Why do activists believe the economy’s self-correcting mechanism is slow?
> 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
> 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
> 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.
> 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
> A government committed to long-run fiscal discipline (i.e., low or zero budget deficits) usually conducts contractionary fiscal policy at some point to reduce the government deficit. If that action is interpreted as a commitment to long-run fiscal discip
> Assume that the expenditure and tax multipliers can be estimated at 0.75 and 0.5, respectively. a) Would you recommend expansionary fiscal policy based on tax cuts or increased government expenditures? b) Suppose there is substantial evidence that supp
> Concerns about the ability of the U.S. government to finance its own budget deficit might lead to higher interest rates on U.S Treasury securities. a) Explain the effect of higher interest rates on Treasury securities on the government deficit. b) What w
> As announced by the Obama administration, part of the 2009 fiscal stimulus package was directed to making broadband Internet access available to most Americans. a) Should this plan be considered government consumption or government investment? b) Describ
> In recent years, the United States has experienced a sharp increase in obesity rates (in particular amongst teenagers), which is considered to increase the probability of chronic diseases like diabetes. Even if the dependency ratio is constant, what woul
> The definition of the government deficit is a matter of debate. What would be the effect on the measurement of the government deficit if one considered Social Security taxes a “forced loan to the government” and benefit payments (e.g., Medicare, Social S
> Assume that Social Security tax rates remain constant but the number of employed people in the United States declines over time. a) Explain the effect of such a scenario on the size of contributions for social insurance and the government deficit in the
> Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1), the labor force (CLF16OV), and a measure of the capital stock, real consumption of fixed capital (A262RX1Q020SBEA). Download all of the data onto a spreadsheet. For (CL
> Consider the effect of a tax cut (if government spending remains the same) in a country with an underdeveloped financial system. a) Assuming individuals are forward- looking (i.e., the Ricardian equivalence argument holds), what do you think might happen
> What would happen to revenue from seignorage if the inflation rate was very high? Hint: check Equation 8 and assume a quickly rising price level.
> Internet sites that allow people to post their resumes online reduce the costs of job searches and create opportunities for individuals looking for jobs to be matched with potential employers more quickly. Assume that these advantages of Internet job hun
> Although Okun’s law holds for different countries, those with more flexible labor markets experience a higher response of unemployment to changes in GDP. During the recent financial crisis, real GDP decreased in the United States, Germany, and France. Co
> Using the expression for the short-run aggregate supply curve obtained in Problem 6, draw a new short-run aggregate supply curve on the same graph if there is a price shock such that ρ = 2. Calculate inflation when output is $8, $10, and $12 trillion, re
> Assuming that Okun’s law is given by U - Un = -0.75 *1Y - YP2 and that the Phillips curve is given by π = πe - 0.6 * 1U - Un2+ ρ, a) Obtain the short-run aggregate supply curve if expectations are adaptive, inflation was 3% last year, and potential outpu
> Suppose Okun’s law can be expressed according to the following formula: U - Un = -0.75 *1Y - YP. Assuming that potential output grows at a steady rate of 2.5% and that the natural rate of unemployment remains unchanged, a) Calculate by how much unemploym
> During 2007, the U.S. economy was hit by a price shock when the price of oil increased from around $60 per barrel to around $130 per barrel by June 2008. While inflation increased during the fall of 2007 (from around 2.5% to 4.0%), unemployment did not c
> Suppose that the expectations-augmented Phillips curve is given by π = πe 0.51U - Un2. If expected inflation is 3% and the natural rate of unemployment is 5%, complete the following: a) Calculate the inflation rate according to the Phillips curve if unem
> The following graph shows inflation and unemployment rates for Canada for the period between 1970 and 2012. Does this graph show evidence in favor of the Phillips curve?
> Go to the St. Louis Federal Reserve FRED database, and find data on the GDP deflator (GDPDEF) and the price of a barrel of oil (OILPRICE). For the GDP deflator, convert the Units setting to “Percent Change from Year Ago” and download the data. a) Calcul
> Some Federal Reserve officials have discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the
> Plot the Phillips curve for Canada using the following data. Do you find evidence in favor of the Phillips curve in your plot? Explain.
> Consider the money market. Suppose the U.S. economy begins to boom and aggregate output increases. Describe the effect on the interest rate if the Federal Reserve decides to increase the money supply at the same time that aggregate output increases.
