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布兰查德_宏观经济学英文版课后习题答案

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ANSWERS TO END-OF-CHAPTER PROBLEMS likely involve more pain in the short run since some banks and CHAPTER 1 firms would be forced to close. Quick Check e. Although the Euro will remove obstacles to free trade between 1. a. True. European countries, each country will be forced to give up its b. True. own monetary policy. ====== c.True. Dig Deeper d. Uncertain. It is true that the growth of output per worker 4. This is a discussion question, so answers will vary. Based on the increased in the mid-1990s, but discussion in the text, there are economists disagree about the degree to which this increase in clear similarities in the policy responses of the U.S. and Japanese growth will persist. The governments. Central banks in both countries reduced interest rates, growth of output per worker fluctuates a great deal from year to and governments in both countries tried to stimulate the economy with year, which ****kes it difficult to draw inferences from the data. lower taxes. Government spending also increased in both countries; e. True. explicitly for economic stimulus in Japan, and as part of foreign and f. False. The European “unemployment miracle” refers to the low security policy in the United States. As for the differences, the text rate of unemployment leaves the implication that Japanese banking system is less efficient in Europe in the 1960s. than the U.S. banking system, which perhaps allows for easier recovery g. False. The slump was triggered by the collapse of the in the United States. There is also an allusion to the liquidity trap in Japanese stock ****rket. Japan, since interest rates are zero. However, the mechanics of the h. False. liquidity trap are not discussed in detail until Chapter 22. 2. a. 1960-2000 1994-2000 2001-2004 5. a. 10 years: (1.01)10≈1.10 or 10 % higher; 20 years: 22% higher; 50 years: ****% higher US 3.2% 3.9% 2.45% b. 22%; 49%; 169% higher EU 3.1% 2.3% 2.3% c. Take output per worker as a measure of the standard of living. Japan 4.7% 1.4% 2.3% 10 years: 1.22/1.≈11.11, so the standard of living would be Growth rates in all three regions are lower in the most recent about 11% higher; period than over the period 20 years: 22% higher; 50 years: ****% higher 1960-2004. However, compared to the period 1994-2000, U.S. d. No. Labor productivity growth fluctuates a lot from year to year. growth is lower in the most recent period, Japanese growth is The last few years ****y represent good luck. Some higher, and European growth is unchanged. economists believe there has been a lasting change in the U.S. b. Answers will vary. economy that will lead to continued high productivity growth in 3. a. Low unemployment might lead to an increase in inflation. the future, but we cannot be certain. b. Tax cuts ****y have been useful to stimulate the U.S. economy 6. China overtakes the United States in 2044, or 41 years from 2003.. The during the 2001 recession. However, the tax cuts were problem asks students to per****nent. The recession is over and the deficit re****ins high. find the answer by using a spreadsheet. Algebraically, 11(1.03)t=1.6(1.08)t c. Although labor ****rket rigidities ****y be important, it is also 11/1.6 = (1.08/1.03)t important to consider that these rigidities ****y not be excessive, t = ln(11/1.6)/ln(1.08/1.03) ≈ 40.7 yrs and that high unemployment ****y arise from flawed Explore Further ****croeconomic policies. 7. a-c. As of June 2005, there have been 5 recessions since 1960. d. Although poor regulation of the financial system ****y be The numbers are seasonally- contributing to the length of Japan's slump, most economists adjusted annual percentage growth rates of GDP in chained believe that the collapse in Japanese asset prices triggered the 2000 dollars. economic downturn. Moreover, tightening regulation would 1969:4 -1.9 1980:2 -7.8 1970:1 -0.7 1980:3 -0.7 c. 2003 real (2004) GDP: 10*$3,000+4*$500+1,000*$1=$33,000 2004 real (2004) GDP: $40,000. 1974:3 -3.8 1981:4 -4.9 Real (2004) GDP has increased by 21.2%. The answers measure real GDP growth in different units. 1974:4 -1.6 1982:1 -6.4 Neither answer is incorrect, just as measurement in inches is not more or less correct than measurement in centimeters. 1975:1 -4.8 1990.4 -3.0 d. 2003 base year: Deflator(2003)=1; Deflator(2004)=$40,000/$31,000=1.29 1991:1 -2.0 Inflation=29% 2004 base year: 8. a-b. % point increase in unemployment rate for the 5 recessions Deflator(2003)=$25,000/$33,000=0.76; Deflator(2004)=1 Inflation=(1-0.76)/0.76=.32=32% 5. a. Analogous to 4d. 2003 real GDP = 10*$2,500 + 4*$750 + 1000*$1 = $29,000 1969-70 0.7 1981-82 1.1 2004 real GDP = 12*$2,500 + 6*$750 + 1000*$1 = $35,500 (35,500-29,000)/29,000 = .224 = 22.4% 1974-75 3.1 1990-91 0.9 Deflator in 2003=$25,000/$29,000=.862 Deflator in 2004=$40,000/$35,500=1.127 1980 0.9 Jan. 2001 – Jan. 2002 1.5 b. Inflation = (1.13 -.86)/.86 = .307 = 30.7%. Yes, see appendix for further discussion. CHAPTER 2 Quick Check The quality of a routine checkup improves over time. Checkups now ****y include EKGs, for example. Medical services are 1. a. False. c. particularly affected by this problem due to constant Uncertain. True for nominal GDP, false for real GDP. improvements in medical technology. b. True. 6. a. 10%. True. The quality-adjusted price of checkups is 5% higher. The c. False. The level of the CPI means nothing. Its rate of change re****ining 10% of the price increase reflects a quality tells us about inflation. improvement. d. Uncertain. Which index is better depends on what we are trying b. We need to know the price of checkups using the old method in to measure—inflation faced by consumers or by the economy c. the year the new ultrasound infor****tion is introduced. Even e. as a whole. without this infor****tion, we can say that the quality-adjusted no change: intermediate good price increase of checkups is less than 15%, since there has f. +$100; Personal Consumption Expenditures been some quality improvement. +$200 million; Gross Private Domestic Fixed Investment Measured GDP increases by $10+$12=$22. (Strictly, this +$200 million; Net Exports d. involves mixing the final goods and income approaches to GDP. no change: the jet was already counted when it was produced, Assume here that the $12 per hour of work creates a final good i.e., presu****bly when Delta (or some other airline) bought it Dig Deeper worth $12.) new as an investment. True GDP should increase by less than $22 because by 2. a. $1,000,000, the value of the silver necklaces. 