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 foreign exchange market.
> 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
> What are adaptive expectations? What justifies the assumption of adaptive expectations in Phillips curve analysis?
> According to the expectations-augmented Phillips curve, what factors determine the rate of inflation? How do changes in each factor affect the short-run Phillips curve?
> What basic relationship does the long-run Phillips curve describe? How does this relationship differ from that described by the short-run Phillips curve?
> What condition is required for equilibrium in the money market? Why does the money market move toward equilibrium?
> What are open market operations? How does the Fed use these operations to increase or decrease the money supply?
> In Keynes’s liquidity preference theory, what variables determine the demand for real money balances? How does the demand for real money balances respond to changes in each of these variables?
> How does an autonomous tightening or easing of monetary policy by the Fed affect the aggregate demand curve?
> What is the aggregate demand curve? Why does it slope downward?
> How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve?
> What is the monetary policy curve? Why does it slope upward?
> 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
> What can increase the equilibrium interest rate in the liquidity preference framework?
> What is the real interest rate? Why can the Fed control the real interest rate in the short run but not in the long run?
> What causes the IS curve to shift?
> What does the IS curve show? Why does it slope downward?
> What happens to aggregate output if unplanned inventory investment is either positive or negative?
> What condition is required for equilibrium in the goods market?
> How and why do changes in the real interest rate affect net exports?
> How do changes in planned expenditures affect the aggregate demand curve?
> How and why do changes in the real interest rate affect planned investment spending?
> What are the two types of planned investment spending?
> 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
> According to the consumption function, what variables determine aggregate spending on consumer goods and services? How is consumption related to each of these variables?
> What are the four components of planned expenditure, and why did Keynesian analysis emphasize this concept?
> 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 an
> 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
> 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
> 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
> 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?
> 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
> 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.
> 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
> 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
> 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.
> 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?
> 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
> 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
> 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
> 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
> 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
> 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
> 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
> 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 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)
> 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
> 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
> 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
> 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
> The production function for technology in Equation 8 can be expressed as At+1 - At = χ At αt Nt. Assume that χ = 1, that both N and α can vary over time, and that N is interpreted as the labor force rather than population. Go to the St. Louis Federal Res
> The Heritage Index, published yearly by the Heritage Foundation, provides a comprehensive numerical measure of overall economic freedom for countries and reflects the strength or weakness of institutions, political freedom, ease of doing business, and ru
> Go to the St. Louis Federal Reserve FRED database, and find data on the labor force, capital stock, GDP, and the price level for Turkey and South Korea, with data codes provided in the table below. Download each country’s data on a sepa
> The Heritage Index, published yearly by the Heritage Foundation, provides a comprehensive numerical measure of overall economic freedom for countries, with specific indicators reflecting the overall quality of financial markets through two indicators: fi
> Go to the St. Louis Federal Reserve FRED database, and find data on the St. Louis Fed financial stress index (STLFSI), the percent value of loans collateralized for commercial and industrial loans (ESAXDBNQ), and the net percentage of loan officers repor
> Go to the St. Louis Federal Reserve FRED database, and find data on the three-month U.S. Treasury note (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the three-month AA financial commercial rate (CPF3M), and the St. Louis Fed fin
> 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
> 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
> 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
> 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?
> One of the main characteristics of financial deepening is that more individuals participate in the financial system: more people open checking and saving accounts, and more firms rely on financial intermediaries as a source of funds. Comment on the effec
> Many policy makers in developing countries have proposed the implementation of systems of deposit insurance like the one that exists in the United States. Explain why this might create more problems than solutions in the financial system of a developing
> 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.
> Go to the St. Louis Federal Reserve FRED database and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL). a) Calculate the value of the money multiplier using the most recent data available, and the data from five years prior. b) Based
> Financial regulators have been working to improve transparency and reduce risk in the derivatives market. How do you think increased transparency will affect financial intermediaries that trade derivatives? How do you think it will affect the overall per
> Gustavo is a young doctor who lives in a country with a relatively inefficient legal system and (probably as a consequence) an inefficient financial system. When Gustavo applied for a mortgage, he found that banks (he visited many) usually required colla
> In December 2001, Argentina announced that it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds that were now priced at a fraction of their recent value. A few years later, Argentina announced that
> Suppose you go to a bank intending to buy a certificate of deposit with your savings. Explain why you would not offer a loan to the next individual who applies for a car loan at the bank at a higher interest rate than the rate the bank pays on certificat
> Identify the type of asymmetric information problem described in each of the following scenarios: a) A loan officer requests information about your work and credit history before approving your car loan application. b) The same loan officer explains that
> Suppose a given country encourages its citizens to save 20% of their income and then allocates these funds through government owned financial intermediaries. As a result, many government officials get mortgages to buy expensive houses (and often default
> Microcredit programs (i.e., very small loans issued to the extremely poor) usually target a group of women and assign funds to them under the condition that decisions about the use of funds are made by all women in the group. How do you think this proced
> Suppose a firm has a great idea: overnight shipping. This idea will decrease costs for many businesses and will therefore result in a more efficient economy. If the entrepreneurs who create this concept cannot get funds to put their idea to work, what do
> Suppose that f is determined by two factors: financial panic and asset purchases. a) Using an MP curve and an AS>AD graph, show how a sufficiently large financial panic can pull the economy below the zero lower bound and into a destabilizing deflationary
> In 2003, as the economy finally seemed poised to exit its ongoing recession, the Fed began worrying about a “soft patch” in the economy; in particular, it worried about the possibility of deflation. As a result, the Fed proactively lowered the federal fu
> 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
