify the five factors that determine the money supply. For each factor, explain which player(s) in the money supply process—the Federal Reserve, depositors, and banks—control or influence it, and how and why it affects the money supply.
> Suppose the Fed buys U.S. Treasury securities from Bank of America. According to the simple model of multiple deposit creation, how does this open market purchase affect the money supply? What are the two basic assumptions of the simple model you have de
> What is the monetary base? How does the Federal Reserve influence its size?
> How do the traditional Keynesian, new Keynesian, and real business cycle models differ in their analysis of the effects of anti- inflation policy?
> How do the traditional Keynesian, new Keynesian, and real business cycle models differ in their analysis of the effects of expansionary policy?
> In the new Keynesian model, what shocks cause business cycle fluctuations? Does it matter whether these shocks are anticipated or unanticipated? Explain.
> Go to the St. Louis Federal Reserve FRED database, and find data on the monthly U.S. dollar exchange rates to the Chinese yuan, Canadian dollar, and South Korean won. Download the data onto a spreadsheet. a) Over the most recent five-year period of data
> How do new Keynesian ideas about expectations affect the IS and aggregate demand curves?
> How do new Keynesian ideas about price setting and inflation expectations affect the short run aggregate supply curve?
> What objections to the real business cycle model have been raised?
> How does the real business cycle model explain fluctuations in employment and unemployment?
> How do the traditional, new Keynesian, and real business cycle models differ in their views about the efficacy of discretionary policy?
> What are the key ideas of the real business cycle model? How does it explain business cycle fluctuations?
> What are the arguments for and against central bank independence?
> What are the purposes of inflation targeting, and how does this monetary policy strategy achieve them?
> How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does it help if a negative aggregate supply shock occurs?
> What benefits does a credible nominal anchor provide?
> Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also, find data on the daily three-month London Interbank Offer Rate (LIBOR)
> What are the arguments for and against rules?
> What is the time-inconsistency problem, and what role does it play in the debate between advocates of discretion and advocates of rules in policy making?
> What is the significance of the Lucas critique of econometric policy evaluation?
> How does the theory of rational expectations differ from that of adaptive expectations?
> What is the natural rate of unemployment? What has caused the natural rate to change over time?
> Why does real wage rigidity contribute to unemployment? What are its causes?
> Why does structural unemployment occur?
> What is frictional unemployment? Why can it be beneficial for workers, firms, and the economy?
> What are the three categories of employment status? What movement between categories results from the existence of discouraged workers?
> Identify three things that can change labor demand or supply and reduce employment. How would each of these affect real wages?
> Go to the St. Louis Federal Reserve FRED database and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for £17,865 or in Boston, United States, for $23,495. a) Use the most rec
> Is the quantity of labor supplied inversely related to the real wage rate? Why or why not?
> Why is the quantity of labor demanded inversely related to the real wage rate?
> What are the determinants of residential investment?
> How are Tobin’s q theory and the neoclassical theory of investment related?
> What is Tobin’s q? How does it provide a theory of investment spending?
> Why do firms hold inventories, and why is their inventory investment a matter of interest to macroeconomists?
> Explain how the desired levels of capital and investment are affected by changes in the expected marginal product of capital, the user cost of capital, and taxes.
> According to the neoclassical theory of investment, how do firms determine their optimal amount of investment spending once they have identified their desired level of capital?
> Explain how the user cost of capital and the expected marginal product of capital together determine the desired level of capital.
> What is the user cost of capital? What variables determine this cost, and how does a change in each variable affect it?
> Go to the St. Louis Federal Reserve FRED database, and find data on daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), Japanese yen (DEXJPUS), Chinese yuan (DEXCHUS), and Canadian dollar (DEXCAUS). a) Report the exchange rates f
> What kinds of policies has the U.S. government pursued to encourage home ownership, and how do they achieve this goal?
> Identify and give examples of the three components of investment spending.
> What is the permanent income hypothesis? How does its consumption function relate to intertemporal choice?
> On what assumptions did Keynes base his theory of consumption? How does his theory relate to intertemporal choice?
> How do binding borrowing constraints affect the IBL and current and future consumption?
> How do changes in the real interest rate affect the IBL and current and future consumption?
> What can shift the intertemporal budget line, IBL? What happens to current and future consumption when IBL shifts occur?
> Explain how the intertemporal budget constraint and indifference curves are used to derive a consumer’s optimal choice of current and future consumption.
> What do indifference curves show about current and future consumption? Why do they slope downward? Why are they convex?
> What is the logic behind the intertermporal budget constraint? On what assumptions is it based, and how is its slope interpreted?
> Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the Federal Reserve (FDHBFRBN). Convert the two “debt held” s
> What modifications to the intertemporal choice theory have been suggested by the random walk hypothesis and behavioral economics?
> Describe the life-cycle hypothesis and how it relates to intertemporal choice.
> Why is a theory of consumption also a theory of saving?
> What happens in a fixed exchange rate regime if a currency is overvalued? What problem can this create?
> How do fixed, floating, and managed (dirty) float exchange rate regimes differ?
