Question: What is the user cost of capital?

> 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

> 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

> 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 population and GDP per capita for the following countries, with data codes provided in the table below. a) For each country, calculate the average population growth rate per year by ca

> 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?

> 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.

> 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

> How do new Keynesian ideas about expectations affect the IS and aggregate demand curves?

> 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?

> 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)

> What are the arguments for and against rules?

> 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?

> 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?

> 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?

> 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?

> 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

> 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.

> 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.

> 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

> 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 is the permanent income hypothesis? How does its consumption function relate to intertemporal choice?

> On what assumptions did Keynes base his theory of consumption? How does his theory relate to intertemporal choice?

> How do binding borrowing constraints affect the IBL and current and future consumption?

> How do changes in the real interest rate affect the IBL and current and future consumption?

> What can shift the intertemporal budget line, IBL? What happens to current and future consumption when IBL shifts occur?

> Explain how the intertemporal budget constraint and indifference curves are used to derive a consumer’s optimal choice of current and future consumption.

> What do indifference curves show about current and future consumption? Why do they slope downward? Why are they convex?

> What is the logic behind the intertermporal budget constraint? On what assumptions is it based, and how is its slope interpreted?

> Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the Federal Reserve (FDHBFRBN). Convert the two “debt held” s

> What modifications to the intertemporal choice theory have been suggested by the random walk hypothesis and behavioral economics?

> Describe the life-cycle hypothesis and how it relates to intertemporal choice.

> Why is a theory of consumption also a theory of saving?

> What happens in a fixed exchange rate regime if a currency is overvalued? What problem can this create?

> How do fixed, floating, and managed (dirty) float exchange rate regimes differ?

> Why do central banks intervene in foreign exchange markets? How do these interventions affect their international reserves and exchange rates?

> What are the short-run effects on aggregate output and the inflation rate when the domestic currency appreciates or depreciates?

> Why does the foreign exchange market move toward equilibrium when the foreign exchange rate for the dollar is either above or below its equilibrium value?

> How is the theory of purchasing power parity related to the law of one price? Why doesn’t PPP hold in the short run?

> Differentiate the nominal and real exchange rates between dollars and euros. Do the two exchange rates move together? Why is appreciation or depreciation of real exchange rates important?

> Go to the St. Louis Federal Reserve FRED database, and find data on the total public debt by the federal government (GFDEBTN) and the amount of debt held by foreign and international investors (FDHBFIN). Download the data into a spreadsheet, and make sur

> What are the advantages and disadvantages of exchange-rate pegging?

> What is the foreign exchange market? Describe the two types of transactions that take place in this market.

> 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?

> 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?

> Go to the St. Louis Federal Reserve FRED database, and find data on the total government debt as a percentage of GDP (GFDEGDQ188S) and gross domestic product (GDP). a) Report the most current available debt to-GDP ratio, and the ratio one year prior and

> 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 prevented the financial crisis of 2007– 2009 from becoming a depression?

> 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?

> How should central banks respond to asset-price bubbles?

> 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

> 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?

> 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.