7. a. working for an extra hour, you are no longer producing the work of cooking within the house. Since cooking within the house is b. a final service, it should count as part of GDP. Unfortunately, it is hard to measure the value of work within the home, which is c. d. e. b. c. 3. a. d. b. 1st Stage: $300,000. 2nd Stage: $1,000,00- $300,000=$700,000. GDP: $300,000+$700,000=$1,000,000. c. Wages: $200,000 + $250,000=$450,000. Profits: ($300,000-$200,000)+($1,000,000-$250,000-300,000) 8. a. =$100,000+$450,000=$550,000. GDP: $450,000+$550,000=$1,000,000. 4. a. 2003 GDP: 10*$2,000+4*$1,000+1000*$1=$25,000 2004 GDP: 12*$3,000+6*$500+1000*$1=$40,000 b. Nominal GDP has increased by 60%. b. 2003 real (2003) GDP: $25,000 2004 real (2003) GDP: 12*$2,000+6*$1,000+1000*$1=$31,000 Real (2003) GDP has increased by 24%. why measured GDP does not include it. If we assume, for this 2. a. Y=160+0.6*(Y-100)+150+150 problem, that the value of home cooking is equal to the value of Y=1000 restaurant cooking, and that eating out simply replaces home b. YD=Y-T=1000-100=900 cooking, then working late increases true GDP by only the c. C=160+0.6*(900)=700 value of the work, in this case $12. 3. a. Equilibrium output is 1000. Total 9. a. As of revisions through June 2005, there were 3 quarters of de****nd=C+I+G=700+150+150=1000. Total de****nd equals negative growth during the production. This is the equilibrium condition used to solve for period 1999-2002. The numbers are seasonally-adjusted output. annual percentage growth rates of GDP in chained 2000 dollars. b. Output falls by: 40*multiplier = 40/.4=100. So equilibrium 2000:3 -0.5 output is now 900. Total 2001:1 -0.5 de****nd=C+I+G=160+0.6*(800)+150+110=900. Again, total 2001:3 -1.4 de****nd equals production. b. The unemployment rose in 2001 and continued to rise until mid- c. Private saving=Y-C-T=900-160-0.6*(800)-100=160. Public 2003, when it began to saving =T-G=-10. National saving (or in short, saving) equals fall. Unemployment is not the whole story because discouraged private plus public saving, or 150. National saving equals workers ****y leave the investment. This statement is ****the****tically equivalent to the labor force and thus not be counted as unemployed. The equilibrium condition that total de****nd equals production. participation rate fell over 2001, and continued to all (albeit Thus, national saving equals investment is an alternative more slowly and with substantial monthly variation) over the statement of the equilibrium condition. period. Dig Deeper c. Although we graph employment against time in this problem 4. a. Y increases by 1/(1-c1) (since the book does not use logarithms), the result would be b. Y decreases by c1/(1- c1) similar if we used a logarithmic scale. From the graph, c. The answers differ because government spending affects employment growth was negative over 2001. Then, de****nd directly, but taxes employment growth continued at roughly the same rate affect de****nd through consumption, and the propensity to (perhaps lower, as would be clear with a logarithmic scale) as consume is less than one. before the recession. In other words, employment did not d. The change in Y equals 1/(1-c1) - c1/(1- c1) = 1. Balanced rapidly catch up to its previous trajectory. Indeed, as of June 2005, the graph is consistent with a per****nent, negative effect budget changes in G and T are on employment. The employment to population ratio fell by not ****croeconomically neutral. about 1.5 percentage points over 2001 and continued to fall e. The propensity to consume has no effect because the balanced until August, 2003, when it leveled off and then rose slightly. budget tax increase aborts the multiplier process. Y and T both d. Clearly, the labor ****rket recovered much more slowly than increase by on unit, so disposable income, and hence GDP. consumption, do not change. CHAPTER 3 5. a. Y=c0+c1YD+I+G implies Quick Check Y=[1/(1-c1+c1t1)]*[c0-c1t0+I+G] 1. a. True. b. False. Government spending without transfers was 19% of b. The multiplier = 1/(1-c1+c1t1) <1/(1- c1), so the economy GDP. responds less to changes in autonomous spending when t1 is c. False. The propensity to consume must be less than one for positive. After a positive change in autonomous spending, the our model to be well defined. increase in total taxes (because of the increase in income) d. True. tends to lessen the increase in output. After a negative change e. False. in autonomous spending, the fall in total taxes tends to lessen f. False. The increase in output is one times the multiplier. the decrease in output. g. False. c. Because of the auto****tic effect of taxes on the economy, the c. Equilibrium output increases. Investment increases by more economy responds less to changes in autonomous spending than the increase in business than in the case where taxes are independent of income. So, confidence, since the increase in output also leads investment output tends to vary less, and fiscal policy is called an to increase. In equilibrium, auto****tic stabilizer. national saving equals investment. If investment increases in ====== 6.a.Y=[1/(1-c1+c1t1)]*[c0-c1t0+I+G] equilibrium, then so does national saving. 9. Answers will vary depending upon when the website is accessed. b. T = t0 + t1*[1/(1-c1+c1t1)]*[c0-c1t0+I+G] CHAPTER 4 c. Both Y and T decrease. Quick Check d. If G is cut, Y decreases even more, so the balanced budget 1. a. False. reinforces (or amplifies) the b. False. effect of the fall in consumer confidence. c. True. 7. a. Disposable income and hence consumption both increase for d. False. any level of Y, so the ZZ e. False. curve shifts up, and equilibrium output increases. f. True. b. There is no effect on equilibrium output, since T does not 2. a. i=0.05: Money de****nd = $18,000 change. i=0.10: Money de****nd = $15,000 c. Presu****bly, equilibrium output increases. The fall in b. Money de****nd decreases when the interest rate increases consumption from the tax increase because bonds, which pay interest, become more attractive. is s****ller in ****gnitude than the increase in consumption from For the same reason, bond de****nd increases. the transfer increase, c. The de****nd for money falls by 50%. because of the difference in the propensities to consume. So, d. The de****nd for money falls by 