Question: What are factor prices? What classical assumptions

> Assume the demand for real money balances is given by Md = Y - 150i (an interest rate of 2% is entered into this formula as 2). Suppose P 6 Y = 12,900 billion, so that Md =12,900

> Suppose U.S. aggregate output is still below potential by 2018, when a new Fed chair is appointed. Suppose his or her approach to monetary policy can be summarized by the following statement: “I care only about increasing employment; inflation has been a

> What would be the effect on the aggregate demand curve of an increase in U.S. net exports? Would an increase in net exports affect the monetary policy curve? Explain why or why not.

> Suppose the monetary policy curve is given by r = 1.5 + 0.75 π, and the IS curve is given by Y = 13 - r. a) Find the expression for the aggregate demand curve. b) Calculate aggregate output when the inflation rate is at 2%, 3%, and 4%. c) Plot the aggreg

> Refer to the monetary policy curve described in Problem 1. Assume now that the monetary policy curve is given by r = 2.5 + 0.75 π. a) Does the new monetary policy curve represent an autonomous tightening or loosening of monetary policy? b) Plot the new m

> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the Units setting to “Percent Change from Year Ago” and download the data. Beginning in January 2012, the Fed formally

> Referring to Problem 8, what is the combined effect of these two events on the IS curve? Data from Problem 8: Suppose you read in the newspaper that prospects for stronger future economic growth will lead the dollar to strengthen and stock prices to inc

> Suppose you read in the newspaper that prospects for stronger future economic growth will lead the dollar to strengthen and stock prices to increase. a) Comment only on the effect of the strengthened dollar on the IS curve. b) Comment only on the effect

> After the press conference that followed the Federal Open Market Committee meeting on June 19, 2013, there were reports in the media that Chairman Bernanke’s comments were a signal that the Fed would raise interest rates sooner than expected. As a result

> Part of the 2009 stimulus package ($93 billion) was paid out in the form of tax credits. However, even though interest rates did not change significantly during that year, aggregate output did not increase. Using the parameters from the numerical example

> Suppose the U.S. Congress declares China to be a “currency manipulator” and therefore legislates a tariff on Chinese goods. Considering only the decrease in imports, a) comment on the effect of such a measure on the IS curve. b) show your answer graphica

> Suppose that Dell Corporation has 20,000 computers in its warehouses on December 31, 2016, ready to be shipped to merchants (each computer is valued at $500). By December 31, 2017, Dell Corporation has 25,000 computers ready to be shipped, each valued at

> Calculate consumption expenditure using the consumption function (as described by Equation 2) and the following estimates: Autonomous consumption: ……………….………. $1,450 billion Income: ……………………………………….………... $14,000 billion Taxes: ……………………………………………………... $

> Assume the following estimates: Autonomous consumption: $1,625 billion Disposable income: $11,500 billion Using the consumption function in Equation 2, calculate consumption expenditure if an increase of $1,000 in disposable income leads to an increase

> Assume the monetary policy curve is given by r = 1.5 + 0.75 π. a) Calculate the real interest rate when the inflation rate is at 2%, 3%, and 4%. b) Plot the monetary policy curve and identify the points from part (a).

> 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 federal funds rate (FEDFUNDS), and the total volume of assets on the Federa

> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Download the data, then calculate a series for inflation. For each quarter, take the percentage change in the price index from

> Go to the St. Louis Federal Reserve FRED database and find the most currently available data on Currency (CURRNS), Total Checkable Deposits (TCDSL), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ). a) Calculate the value of the currency depo

> How is the quantity theory of money converted into a theory of inflation? According to this theory, what determines the inflation rate?

> What are the classical dichotomy, the quantity theory of money, and the neutrality of money?

> What is the relationship between velocity and the equation of exchange?

> What are the M1 and M2 monetary aggregates?

> What are open market operations? What open market operation can the Federal Reserve conduct to increase the money supply?

> What are the costs of anticipated and unanticipated inflation?

> Describe the three primary functions money performs in an economy.

> What happens in a small open economy if there is an increase in domestic saving?

> What determines whether a small open economy will have a trade surplus or a trade deficit?

> How does a small open economy differ from a large open economy?

> Assume that the marginal product of labor is given by the following expression: MPL = 52 (L is measured in millions). L0.3 a) What is the marginal product of labor when L = 80 million? b) Determine the equilibrium real wage if the labor

> What determines the world real interest rate? Why must the domestic real interest rate be the same as the world rate?

> Distinguish between a closed and an open economy. How do the conditions required for goods market equilibrium differ in the two types of economies?

> What is crowding out?

> What determines the desired amounts of national saving and investment? What relationship between desired saving and desired investment is required for goods market equilibrium, and how is this condition reached?

> How are the effects of changes in domestic saving and investment for large open economies similar to those for small open economies and closed economies?

> Describe the two components of national saving and explain how saving affects national wealth.

> Why do the factor demand and supply curves have their particular slopes?

> What rule do firms follow to determine how much of each input to hire in order to maximize profits?

> Explain each term in the profit function for a firm.

> Explain the two characteristics of the Cobb Douglas production function that make it particularly useful to macroeconomists.

