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 government might undertake to affect structural unemployment in this case?
> The NBER Business Cycle Dating Committee stated that the U.S. economy entered a recession in December 2007. The S&P/Case-Shiller Home Price Index (a widely used measure of home prices) shows an increase in home prices from January 2000 to April 2006. Fro
> Discuss the following statement: “Real GDP has decreased for two quarters in a row; we definitively are living through a contraction.”
> Do you think that the hourly wage (i.e., the price of labor) is a relatively flexible or a relatively sticky price? Explain why.
> Using the accompanying graph, measure the following: a) Expansions (in months from trough to peak) b) Contractions (in months from peak to trough) Economic Activity 01/1912 01/1913 12/1914 08/1918 03/1919 Time
> Do you tend to agree more with Sachs (foreign aid should be increased) or with Easterly (foreign aid can do more harm than good) in the foreign aid debate? Explain your arguments.
> Do you think corruption affects the enforcement of property rights, or is it that badly designed institutions create opportunities for corruption? In other words, does corruption determine the enforcement and design of property rights, or is it the other
> Transparency International constructs the Corruption Perception Index (CPI), meant to measure “the perceived level of public-sector corruption in 180 countries and territories around the world.” The CPI ranges from 0 (
> The International Property Rights Index (IPRI) ranks countries according to the significance and protection of both intellectual and physical property rights. What correlation between income per capita growth and the IPRI ranking might you expect? Why?
> How might the effects of government spending on proper sewage infrastructure, which results in improved sanitation for crowded cities in poor countries, promote economic growth?
> Uruguay has implemented the One Laptop per Child (OLPC) initiative in which one laptop is given to every child and teacher in a public primary school. Comment on the effects of this program on the following: a) Uruguay’s human capital stock b) Uruguay’s
> Go to the St. Louis Federal Reserve FRED database, and find data on the Bank Prime Loan Rate (MPRIME), the Effective Fed Funds Rate (FEDFUNDS), and the 3-Month Treasury Bill: Secondary Market Rate (TB3MS). Use data from the most recent month available an
> Consider the world economy and comment on the effect of the Industrial Revolution on the world growth rate of output per person, according to the assumptions of the Romer model.
> Discuss the validity of the following statement: “Unlike Solow’s model, Romer’s model concludes that changes in the saving rate do not affect the sustained per-capita output growth rate.”
> Michael Kremer’s research suggests that higher population might stimulate technological progress. How can higher population stimulate technological change?
> During the late 1960s, Chinese authorities imposed the precepts of the “Cultural Revolution” on their people. As a result, almost all scholars and researchers were sent to the fields to perform manual agricultural tasks. Comment on the effect this had on
> Suppose two countries have the same growth rates of capital and labor inputs. These factors contribute two percentage points to their respective countries’ total output growth rates. Output growth rates are 2.5% for country 1 and 4.5% for country 2. a) E
> The U.S. government has provided billions of dollars for broadband Internet access nationwide, including grants for rural broadband access, expansion of computer center capacity, and sustainable broadband adoption initiatives. Is there a good rationale f
> Start by drawing a given country’s steady state, using only the investment and the depreciation and capital dilution curves. On the same graph, do the following: a) Consider the effects of an immigration wave of individuals who exhibit both higher saving
> Start by graphing the U.S. steady-state capital labor ratio and labeling it k* 1900 (draw only the investment and the depreciation and capital dilution curves). a) On the same graph, show the effects of the following: ■ The massive immigration waves of t
> Based on the Solow model’s conclusions about population growth, comment on the effects of immigration on a country’s a) aggregate output level. b) capital-labor ratio.
> One of the most well-known population control policies is the one-child policy implemented by China since the late 1970s. Comment on the side effects of such a policy. This policy has been dubbed a success, since fertility rates dropped by a considerable
> A measure of real interest rates can be approximated by the Treasury Inflation Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five year TIIS (FII5) and a measure of the price index, the personal consump
> Assume that low standards of living (i.e., low capital-labor ratios, in the Solow model’s terms) are the reason that some countries exhibit high fertility rates. Comment on the effect of population control policies to reduce fertility rates. Explain why
> Consider the effects of an increase in the saving rate on the United States capital-labor ratio, according to the Solow model. a) What would be the immediate effect of a saving rate increase on the capital-labor ratio? What would be the long-run effect?
> The tsunami that hit Japan in April of 2011 was the costliest national disaster in history. The following graph describes Japan’s economy before the tsunami. Assume Japan was at its steady-state capital-labor ratio before the tsunami hi
> Compare the following factors of production in terms of their rivalry and excludability: a) A robot that welds car frames and the idea of building a car in an assembly line b) A recipe to make pancakes and the recipe to manufacture a soda drink
> Transparency and communication with the public by the Federal Reserve have increased significantly over the last decade. What does this say about the Federal Reserve’s view of the relevance of the three business cycle models?
> Suppose the U.S. Congress is forced to increase taxes to pay for the cost of health care reform in the United States. Describe the effects of such a policy, according to the three business cycle models, if this increase in taxes is fully anticipated by e
> Speeches made by Federal Reserve officials are an integral part of the Fed’s management of expectations strategy. In a speech made in November 2002, then-Fed Governor Ben Bernanke, when trying to reassure the public that the Fed would try to avoid a gene
> For each of the following cases, determine which would be the preferred macroeconomic model to analyze business fluctuations. a) Most wages are the result of collective bargaining and are therefore quite rigid. In addition, expectations are based mostly
> Suppose consumer confidence surges, making consumers more willing to spend. Use the New Keynesian model to describe the effects on output and inflation depending on whether the surge in consumers’ confidence was anticipated or unanticipated.
> Using a graphical representation of the new Keynesian model, describe the effects of an unanticipated negative demand shock (label this equilibrium as point 2). Compare these effects to those of an anticipated negative demand shock (label this equilibriu
> A measure of real interest rates can be approximated by the Treasury Inflation Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five year TIIS (FII5) and a measure of the price index, the personal consump
> The Bureau of Labor Statistics (BLS) tracks the numbers of workers who are employed part-time for economic reasons. The number typically increases sharply at the beginnings of recessions and gradually declines at the ends of recessions. Is this behavior
> The graph on the next page is based on quarterly data on unemployment and real output growth in the United States between 2006 (q1) and 2013 (q2). Are these data consistent with the real business cycle theory hypothesis regarding the relationship between
> The table below shows the inflation rate and the level of real GDP under the anti-inflation policy known as the Volcker disinflation for two periods in the early 1980s. a) Use the data in the table to calculate the sacrifice ratio. b) Leading up to the
> Assume the following production function: Yt = AK0.4 t L0.6 t . The capital stock and output are measured in trillions of dollars, and the labor stock is measured in millions of people. a) Using the value of output and the capital and labor stocks, cal
> 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
> 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
> 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
> 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