50%. de****nd and equilibrium output increase. e. A 1% increase (decrease) in income leads to a 1% increase d. People with high wealth probably have a lower propensity to (decrease) in money de****nd. This effect is independent of the consume than people with interest rate. low wealth. At the extreme, those in poverty ****y spend most 3. a. i=100/$PB –1; i≈ 33%; 18%; 5% when $PB =$75; $85; $95. of any additional dollar on basic needs. Since wealth and b. When the price increases, the interest rate falls. income are usually related, people with high income probably c. $PB =100/(1.08) ≈ $93 have a lower propensity to consume than people with low 4. a. $20=MD=$100*(.25-i) income. Therefore, tax cuts are likely to be more effective at i=5% stimulating output when they are directed toward people with b. M=$100*(.25-.15) low income, who are likely to spend more of the extra M=$10 disposable income. Dig Deeper 8. a. Y= c0 + c1(Y-T) + b0+b1Y + G 5. a. BD = 50,000 - 60,000*(.35-i) Y=[1/(1- c1- b1)]*[c0 - c1T + b0 + G] An increase in the interest rate of 10% increases bond de****nd b. The multiplier is 1/(1- c1- b1), and increases with b1. Allowing by $6,000. investment to depend on b. An increase in wealth increases bond de****nd, but has no output increases the multiplier. Intuitively, an increase in effect on money de****nd, which autonomous spending now has a multiplier effect through two depends on income (a proxy for transactions de****nd). channels, consumption and investment, so the multiplier increases. For the multiplier to be positive, we need c1+ b1<1. c. An increase in income increases money de****nd, but If this inequality were reversed, the economy would not have a decreases bond de****nd, since we well-defined equilibrium. One extra unit of autonomous implicitly hold wealth constant. spending would lead to a greater than one unit increase in spending (consumption plus investment) in every round of the multiplier, so the economy would explode into infinite output. d. When people earn more income, this does not change their f. Uncertain. An increase in G leads to an increase in Y (which wealth right away. Thus, they increase their de****nd for money tends to increase investment), but also to an increase in the and decrease their de****nd for bonds. interest rate (which tends to reduce investment). 6. An increase in the interest rate ****kes the purchase of bonds more g. True. attractive because it reduces 2. a. Y=[1/(1-c1)]*[c0-c1T+I+G] their price. A purchaser of a bond can receive the same nominal The multiplier is 1/(1-c1). payment for a lower price. b. Y=[1/(1-c1-b1)]*[c0-c1T+ b0-b2i +G] 7. a. $16 is withdrawn on each trip to the bank. The multiplier is 1/(1-c1-b1). Since the multiplier is larger than Money holdings—day one: $16; day two: $12; day three: $8; the multiplier in part (a), the effect of a change in autonomous day four: $4. spending is bigger than in part (a). An increase in autonomous b. Average money holding is ($16+$12+$8+$4)/4=$10. spending now leads to an increase in investment as well as c. $8 dollar withdrawals. Money holdings of $8; $4; $8; $4. consumption. d, Average money holdings is $6. e. $16 dollar withdrawals; money holdings of $0; $0; $0; $16. c. Substituting for the interest rate in the answer to part (b): f. Average money holding is $4. Y=[1/(1-c1-b1+ b2d1/d2)]*[c0-c1T+ b0+(b2*M/P)/d2 +G] g. Based on these answers, ATMs and credit cards have reduced The multiplier is 1/(1-c1-b1+ b2d1/d2). money de****nd. d. The multiplier is greater (less) than the multiplier in part (a) if 8. a. velocity=1/(M/$Y)=1/L(i) (b1- b2d1/d2) is greater (less) than zero. The multiplier is big if b1 b. Velocity increased from 3.7 to 9.1 between 1960 and 2003. is big, b2 is s****ll, d1 is s****ll, and/or d2 is big, i.e., if investment c. ATMS and credit cards reduced L(i) so velocity increased. is very sensitive to Y, investment is not very sensitive to i, 9. a. De****nd for central bank money=0.1*$5,000b*(.8-4i) money de****nd is not very sensitive to Y, money de****nd is b. $100 b = 0.1*$5,000b*(.8-4i) very sensitive to i. i=15% 3. a. The IS curve shifts left. Output and the interest rate fall. The c. M=(1/.1)*$100 b=$1,000 b effect on investment is ambiguous because the output and M= Md at the interest derived in part (b). interest rate effects work in opposite directions. The fall in d. If H increases to $300 b, the interest rate falls to 5%. output tends to reduce investment, but the fall in the interest e. The interest rate falls to 5%, since when H equals $300 b, rate tends to increase it. M=(1/.1)*$300 b=$3,000 b. b. From 2c: Y=[1/(1-c1-b1+ b2d1/d2)]*[c0-c1T+ b0+(b2*M/P)/d2 +G] 10. The ratio of currency to total money (the parameter c in the text) would c. From the LM relation: i= Y*d1/d2 – (M/P)/d2 rise, leading to a fall in To obtain the equilibrium interest rate, substitute for equilibrium the money multiplier. Y from part (b). Explore Further d. I= b0+ b1Y- b2i= b0+ (b1- b2d1/d2)*Y+ b2(M/P)/d2 11. Answers will vary depending upon when the website is accessed. To obtain equilibrium investment, substitute for Y from part (b). CHAPTER 5 e. From parts b and d, holding M/P constant, I increases by (b1- Quick Check b2d1/d2)/ (1-c1-b1+ b2d1/d2), in response to a one-unit increase in 1. a. True. G. So, if G decreases by one unit, investment will increase b. True. when b1$100,000 b. There appears to be positive relationship between the variables, d. IS shifts left. but it is not tight. 4. Rational expectations ****y be unrealistic, but it does not imply that c. Personal disposable income increased at an annual rate of every consumer has perfect knowledge of the economy. It implies that 11.5% in 2001:III and at an consumers use the best available infor****tion—models, data, and annual rate of 10.8% in 2002:I. Consumer confidence fell in techniques—to assess the future and ****ke decisions. Moreover, they 2001:III but rose in 2002:I. Clearly the events of September 11, do not have to work out the implications of economic models for the as well as the ongoing recession, played in role in the future by themselves; they can rely on the predictions of experts on consumer confidence numbers for 2001:III. television or in the newspapers. Essentially, rational expectations rules CHAPTER 17 out syste****tic mistakes on the part of consumers. Thus, although Quick Check rational expectations ****y not literally be true, it seems a reasonable 1. a. False. bench****rk for policy ****ysis. b. False. 