What is the time-inconsistency problem, and what role does it play in the debate between advocates of discretion and advocates of rules in policy making?
> How is the theory of purchasing power parity related to the law of one price? Why doesn’t PPP hold in the short run?
> What are the advantages and disadvantages of exchange-rate pegging?
> What is the impact of an increase in saving in the Romer model?
> In the Romer model, how does an increase in total population affect the growth rate of per capita output over time?
> Using the accompanying graph, measure the following: a) Expansions (in months from trough to peak) b) Contractions (in months from peak to trough)
> In the Romer model, how does an increase in the fraction of the population engaged in R&D affect the growth rate of per-capita output over time?
> As an input to production, how does technology differ from labor and capital inputs?
> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF). For the price index, adjust the un
> Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the un
> On January 29, 2013, the Federal Reserve released a special statement that clarified its goals of “price stability” and “maximum employment.” Specifically, it stated that “the Committee judges that inflation at the rate of 2 percent, as measured by the a
> Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a temporary negative supply shock?
> What are supply shocks? Distinguish between positive and negative supply shocks and between temporary and permanent ones.
> Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a positive demand shock?
> What are demand shocks? Distinguish between positive and negative demand shocks.
> Describe the adjustment to long-run equilibrium if an economy’s short-run equilibrium output is above potential output.
> Transparency and communication with the public by the Federal Reserve have increased significantly over the last decade. What does this say about the Federal Reserve’s view of the relevance of the three business cycle models?
> How does the condition for short-run equilibrium differ from that for long-run equilibrium?
> What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?
> What prevented the financial crisis of 2007– 2009 from becoming a depression?
> Identify changes in three factors that will shift the aggregate demand curve to the right and changes in three different factors that will shift the aggregate demand curve to the left.
> What principal-agent problems resulted from the originate-to-distribute mortgage lending model?
> How did financial innovations in mortgage markets contribute to the 2007–2009 financial crisis?
> Why does debt deflation make financial crises worse?
> What causes bank panics and why do they worsen financial crises?
> Describe the three factors that commonly initiate financial crises, and explain how each one contributes to a crisis.
> Why is a financial crisis likely to lead to a contraction in economic activity?
> Suppose the U.S. Congress is forced to increase taxes to pay for the cost of health care reform in the United States. Describe the effects of such a policy, according to the three business cycle models, if this increase in taxes is fully anticipated by e
> What are the two types of asset-price bubbles? Which type poses a bigger threat to the financial system? Why?
> How does asymmetric information help us define a financial crisis?
> How should central banks respond to asset-price bubbles?
> Starting from a situation of long-run equilibrium, what are the short- and long-run effects of a permanent negative supply shock?
> Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.
> How do the traditional Keynesian, new Keynesian, and real business cycle models differ in their analysis of the effects of anti- inflation policy?
> How do the traditional Keynesian, new Keynesian, and real business cycle models differ in their analysis of the effects of expansionary policy?
> Compare the traditional Keynesian, new Keynesian, and real business cycle models in terms of expectations, price flexibility, and potential sources of business cycle fluctuations.
> In the new Keynesian model, what shocks cause business cycle fluctuations? Does it matter whether these shocks are anticipated or unanticipated? Explain.
> How do new Keynesian ideas about expectations affect the IS and aggregate demand curves?
> Speeches made by Federal Reserve officials are an integral part of the Fed’s management of expectations strategy. In a speech made in November 2002, then-Fed Governor Ben Bernanke, when trying to reassure the public that the Fed would try to avoid a gene
> How do new Keynesian ideas about price setting and inflation expectations affect the short run aggregate supply curve?
> What objections to the real business cycle model have been raised?
> How does the real business cycle model explain fluctuations in employment and unemployment?
> How do the traditional, new Keynesian, and real business cycle models differ in their views about the efficacy of discretionary policy?
> What are the key ideas of the real business cycle model? How does it explain business cycle fluctuations?
> What are the arguments for and against central bank independence?
> What are the purposes of inflation targeting, and how does this monetary policy strategy achieve them?
> How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does it help if a negative aggregate supply shock occurs?
> What benefits does a credible nominal anchor provide?
> What are the arguments for and against rules?
> For each of the following cases, determine which would be the preferred macroeconomic model to analyze business fluctuations. a) Most wages are the result of collective bargaining and are therefore quite rigid. In addition, expectations are based mostly
> What is the significance of the Lucas critique of econometric policy evaluation?
> How does the theory of rational expectations differ from that of adaptive expectations?
> How do conflicting views of market structure influence the ideas of classical and Keynesian macroeconomists regarding price and wage flexibility and how quickly the economy adjusts to long-run equilibrium?
> How do Keynesian views on macroeconomic fluctuations differ from those of classical macroeconomists?
> What were the “Great Inflation” and the “Great Moderation”?
> Distinguish among leading, lagging, and coincident economic variables.
> Distinguish between pro cyclical and countercyclical economic variables.
> How do menu costs contribute to sticky prices?
> What are business cycles?
> Suppose consumer confidence surges, making consumers more willing to spend. Use the New Keynesian model to describe the effects on output and inflation depending on whether the surge in consumers’ confidence was anticipated or unanticipated.
> According to the growth accounting equation, what are the three sources that contribute to economic growth?
> What are the four basic results of the Solow growth model? What is the model’s chief weakness?
> How does an increase in total factor productivity affect output per worker?
> What is the difference between the short run and the long run in macroeconomic analysis? Why do macroeconomists differentiate between the two time horizons?
> How does population growth affect the steady-state levels of capital and output per worker?
> Beginning from a steady state in the Solow growth model, explain how an increase in the saving rate will affect the levels and growth rates of capital and output per worker.
> What are the two determinants of the steady state level of capital per worker? Why does capital per worker move to this steady-state level?
> What determines the amount of investment per worker and capital accumulation in the Solow growth model?
> Why does the per-worker production function have its particular shape and slope?
> In the per-worker production function, what factors determine the level of output per worker? Which one of these factors does the Solow growth model consider to be exogenous?
> 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?
