Question: How does the Ricardian equivalence view of

> 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

> Use the graphical representation of the Solow growth model to explain why an increase in the technology factor A leads to a more-than proportional increase in both the capital-labor ratio and output per worker.

> Refer to Problem 1 for data and assume now that the population growth rate increases to 5%. Calculate the new steady-state values of the capital-labor ratio and output. Explain your answer graphically, and compare the new values of the capital-labor rati

> Refer to Problem 1 for data and assume now that the saving rate increases to 50%. Calculate the new steady-state values of the capital labor ratio and output. Explain your answer graphically. Data from Problem 1: Use the following table to find the ste

> Use the following table to find the steady-state values of the capital-labor ratio and output per worker (i.e., complete the table) if the per worker production function is yt = 2kt 0.3:

> 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,

> 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

> 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. 8

> 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

> 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?

> 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?

> 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

> 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?

> 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?

> 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 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