5. The answers below ignore any effect on capital accumulation and c. False. output in the long run. d. True/Uncertain (They can rely on forecasts by others, but Assume the tax cut policy in the future is temporary, so we need only somebody has to do it.) worry about future short run effects. e. False. a. The effect on current output is ambiguous. The tax cut in the f. True. future will lead to a boom. Output and the real interest rate will g. False. increase. The increase in expected future output tends to shift 2. a. Higher real stock prices increase real wealth directly, and IS right; the increase in the expected future real interest rate therefore tend to increase consumption. Moreover, the hype tends to shift IS left. Finally, the fall in expected future taxes about the New Economy, combined with increasing stock prices, tends to increase expected future after-tax income (for any ****y have led to favorable expectations about future labor income, given level of income). This effect tends to shift IS right. which would also tend to increase consumption. b. This means that the Fed will increase the interest rate in the future (shift LM left). The expected interest rate will increase b. Subsequent declines in the stock ****rket decreased wealth and more, but there is still the effect of lower expected taxes on ****y have led consumers to revise (downward) expectations about current consumption. The effect today on output is still future labor income, effects that would tend to reduce consumption. ambiguous, but more likely to be negative than in part (a). 3. a. IS shifts right. c. Future output will be higher, the future interest rate will not b. LM shifts right. increase, and future taxes will be lower. The current IS curve c. There are three effects. First, an increase in expected future definitely shifts right, and current output increases. taxes tends to reduce expected future after-tax income (for any Dig Deeper given level of income), and therefore to reduce consumption. 6. a-b. See the discussion in the text. This effect tends to shift IS to the left. Second, the increase in c. The gesture seemed to indicate that the Fed supported deficit future taxes (a deficit reduction program) will lead to lower real reduction, and would be willing to conduct expansionary interest rates in the future. The fall in the expected future monetary policy in the future to offset the direct negative effects interest rate tends to shift IS to the right. Third, the fall in future on output from spending cuts and tax increases. A belief that real interest rates leads to an increase in investment in the the Fed would be willing to act in this way would tend to medium run and an increase in output in the long run. The increase expected future output (relative to the case where the increase in expected future output tends to shift IS to the right. Fed did nothing) and reduce expected future interest rates. The net effect on the IS curve is ambiguous. Note that the Both of these effects tend to increase output in the short-run. model of the text has lump sum taxes. More generally, the tax 7. a. Future interest rates will tend to rise. Future output will tend to increase ****y increase distortions in the economy. These fall. Both effects shift the IS curve to the left in the present. effects tend to reduce output (or the growth rate). Current output and the current interest rate fall. The yield curve Statistical Discrepancy -15 gets steeper on the day of the announcement. (=115-130) b. No. 3. a. The nominal return on the U.S. bond is 10,000/(9615.38) –1 c. Compared to original expectations, the nominee is expected to ≈4%. follow a more expansionary monetary policy. The yield curve The nominal return on the Ger****n bond is approxi****tely 6%. will get flatter on the day of the announcement. b. Uncovered interest parity implies that the dollar is expected to Explore Further appreciate. Thus, the expected exchange rate is 8. a. The interest rate will increase in the short run, and increase E*(1+i*)/(1+i)=0.75(1.06)/(1.04) ≈ .7**** Euro/$. even further in the medium run. The yield curve will get steeper. c. If you expect the dollar to depreciate instead, purchase the b. The spread increased over the period. Ger****n bond, since it pays a higher interest rate and you gain 5-Year Yield minus 3-Month Yield by holding Euros. August 2002: 1.****% d. The dollar depreciates by 4%, so the total return on the Ger****n January 2003: 1.86% bond (in $) is August 2003: 2.4% approxi****tely 6% + 4% =10%. Investing in the U.S. bond January 2004: 2.22% would have produced a 4% return. CHAPTER 18 e. The uncovered interest parity condition is about equality of Quick Check expected returns, not equality 1. a. True. of actual returns. b. False. Dig Deeper c. False. 4. a. GDP is 15 in each economy. Consumers will spend 5 on each d. False. good. e. False. b. Each country has a zero trade balance. Country A exports f. True. clothes to Country B, Country g. False. B exports cars to Country C, and Country C exports computers 2. Domestic Country Balance of Payments ($) to Country A. Current Account c. No country will have a zero trade balance with any other Exports 25 country. Imports 100 d. There is no reason to expect that the United States will have Trade Balance -75 balanced trade with any particular country, even if the United (=25-100) States eliminates its overall trade deficit. Investment Income Received 0 5. a. The relative price of domestic goods falls. Relative de****nd for Investment Income Paid 15 home goods rises. The home unemployment rate falls in the Net Investment Income -15 short run. (=0-15) b. The price of foreign goods in terms of domestic currency is P*/E. Net Transfers Received -25 A nominal depreciation (fall in E) increases the price of foreign Current Account Balance goods in terms of domestic currency. Therefore, a nominal -115 (=-75-15-25) depreciation tends to increase the CPI. Capital Account c. The real wage falls. Increase in Foreign Holdings of Domestic Assets 80 (=65+15) d. Essentially, a nominal depreciation stimulates output by Increase in Domestic Holdings of Foreign Assets -50 reducing the home real wage, which leads to an increase in Net Increase in Foreign Holdings 130 home employment. (=80-(-50)) Explore Further 6. a. The yen appreciated form mid-1985 to mid-1995, depreciated 2. a. There is a real appreciation over time. Over time, the trade until mid-1998, appreciated through the end of 1999, balance worsens. depreciated through the end of 2001, appreciated through 2004, b. The currency depreciates at the rate of π-π*. and then began to depreciate.. From a broader perspective, 3. a. The share of Japanese spending on U.S. goods relative to U.S. between the end of 1984 and the end of 2004, the yen GDP is (0.07)(0.1)=0.7%. appreciated by about 100%. The yen reached its strongest b. U.S. GDP falls by 2(.05)(.007)=0.07%. value against the dollar in mid-1995. c. U.S. GDP falls by 2(.05)(.1)=1%. b. Depreciation of the yen. d. This is an overstatement. The numbers above indicated that c. The yen appreciated from the end of 2001 to the end of 2004. even if U.S. exports fall by 5%, the effect is to reduce growth by This did not help the Japanese recovery. 