> Although they are distinctly different, the marginal product of labor, MPL, and labor productivity are closely related and should behave similarly. Go to the St. Louis Federal Reserve FRED database, and find data on output per hour (OPHNFB) and real comp

> Explain each symbol or term in the Cobb Douglas production function. Which element in the production function cannot be measured directly? How is it measured?

> How does total factor productivity differ from labor productivity?

> What determines the distribution of national income between payments to labor and payments to capital?

> Explain how an equilibrium factor price is established in a factor market if there is either an excess demand for the factor or an excess supply of the factor.

> What are global trade imbalances and why do economists focus on them?

> What is stabilization policy? What two important debates occur among macroeconomists regarding its use, and who are the parties to these debates?

> Explain the difference between fiscal policy and monetary policy. What are some of the reasons these macroeconomic policies are used?

> What is a government budget deficit? Why are macroeconomists concerned with budget deficits?

> What is the nation’s saving rate and why is it an important concern for macroeconomists

> GDP per capita can be expressed as GDP/ Population = GDP/Worker * Workers/ Population, or GDP per capita = Labor Productivity * Labor Force Participation Rate. Go to the St. Louis Federal Reserve FRED database, and find data on nonfarm business output pe

> What are supply shocks and from what sources can they arise? Distinguish between positive and negative supply shocks.

> What three macroeconomic data series are of particular interest to macroeconomists? Why?

> What is the five-step process for developing macroeconomic models?

> What is the distinction between endogenous variables and exogenous variables in economic models?

> What relationship does the aggregate production function portray? Which of the production function’s variables are endogenous and which are exogenous?

> Consider the following production function: Y = F1K, L2= AK0.4 L1.0. a) Calculate the marginal product of labor. b) Does this production function exhibit diminishing marginal product of labor?

> Suppose that the following Cobb-Douglas production function represents the economy of Chile: Y = F1K, L2= AK0.4 L0.6. Assuming Chile’s national income equals $170 billion, calculate real labor income and real capital income.

> Consider the following production function: Y = F1K, L2= A12K + 3L2. Does this production function exhibit constant returns to scale? (Hint: Replace K and L by 2K and 2L, respectively, and check if F(2K, 2L) = 2F(K, L).)

> Consider the difficult task of raising children. One of the most widely recognized challenges of this task is to properly balance rules and ad-hoc decisions. Constantly breaking rules might send the wrong message to a kid, while strictly enforcing rules

> The Federal Reserve took swift action to help restore the United States financial system after the global financial crisis started in fall 2007. The various instruments used by the Federal Reserve were highly criticized for fueling expectations of higher

> Go to the St. Louis Federal Reserve FRED database, and pull data on a common measure of standard of living, real GDP per capita, in 2011 U.S. dollars. Choose the following countries: United States (USARGDPC), Japan (JPNRGDPC), United Kingdom (GBRRGDPC),

> A Council of Economic Advisers post on January 15, 2010, stated that “The American Recovery and Reinvestment Act [...] was the boldest countercyclical fiscal action in American history. [...] the Administration is committed to taking every responsible me

> The United States has been experiencing very low or even negative savings rates during the recent past. If this situation persists, what does it means for future generations?

> The recent global financial crisis is a good example of how important the financial system is for the performance of any economy. Usually the immediate effects of a financial crisis include a decrease in asset prices, business failures, and more difficul

> Assume that a civil war erupts in a given country, creating chaos and destroying most of the economy’s infrastructure (e.g., roads, businesses, and telecommunications). a) What would be the effect on economic growth? b) How do you think a civil war affec

> During the 1970s, most Latin American countries ran huge budget deficits. As their governments resorted to printing money (increasing the money supply) to pay for these deficits, very high inflation rates resulted. As a consequence, real GDP declined or

> Unemployment is a very important topic in macroeconomics. A high unemployment rate means that a lot of individuals willing to work cannot find a job. This is bad for the economy, as some resources (i.e., labor) remain idle. Comment on the effects that be

> The following table shows Spain’s (annualized) quarterly real GDP growth rates for the 2007–2012 period. (Roman numbers refer to quarters.) a) Plot real GDP growth rate in a graph. Can you identify a trend in the dat

> Suppose your model predicts that overweight children have an 80% higher risk of suffering from diabetes in their adult life. If data show that overweight children do not suffer from diabetes as predicted by your model (i.e., data show a lower than 80% pr

> Sciences other than economics also use models to explain the behavior of endogenous variables based on assumptions about the environment and changes in exogenous variables. Suppose you have to design a model that links childhood obesity and diabetes. a)

> Refer to the previous exercise for data and assume that three million unemployed individuals become “discouraged” and decide not to look for a job anymore. Calculate the new unemployment rate for Brazil. Data from Exercise 8: Use the accompanying table

> Suppose Equation 2 represents the production function of both Mexico and Spain. Use the following information to answer the next questions. a) Calculate total factor productivity for both countries using Equation 3. b) Calculate per capita income for b

