Question: How and why do changes in the

> Identify three things that can change labor demand or supply and reduce employment. How would each of these affect real wages?

> 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.

> 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

> Go to the St. Louis Federal Reserve FRED database and find data on the net saving rate as a percentage of national income (W207RC1A156NBEA). a) Calculate the average net saving rate over the period from 1960 to 1980, and again for the period from 1980 to

> 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?

> 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 determines whether budget deficits will result in inflation in the long run?

> Why are fiscal multipliers higher when the policy rate has hit the floor of the zero lower bound?

> Is balancing the budget a contractionary macroeconomic policy?

> How does a supply-side analysis of the effects of a tax cut differ from one that focuses solely on aggregate demand?

> How can government increase the quantity of aggregate output demanded by changing government spending and taxes? Why does the multiplier for spending changes differ from that for tax changes?

> 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

> What arguments should be considered in assessing the burden that government debt imposes on future generations?

> What factors have influenced the debt-to GDP ratio in the United States since 1940?

> What is a budget deficit, and what are the two main ways in which the government can finance deficit spending? Which of these methods of financing deficits does the U.S. government most commonly use?

> How does the Ricardian equivalence view of the effects of tax cuts (and budget deficits) differ from the traditional view? What objections to the Ricardian equivalence view have been raised?

> Identify the four main categories of government spending and give an example of each. What are the government’s four main revenue sources?

> What causes the long-run aggregate supply curve to shift?

> Why does the short-run aggregate supply curve slope upward?

> What is Okun’s law? How do we combine it with Phillips curve analysis to derive the short-run aggregate supply curve?

> What relationship does the aggregate supply curve describe? How is this relationship depicted with the long-run aggregate supply curve?

> According to modern Phillips curve analysis, what factors determine the rate of inflation? How do changes in each factor affect the short-run Phillips curve?

> 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 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.

> 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

> 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