1%. This is s****ll relative to GDP, but large relative to nor****l 7. "U.S. Assets Abroad" refers to foreign assets acquired by the United growth (of around 3%). States. The sign convention is that a negative number implies a capital 4. Answers follow the model in the text. outflow (not an outflow of assets), meaning U.S. acquisition of foreign Dig Deeper assets. Loosely, a capital outflow is the exchange of home currency for 5. a. The ZZ and NX lines shift up. Domestic output and domestic foreign assets. During the period 1990-2004, the United States net exports increase. acquired a substantial amount of foreign assets. However, this is only b. Domestic investment will increase because output increases. one side of the capital account. Capital inflows are recorded in the category, "Foreign Assets in the U.S." In principle, the sum of "U.S. Assuming taxes are fixed, Assets Abroad" and "Foreign Assets in the U.S." (with the proper sign there is no effect on the deficit. conventions) equals the U.S. current account. In practice, there are c. Private saving must increase, since NX=S-I +T-G. Since the measurement errors, sum****rized in the category, "Statistical deficit is unchanged, and I Discrepancy." and NX increase, S must increase. Given that the United States had a substantial current account deficit in d. Except for G and (for our purposes) T, the other variables in the 1990s (except during the first half of 1991), it received, on net, equation (19.5) are capital inflows, which means the inflow from "Foreign Assets in the endogenous. Exogenous shocks can affect all of them U.S." should have exceeded the outflow from "U.S. Assets Abroad" by the amount of the U.S. current account deficit. In all quarters except simultaneously. 1991:1 and 1995:4, measured U.S. capital inflows exceeded measured 6. a. There must be a real depreciation. U.S. capital outflows, although never by exactly the amount of the U.S. b. C+I+G must fall. The government can reduce G or increase T, current account deficit. In some quarters the statistical discrepancy was which will reduce C. positive; in others, negative. 7. a. Y = C + I + G + X – IM = 20 + 0.8*(Y - 10) + G + 0.3Y*- 0.3Y 8. Exact answers will depend upon when the website is accessed, but the Y = [1/(1 - .8 + .3)](12 + G + 0.3Y*) = 2*(12 + G + 0.3Y*) = 44 + basic point is that the United States is the world’s largest debtor, and 0.6Y* borrows more than the net lending of all the other advanced economies The multiplier is 2 (=1/(1-.8+.3)) when foreign output is fixed. combined. The closed economy multiplier is 5 (=1/.5). It differs from the CHAPTER 19 open economy multiplier because, in the open economy, only Quick Check some of an increase in autonomous de****nd falls on domestic 1. a. Uncertain. goods. b. False. b. Since the countries are identical, Y=Y*=110. Taking into c. False. account the endogeneity of foreign income, the multiplier d. True. equals [1/(1-0.8 -0.3*0.6 +0.3)]=3.125. The multiplier is higher e. True. than the open economy multiplier in part (a) because it takes f. True. into account the fact that an increase in domestic income leads g. False. to an increase in foreign income (as a result of an increase in h. False. domestic imports of foreign goods). The increase in foreign 2. The appropriate mix is a monetary expansion to depreciate the currency income leads to an increase in domestic exports. (and improve the trade c. If Y=125, then foreign output Y*= 44+0.6*125=119. Using balance) and a fiscal contraction to prevent output from increasing. these two facts and the equation Y = 2(12+G+0.3Y*) yields: 125 3. a. Consumption increases because output increases. Investment = 24+2G+0.6*(119). Solving for G gives G=14.8. In the increases because output increases and the interest rate falls. domestic country, NX = 0.3*(119)-0.3*(125) = -1.8; T-G = 10- b. A monetary expansion has an ambiguous effect on net exports. 14.8=-4.8. In the foreign country, NX*=1.8; T*-G*=0. The nominal (and real) depreciation tends to increase net d. If Y=Y*=125, then we have: 125=24+2G+0.6*(125), which exports, but the increase in output tends to reduce net exports. implies G=G*=13. In both countries, net exports are zero, but 4. a. IS shifts right, because NX tend to increase. the budget deficit has increased by 3. b. IS shifts right, because the increase in i* tends to create a e. In part, fiscal coordination is difficult to achieve because of the depreciation of the home benefits of doing nothing, as indicated from part (c). currency and an increase in NX. The interest parity line also Explore Further shifts up. 8. a. NX=National Saving minus Investment. c. A foreign fiscal expansion is likely to increase Y* and increase i*. b. As a % of GDP, gross private domestic investment was 3.6 A foreign percentage points higher in monetary expansion is likely to increase Y* and reduce i*. 2004 than in 1981. NX were 5.6 percentage points lower. d. A foreign fiscal expansion is likely to increase home output. A Since, National Saving=NX+I, national saving fell by 3.6 –5.6 = foreign monetary 2 percentage points relative to GDP. expansion has an ambiguous effect on home output. The c. Change in Investment Change in NX increase in Y* tends to increase home output. The fall in i* (% of GDP) (% of GDP) tends to reduce home output. 