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 subscripts denote the sectors. The economy has 100 workers who are willing and able to work in either sector. a. If workers are free to move between sectors, what relationship will there be between Wm and W s ? b. Suppose that the condition in part (a) holds and wages adjust to equilibrate labor supply and labor demand. Calculate the wage and employment in each sector. c. Suppose a union establishes itself in manufacturing and pushes the manufacturing wage to $25. Calculate employment in manufacturing. d. In the aftermath of the unionization of manufacturing, all workers who cannot get the highly paid union jobs move to the service sector. Calculate the wage and employment in services. e. Now suppose that workers have a reservation wage of $15—that is, rather than taking a job at a wage below $15, they would rather wait for a $25 union job to open up. Calculate the wage and employment in each sector. What is the economy’s unemployment rate?
> Suppose that consumption depends on the interest rate. How, if at all, does this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment, consumption, national saving, and the interest rate?
> When the government subsidizes investment, such as with an investment tax credit, the subsidy often applies to only some types of investment. This question asks you to consider the effect of such a change. Suppose there are two types of investment in the
> Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think the well-being of the average person in society most likely changes in the same direction as real GDP? Why or why not? a. A hurricane in
> You read on a financial Web site that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that international capital flows equalize the real interest rates in the two countries and that purchasi
> Suppose that the government increases taxes and government purchases by equal amounts. What happens to the interest rate and investment in response to this balanced-budget change? Explain how your answer depends on the marginal propensity to consume.
> In a speech that Senator Robert Kennedy gave when he was running for president in 1968, he said the following about GDP: [It] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include th
> This problem asks you to analyze the IS–LM model algebraically. Suppose consumption is a linear function of disposable income: C(Y - T ) = a + b(Y - T ), where a> 0 and 0 < b < 1. The parameter b is the marginal propensity to consume, and the parameter a
> “Traveling in Mexico is much cheaper now than it was ten years ago,” says a friend. “Ten years ago, a dollar bought 10 pesos; this year, a dollar buys 15 pesos.” Is your friend right
> Consider an economy described as follows: Y= C + I+ G. Y = 8,000. G = 2,500. T = 2,000. C = 1000 + 2/3(Y-T ). I = 1,200 - 100r. a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now
> Imagine that you run the central bank in a large open economy with a floating exchange rate. Your goal is to stabilize income, and you adjust the money supply accordingly. Under your policy, what happens to the money supply, the interest rate, the exchan
> An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for jobs, 10 would like to work but are so discouraged they have given up lo
> This problem uses calculus to compare two scenarios of consumer optimization. a. Nina has the following utility function: U = ln(C1) + ln(C2) - ln(C3) She starts with wealth of $120,000, earns no additional income, and faces a zero interest rate. How m
> Use the dynamic AD–AS model to solve for inflation as a function of only lagged inflation and supply and demand shocks. (Assume target inflation is constant.) a. According to the equation you have derived, does inflation return to its target after a shoc
> Go to the Web site of the Bureau of Labor Statistics (http://www.bls.gov). For each of the past five years, find the inflation rate as measured by the consumer price index for\all items (sometimes called headline inflation) and as measured by the CPI exc
> Use the Mundell–Fleming model to answer the following questions about the state of California (a small open economy). a. What kind of exchange-rate system does California have with its major trading partners (Alabama, Alaska, Arizona, . . .)? b. If Calif
> Suppose that the demand for real money balances depends on disposable income. That is, the money demand function is M/P = L(r, Y - T ). Using the IS–LM model, discuss whether this change in the money demand function alters the following. a. The analysis
> In any city at any time, some of the stock of usable office space is vacant. This vacant office space is unemployed capital. How would you explain this phenomenon? In particular, which approach to explaining unemployed labor applies best to unemployed ca
> Oceania is a small open economy. Suppose that a large number of foreign countries begin to subsidize investment by instituting an investment tax credit (while adjusting other taxes to hold their tax revenue constant), but Oceania does not institute such
> Jimmy Paul Miller starts his own bank, called JPM. As owner, Jimmy puts in $2,000 of his own money. JPM then borrows $4,000 in a long-term loan from Jimmy’s uncle, accepts $14,000 in demand deposits from his neighbors, buys $7,000 of U.S. Treasury bonds,
> Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases the amount they want to consume today. This might be interpreted as an upward shift in the consumption function. How does this shi
> Explain why the aggregate demand curve slopes downward.
> Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green apples. a. Compute a consumer price index for apples for ea
> Why might the level of government debt affect the government’s incentives regarding money creation?
> Consider two savings accounts that pay the same interest rate. One account lets you take your money out on demand. The second requires that you give 30-day advance notification before withdrawals. a. Which account would you prefer? Why? b. Can you imagin
> Suppose that people’s expectations of inflation are subject to random shocks. That is, instead of being merely adaptive, expected inflation in period t, as seen in period t - 1, is Et-1πt =π t-1 + nt 1, where ht21 is a random shock. This shock is normall
> Some economists believe that taxes have an important effect on the labor supply. They argue that higher taxes cause people to want to work less and that lower taxes cause them to want to work more. Consider how this effect alters the macroeconomic analys
> Suppose that the price level relevant for money demand includes the price of imported goods and that the price of imported goods depends on the exchange rate. That is, the money market is described by M/P = L(r, Y ), where P = λPd + (1 -λ)Pf/e. Her
> The Fed is considering two alternative monetary policies: • holding the money supply constant and letting the interest rate adjust, or • adjusting the money supply to hold the interest rate constant. In the IS–LM model, which policy will better stabilize
> Choose two countries that interest you—one rich and one poor. What is the income per person in each country? Find some data on country characteristics that might help explain the difference in income: investment rates, population growth rates, educationa
> Consider how unemployment would affect the Solow growth model. Suppose that output is produced according to the production function Y= K a[(1 - u)L]1-a, where K is capital, L is the labor force, and u is the natural rate of unemployment. The national sav
> When workers’ wages rise, their decision about how much time to spend working is affected in two conflicting ways—as you may have learned in courses in microeconomics. The income effect is the impulse to work less, because greater incomes mean workers ca
> 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
> 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?
> 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 hypothe
> 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
