What prevented the financial crisis of 2007– 2009 from becoming a depression?
> The Bureau of Economic Analysis valued nominal U.S. gross domestic product (i.e., actual expenditure) at $16,420 billion at the end of 2012. Suppose that consumption expenditure was $12,210 billion, planned investment spending was $1,680 billion, and gov
> Assume that low standards of living (i.e., low capital-labor ratios, in the Solow model’s terms) are the reason that some countries exhibit high fertility rates. Comment on the effect of population control policies to reduce fertility rates. Explain why
> Assume that Luke is considering investing in new equipment and computers for his construction company. The real interest rate is 5%, construction equipment is valued at $600,000, and computers are valued at $20,000. Neither type of capital is expected to
> Suppose government purchases amount to $2.5 trillion, transfer payments amount to $1 trillion, net interest payments are $0.5 trillion, and tax revenue is valued at $3 trillion. a) Calculate the government deficit. b) Calculate the primary deficit.
> Assume that the per-worker production function is yt = 2kt 0.5. The saving and depreciation rates are estimated at 0.2 and 0.04, respectively. a) Calculate the capital-labor ratio steady state for this economy. b) Calculate consumption per worker at the
> What happens in a fixed exchange rate regime if a currency is overvalued? What problem can this create?
> Why is sustained per-capita growth possible in the Romer model but not in the Solow model?
> What shortcoming of the Solow growth model does the Romer model attempt to remedy?
> What role does the legal system play in promoting property rights?
> What is the foreign exchange market? Describe the two types of transactions that take place in this market.
> What is a patent? Why do governments grant them?
> Why may private R&D expenditures be too low?
> Consider the effects of an increase in the saving rate on the United States capital-labor ratio, according to the Solow model. a) What would be the immediate effect of a saving rate increase on the capital-labor ratio? What would be the long-run effect?
> 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?
> 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.
> The tsunami that hit Japan in April of 2011 was the costliest national disaster in history. The following graph describes Japan’s economy before the tsunami. Assume Japan was at its steady-state capital-labor ratio before the tsunami hi
> 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
> 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?
> Why is a theory of consumption also a theory of saving?
> 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?
> 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?
> 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 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?
> 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?