1981-1990 -0.1% 0.1% Dig Deeper 1990-2000 5.1% 3.1% 5. a. An increase in Y* shifts IS to the right. The incipient rise in the 2000-2004 -0.1% 1.5% home interest rate creates a monetary expansion as the home Only in the 1990s was the fall in NX ****tched by an increase in central bank purchases foreign exchange reserves to prevent investment. the domestic currency from appreciating. So, LM shifts right. d. Yes. An increase in investment leads to more capital Output and NX increase. accumulation and more output in b. The interest parity line shifts up and LM shifts left as the central the future, and therefore to a greater ability to repay foreign bank sells foreign exchange to prevent the domestic currency debt. from depreciating. Output falls, which leads to an increase in CHAPTER 20 NX). Quick Check c. A fiscal expansion in the Leader country, which increases Y* 1. a. True. and i*, reduces home b. False. output, if the effect of Y* on output is s****ll. A monetary c. True. expansion in the Leader d. True. country, which increases Y* and reduces i*, increases domestic e. Uncertain. If expected appreciation on the yen is greater than output. the interest rate in other 6. a. IS shifts to the left. Output falls, the interest rate falls, and the countries, than foreign investors will hold yen bonds. currency depreciates. The exchange rate change tends to f. False. The money stock will change in response to shocks increase output by increasing NX. Therefore, the exchange (including policy shocks) so that the home interest rate equals rate movement dampens the effect of the fall in business the foreign interest rate. confidence. b. IS shifts left and LM shifts left (because the money supply falls) f. In a closed economy, an increase in government spending as the central bank sells foreign exchange reserves to prevent reduces investment in the medium run. the domestic currency from appreciating. The fall in output is g. The statement is true. Under fixed exchange rates, the interest greater than in part (a). rate is anchored to foreign interest rate. Since the interest rate c. When the exchange rate is flexible, movements of the does not change, there is no mechanism for government exchange rate tend to dampen the output effects of IS shocks. spending to crowd out investment. The currency depreciates when IS shifts left and appreciates 3. a. The home real interest rate equals the foreign real interest rate when IS shifts right. minus expected real appreciation of the home currency. When Explore Further the home currency is expected to appreciate in real terms, 7. a. The pound generally depreciated during the period. It was foreign bonds must offer a real interest rate higher than the more stable while the United Kingdom participated in the ERM, home real interest rate to compensate international portfolio and depreciated immediately after the United Kingdom left the investors for the expected loss in real value of the foreign ERM. currency. When the home currency is expected to depreciate in b. The interest rates should be equal. real terms, home bonds must pay a real interest rate higher c. U.K. Interest Rate minus Ger****n Interest Rate than the foreign real interest rate. Jan. 1985 – Sep. 1990: 5.22 b. 10%=6%-expected nominal appreciation, so expected nominal Oct. 1990 – Sep. 1992: 1.14 appreciation = - 4% per year. Therefore, expected depreciation Oct: 1992 – Dec. 2004: 1.72 is 4% per year. d. The spread dropped from 4% to 2.2% in the first three months that the c. 10%-6%=(6%-3%) - expected real appreciation, so expected United Kingdom was part real appreciation = -1% per year. Therefore, expected real of the ERM. It appears that financial ****rkets believed that the United appreciation is 1% per year. Kingdom would continue to participate in the ERM. d. You would purchase the domestic bond because the foreign e. The spread changed from positive to negative immediately after the bond will only yield 6% and there is a loss on your position in United Kingdom left the ERM. Lower interest rates (than they would the foreign currency. have been otherwise) were beneficial to the United Kingdom’s economy. 4. a. The expected exchange rate is E. The home interest rate is i*. CHAPTER 21 b. The expected exchange rate is less than E. The home interest Quick Check rate is greater than i*. 1. a. True. Britain returned to the gold standard at too c. The domestic interest rate returns to i*, because expected appreciated a parity. depreciation is zero. b. True. d. Devalution per se does not lead to higher interest rates. Fear of c. False. devaluation does. d. False. Dig Deeper e. False. 5. a. The price level rises by 10%. 2. b. AD shifts right in the short run. AS shifts left in the medium run. b. The real exchange rate is EP/P*. If P rises by 10%, E falls by In the medium run, output is unchanged, but the price level is 10%. There is a 10% higher. depreciation of the currency in nominal terms. c. Consumption is unchanged in the medium run. c. Eet+n falls by 10%. d. The real exchange rate appreciates, since the price level rises. d. E falls by 10%. NX fall in the medium run, as a result of the real appreciation. e. E falls by more than 10%. By interest parity, i-i* equals e. i=i*. The nominal interest rate is unaffected by government expected depreciation. If i falls spending. Since expected inflation is constant, the real interest below i* in the short run, then there is expected appreciation. rate is also unaffected. Investment is unchanged in the medium This can only happen if E falls by more than 10% in the short run. domestic imports of foreign goods). The increase in foreign 2. The appropriate mix is a monetary expansion to depreciate the currency income leads to an increase in domestic exports. (and improve the trade c. If Y=125, then foreign output Y*= 44+0.6*125=119. Using balance) and a fiscal contraction to prevent output from increasing. these two facts and the equation Y = 2(12+G+0.3Y*) yields: 125 3. a. Consumption increases because output increases. Investment = 24+2G+0.6*(119). Solving for G gives G=14.8. In the increases because output increases and the interest rate falls. domestic country, NX = 0.3*(119)-0.3*(125) = -1.8; T-G = 10- b. A monetary expansion has an ambiguous effect on net exports. 14.8=-4.8. In the foreign country, NX*=1.8; T*-G*=0. The nominal (and real) depreciation tends to increase net d. If Y=Y*=125, then we have: 125=24+2G+0.6*(125), which exports, but the increase in output tends to reduce net exports. implies G=G*=13. In both countries, net exports are zero, but 4. a. IS shifts right, because NX tend to increase. the budget deficit has increased by 3. b. IS shifts right, because the increase in i* tends to create a e. In part, fiscal coordination is difficult to achieve because of the depreciation of the home benefits of doing nothing, as indicated from part (c). currency and an increase in NX. The interest parity line also Explore Further shifts up. 8. a. NX=National Saving minus Investment. c. A foreign fiscal expansion is likely to increase Y* and increase i*. b. As a % of GDP, gross private domestic investment was 3.6 A foreign percentage points higher in monetary expansion is likely to increase Y* and reduce i*. 