The recent debate about healthcare reform in the United States included arguments about how the proposed reform might affect the efficiency of the U.S. economy. Based on the aggregate demand and supply analysis, do you think that a more or less efficient economy is an important issue in this debate? (Hint: consider the long-run effect of a less efficient economy on the output level.)
> 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
> The Taylor rule suggests that the policy rate target should be increased when the output gap is positive. Do you think the Taylor rule encourages or discourages demand-pull inflation? Which might be a limitation of the Taylor rule with respect to demand-
> The following table shows unemployment and inflation rates for Canada during the 1972–1982 period: a) Plot Canada’s unemployment rates during this period. On the same graph, draw a horizontal line at 7.3%, representi
> Assume that policy makers are using the Taylor rule as a basis for policy changes, as specified in Equation 1. Under each of the following scenarios, show how the real interest rate, output, and inflation behave in both the short and long run. Use an IS
> The following panels describe two different short-run aggregate supply curves. In which situation is the case for non-activist policy stronger? Explain why.
> Suppose one could measure the welfare gains derived from eliminating output (and unemployment) fluctuations in the economy. Assuming these gains are relatively small for the average individual, how do you think this conclusion would affect the activist/n
> The following table shows the inflation rate and output level for four consecutive periods in a given economy. In period 1, the economy is at its long-run equilibrium (i.e., the inflation rate equals its target and output equals potential output). In per
> Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit. a) According to the aggregate demand and supply analysis, what will be the effect of such a measure in the short
> According to the Reserve Bank of New Zealand Act of 1989 (section 8): “The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices
> Why do governments provide safety nets for bank depositors, and what are their consequences?
> Discuss the following statement: “When Keynes stated that ’in the long run, we are all dead’ he meant that we should focus only on the short run and not pay attention to any
> How can asymmetric information problems lead to a bank panic?
> What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?
> Why are asymmetric information problems particularly challenging in developing countries? What does this imply about the importance of financial intermediation and the role of banks in these countries?
> Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?
> What is asymmetric information? What two asymmetric information problems hinder the operation of the financial system?
> How does direct finance differ from indirect finance? Which form of finance is more important?
> What are the benefits of financial deepening?
> What role does the financial system play in promoting economic growth?
> What nonconventional monetary policies shift the aggregate demand curve, and how do they work?
> Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
> Using Table 8.1 (NBER business cycles), identify the longest and shortest expansion and contraction in the United States from Table 8.1:
> How does the policy rate hitting a floor of zero lead to an upward-sloping aggregate demand curve?
> Explain the processes of cost-push and demand-pull inflation. How do macroeconomists distinguish between the two?
> How can the monetary authorities target any inflation rate they want?
> Would it be a good idea for monetary policy makers to set the federal funds rate solely using the Taylor rule?
> How does the Taylor rule relate to the monetary policy curve?
> Describe the five time lags involved in implementing stabilization policy.
> Why do activists believe the economy’s self-correcting mechanism is slow?
> Summarize the main points of disagreement in the debate between activists and non activists.
> Why does the divine coincidence simplify the job of policy making? In what situations will it prevail? Why?
> What specific procedures do financial intermediaries use to reduce asymmetric information problems in lending?
> Consider the following variables: real GDP, consumer spending, investment, unemployment, inflation, stock prices, interest rates, and credit spreads. Classify each as pro cyclical, countercyclical, or a cyclical, and as leading, lagging, or coincident.
> What is the equilibrium real interest rate? How does it influence the interest rate decisions of Federal Reserve policy makers?
> Distinguish between hierarchical and dual mandates. Which best describes the policy making environment in the United States?
> Should policy makers strive to achieve zero rates of unemployment and inflation? Why or why not?
> Describe the two primary objectives of macroeconomic stabilization policy.
> 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.
> 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 governmen
> 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 real GDP (GDPC1) and the GDP deflator (GDPDEF). Convert the deflator to the inflation rate by setting the Units setting to “Percent Change from Year Ago,” and download the data. a) Based
> 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.
> 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 civilian employment (CE16OV) and the personal consumption expenditure price index (PCEPI). For both series, change the Units setting to “Percent Change from Year Ago.” a) Report the infl
> 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
> 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