> Suppose that Apple Inc. manufactures a new generation of iPhones that can ascertain whether your interlocutor is lying. Assuming that the price of this good will be higher than that of the currently marketed iPhone, comment on the CPI’s capability to cor

> Based on surveys conducted by the BLS, the CPI basket assigns a weight of approximately 15% to transportation spending. Suppose you walk to your workplace every day and you do not use any other means of transportation. a) With everything else the same, i

> Mario and Lucia are discussing current economic data printed in the morning newspaper. Mario is quite happy about the fact that nominal GDP has increased at a steady rate for the last two years and asserts that this is very good news, since it means they

> Use the following table, based on BEA data from the first quarter of 2013 (billions of dollars), to calculate items (a) and (b): a) Other income b) Net factor income Compensation of employees…………………………………….8,737 Corporate profits……………………………………………………...2

> Consider the expenditure approach to the measurement of GDP. For each of the following situations, decide if the transaction will affect GDP and, if so, in which expenditure category will it be included. a) A household purchase of a home built in 2005. b

> The inhabitants of Pandora value their natural environment (e.g., forests, springs, breathable air, etc.) twice as much as the inhabitants of Utopia. Suppose that the value added for all goods and services increases by the same amount in both countries,

> Suppose you take out a loan at your local bank and the nominal interest rate is 12%. The bank expects the inflation rate to be 4% during the life of your loan. a) What is the bank’s ex ante real interest rate? b) What is the bank’s ex post real interest

> Is it correct to assume that total income equals total expenditure for a household? What about for the whole economy?

> These days many firms post their catalogs or their product prices on the Internet. In addition, most retailers have adopted bar codes to keep track of their inventories and implement price changes. Comment on the effect of these technologies on menu cost

> Currently, many banks offer online services that save customers a trip to the bank. In addition, ATMs and debit cards allow depositors twenty-four-hour access to their balances. Comment on the effects of online banking and ATMs on shoe-leather costs.

> Go to the St. Louis Federal Reserve FRED database, and pull data on annual unemployment rates for the following countries, starting in 2000: United States (USAURNAA), Canada (CANURNAA), United Kingdom (GBRURNAA), Japan (JPNURNAA), and Germany (DEUURNAA).

> Plot the following table on a graph showing average money growth rates on the horizontal axis and average inflation rates on the vertical axis (data is for the period 2002–2012, from the International Monetary Fund. International Financ

> Inhabitants of Pandora use stone beads as money. On average, every stone bead is used five times per year to carry out transactions. The total supply of beads is forty million. a) What is the level of aggregate spending in Pandora according to the quanti

> Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Comment on the effects of your action (everything else being the s

> Consider the following table with data about monetary aggregates (billions of dollars, seasonally adjusted data): a) Calculate the annualized growth rate of M1 and M2 for the following periods: May 2012–May 2013 (one year), Nov. 2012&

> Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emp

> It is not unusual to find a business that displays a sign reading “no personal checks, please.” Based on this observation, comment on the relative degree of liquidity of a checking account and currency.

> Suppose Alex earned $500 (nominal capital gain) from selling stock he bought ten years ago. During the last ten years, prices increased significantly, which means that Alex’s real capital gain is only $300. If the tax applied to capital gains is 35%, a)

> In the movie The Count of Monte Cristo (2002), a scene shows the main character paying for an estate in France using a wagon full of silver and gold coins. During the 1800s, it was not common for people to pay for a house using this method, but gold and

> Comment on the effect of a decrease in autonomous investment on wealth when the economy can be considered a a) closed economy. b) small open economy.

> Consider a small open economy that is currently running a trade surplus. Answer the following questions using a graphical representation of desired saving and investment in the small open economy: a) Is the world real interest rate higher or lower than t

> Go to the St. Louis Federal Reserve FRED database, and find data on the 1-Year Treasury Rate (GS1) and the GDP Deflator price index (GDPDEF). For (GS1), choose the frequency setting as “quarterly”; for (GDPDEF), set the units setting to “Percent Change F

> Suppose Japan has a GDP of $5 trillion, and that its national savings rate is 25%. Assuming Japan is an open economy, a) calculate Japan’s investment if net exports are 1% of GDP. b) calculate Japan’s exports if imports are valued at $650 billion.

> On March 23, 2010, President Obama signed into law a major overhaul of the U.S. healthcare system. The Congressional Budget Office estimated that this legislation will reduce the U.S. government budget deficit by around $140 billion for the next ten year

> The financial crisis that hit the United States first and then the world economy starting in fall 2007 meant that the future prospects of many firms looked gloomy at best for some time. Comment on the effect of a recession on the investment curve (only)

> Consider the (rather implausible) scenario in which the U.S. government phases out all Social Security transfers to retirees. Assuming the goods market is in equilibrium, graph the new saving curve and comment on the effects on the level of saving, inves

> Assume that you have saved $20,000 and that you are considering a couple of options. One of them is to use these funds as a down payment on a newly built house. The other one is to buy a U.S. savings bond. a) Which option will add to the economy’s capita

> Comment on the effect of an increase in the government budget surplus (or a decrease in the government budget deficit) on the real interest rate, desired saving, and net exports for a a) large open economy. b) small open economy.