2004 than in 1981. NX were 5.6 percentage points lower. d. A foreign fiscal expansion is likely to increase home output. A Since, National Saving=NX+I, national saving fell by 3.6 –5.6 = foreign monetary 2 percentage points relative to GDP. expansion has an ambiguous effect on home output. The c. Change in Investment Change in NX increase in Y* tends to increase home output. The fall in i* (% of GDP) (% of GDP) tends to reduce home output. 1981-1990 -0.1% 0.1% Dig Deeper 1990-2000 5.1% 3.1% 5. a. An increase in Y* shifts IS to the right. The incipient rise in the 2000-2004 -0.1% 1.5% home interest rate creates a monetary expansion as the home Only in the 1990s was the fall in NX ****tched by an increase in central bank purchases foreign exchange reserves to prevent investment. the domestic currency from appreciating. So, LM shifts right. d. Yes. An increase in investment leads to more capital Output and NX increase. accumulation and more output in b. The interest parity line shifts up and LM shifts left as the central the future, and therefore to a greater ability to repay foreign bank sells foreign exchange to prevent the domestic currency debt. from depreciating. Output falls, which leads to an increase in CHAPTER 20 NX). Quick Check c. A fiscal expansion in the Leader country, which increases Y* 1. a. True. and i*, reduces home b. False. output, if the effect of Y* on output is s****ll. A monetary c. True. expansion in the Leader d. True. country, which increases Y* and reduces i*, increases domestic e. Uncertain. If expected appreciation on the yen is greater than output. the interest rate in other 6. a. IS shifts to the left. Output falls, the interest rate falls, and the countries, than foreign investors will hold yen bonds. currency depreciates. The exchange rate change tends to f. False. The money stock will change in response to shocks increase output by increasing NX. Therefore, the exchange (including policy shocks) so that the home interest rate equals rate movement dampens the effect of the fall in business the foreign interest rate. confidence. Explore Further does not do so, the central bank could commit not to monetize 6. Answers will vary depending upon when the question is answered. government debt. However, this could drive the government into default CHAPTER 23 on its bonds. Quick Check 5. ****x (0.9-∆M/M)(∆M/M)=45%. 1. a. True. Explore Further ====== b.False. 6. Answers ****y vary depending upon when the website is accessed, but it c. False. is clear that a fall in oil d. False. Although incomes policies ****y be part of a successful prices would tend to increase the budget deficit in Venezuala. This stabilization program in would create the possibility some cases. of a hyperinflation if the government is unwilling or unable to finance e. False. itself and the central bank finances the deficit through money creation. f. False. CHAPTER 24 2. a. If money growth = 25%, 50%, 75%, seignorage=162.5, 325, Quick Check 487.5 1. a. False. b. In the medium run, if money growth = 25%, 50%, 75%, b. True/Uncertain. seignorage=162.5, 200, 112.5. The fall in real money balances c. False. associated with higher ongoing inflation reduces the potential d. False. for seignorage. Part (a) did not allow for this effect. e. True. 3. a. Would decrease the effect of inflation on real tax revenues. f. Uncertain. It ****y be wise for a government to commit not to b. Would decrease the effect of inflation on real tax revenues. negotiate with hostage takers as a means to deter hijackings, c. Would decrease the effect of inflation on real tax revenues, but even recognizing that after a hijacking has taken place, there is would also have other effects. The income tax can tax the rich a strong incentive to negotiate. However, the phrase “under no at a higher rate than the poor, but the sales tax rate is the same circumstances” is categorical. There ****y some for rich and poor. circumstances under which a government might wish to violate Dig Deeper its commitment. This statement, of course, illustrates the 4. i. The end to the crisis depends on shifting the composition of taxes. difficulty of precommitment. Can a government really commit Workers are already paying an inflation tax. not to negotiate, no ****tter what the circumstances, even if ii. The central bank must ****ke a credible commitment that it will no these circumstances ****y not have been i****gined at the time longer auto****tically monetize the government debt. Although a the commitment was ****de? currency board would do this, it is a drastic and perhaps unnecessary g. False. step. 2. a. Inflation will increase in the fourth year. iii. Price controls ****y help, but price controls without other policy b. The President should aim for high unemployment early in the changes only cause distortions and are a recipe for failure. administration, to reduce iv. A recession is not needed, but it ****y happen. Although nominal inflation before the fourth year. rigidities are less important during hyperinflations—which implies that c. The policies are likely to achieve the desired inflation rates, but the sacrifice ratio is s****ll—the issue of credibility re****ins. Unless firms not the increase in output and workers believe in the stabilization program, a severe recession desired in the fourth year. If inflation equals expected inflation, ****y be the result. unemployment equals the natural rate. v. The problem has two parts: (i) there is an ongoing fiscal deficit that 3. Answers will vary. the government is unable or unwilling to finance from nonmonetary 4. New Zealand wants to eliminate fears that the central bank might try to sources and (ii) the central bank is willing to monetize the debt. The reduce unemployment order in which these issues are resolved ulti****tely depends on the below the natural rate with expansionary monetary policy and higher political realities. The fiscal authority could eliminate the deficits. If it inflation. See Chapter 25 for a discussion of inflation targeting. b. De****nd for M1 increases as people transfer funds from money Dig Deeper ****rket funds to checking accounts. De****nd for M2 re****ins 5. a. 0.5(πD + πR) unchanged. b. The unemployment rate will be less than the natural rate. c. Shift in the composition of M1 (and consequently M2) as people Inflation will be higher than hold more currency and ****ke fewer trips to the bank while expected. holding s****ller checking account balances. c. The unemployment rate will be greater than the natural rate. d. The de****nd for M2 increases as the benefit of holding Inflation will be lower than government securities falls. expected. 3. a. 4%-0%=4%; 14%-10%=4% d. Yes, if one looks at the first two years of each administration, b. 4% * (1-0.25)-0%=3%; 14% * (1-0.25)-10%=10.5%-10%=0.5% not just the first. c. Yes, given the deductibility of nominal mortgage interest e. Unemployment equal to the natural rate, because π = πe, and payments in the United States. high inflation. 4. a. The unemployment rate will re****in equal to the natural rate. 7. a. If the Republicans cut military spending, the Democrats get 1 if b. No, there surprises, lags in policy****king, and uncertainty in they cut welfare, but 3 if they do not. So their best response is policy****king. to vote against welfare cuts. The Republicans will get –2 in this c. The changes in the natural rate will ****ke it more difficult for the case. Fed to hits its target. It b. If the Republicans do not cut military spending, the Democrats will be harder to distinguish changes in the actual rate of get –2 if they cut welfare, but only –1 if they do not. So their unemployment from changes in the natural rate of best response is not to cut welfare. The Republicans will get –1 unemployment. in this case. Dig Deeper c. Given the answers above, the Republicans do better when they 5. Discussion question. do not cut military spending, so they will not cut. The 6. c. The MP relation slopes up. An increase in government Democrats will not cut either. The two parties are locked in a spending shifts IS right, so bad equilibrium. They could ****ke a deal: both vote for cuts. If output and the real interest rate rise. they do, they will both be better off. d. The MP relation shifts up. Output falls and the real interest rate Explore Further increases. 8. Answers will vary. 7. a. The MP relation shifts up. Output falls and the real interest rate CHAPTER 25 increases. b. Quick Check c. Since YYn, πe rises. Inflation tends to move away from its d. False/Uncertain. Evidence suggests that people have money target level. A value of a<1 illusion, when would seem ****kes no sense as part of the policy rule, because inflation would tend to move to imply that inflation would distort decision ****king. away from its target e. False. Explore Further f. True/Uncertain. True to the extent the tax code is not indexed 8. Answers will depend upon current Fed policy. to inflation. CHAPTER 26 2. a. De****nd for M1 falls while de****nd for M2 is unchanged. Quick Check People shift funds from savings accounts to time deposits. 1. a. True. b. False. c. False. d. False. e. False. b. The debt-to-GDP ratio is 93% in 10 years. f. False c. The answer is the same as in part (b). What ****tters is r-g, 2. First, even a temporary deficit leads to an increase in the national debt, which is the same in parts (b) and therefore to higher and (c). interest payments. This, in turn, implies continued deficits, higher taxes, d. The required pri****ry surplus is .5*(r-g)=1% of GDP. or lower government spending in the future. Second, the evidence does e. The required pri****ry surplus is 2% of GDP per year. not support the Ricardian equivalence proposition. Third, if Ricardian f. The required reduction in the pri****ry deficit will be larger if equivalence did hold, then government spending would have the same growth is lower. effect on output regardless of whether it was financed by bonds (i.e., g. The policy in part (e) is more dangerous. Waiting to reduce the with a deficit) or taxes. Thus, a deficit, per se, would not be needed to debt ratio requires a stimulate output. Fourth, war-time economies are already low- larger change in fiscal policy. Larger policy changes have more uncertainty unemployment economies. There is no need for further stimulation by associated with their outcomes. Thus, the larger change in policy in part (e) is using deficits rather than tax finance. The only correct part of the more likely to have extreme effects on output (lower growth), which could set off statement is the first sentence. A deficit can be preferable to higher a vicious cycle. Lower growth means larger surpluses are required to reduce taxes during a war, but not for the reasons stated here. the debt to safe levels, larger surpluses lead to lower growth, which mean larger 3. a. Interest payments are 10% of GDP, so the pri****ry surplus is surpluses, and so on. 10%-4%=6%. b. Real interest payments are (10%-7%)*100%=3% of GDP. So the inflation-adjusted surplus is 6%-3%=3%. c. Output is roughly two percent lower than it would have been. Using the rule of thumb in the text, the surplus is lower by 0.5*2%=1%. So, the cyclically-adjusted, inflation- adjusted surplus is 2%. d. The change in the debt to GDP ratio = (3%-2%)*100% - 3% = - 2%. The debt to GDP ratio falls by 2% a year. Dig Deeper 4. a. The domestic interest rate increases from 10% to 20%. b. The real interest rate increases from 3% to 13%. The high real interest rate is likely to decrease growth. c. The official deficit increases from 4% to 14% of GDP. The inflation-adjusted deficit increases from –3% (a surplus) to 7% (a deficit). d. The change in the debt ratio = (13%-(-2%))*100%-3%=12%. It goes up very quickly. e. In this example, the worries were self-fulfilling. 5. a. The IS curve shifts right and output increases in the short run. The increased in government spending is financed by borrowing, i.e., with bonds. b. IS shifts to the right, because the government spending multiplier is bigger than the tax multiplier. The output effect is s****ller than in part (a). c. The effect is the same as in part (b). d. The effect is the same as in parts (b) and (c). e. Government spending affects output, but taxes do not. If taxes are not levied to finance government spending, households will simply save the present value of the required taxes themselves. Explore Further 6. a. The debt-to-GDP ratio is 80% in 10 years.
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