MACRO HW V

Compute the inflation rate for each year 1993-201 2 and determine

which were years of inflation. ln which years did deflation occuP ln

which years did disinflation occur? Was tirere hyperinflation in any yeaf

* (Sources of tnflation)Usingthe concepts of aggregate supply and ag- gregate demand, explain why inflation usually increases during wartime.

s. (nftatiln and lnterest Rates) Using a demand-supply diagram for loanable funds (like the exhibit below), show what happens

to the nominal interest rate and the equilibrium quantity of loans

when both bonowers and lenders increase their estimates of the

expected inflation rate from 5 percent to 1 0 percent.

The Market for Loanable Funds

Loanable funds per period

7-4 Explain how unanticipated inflation harms some individuals and harms the economy as a whole 10, (AnticipatedVersus Unanticipated lnflation) lf actual inflation ex-

ceeds anticipated inflation, who will lose purchasing power and who

will gain? How does unanticipated inflation harm the economy?

GHAPTER 8 8-1 Describe how we measure labor productivity, and explain why is it important for a nation's standard of living

(Measuring Labor Productivily) How do we measure labor productivitf

How do changes in labor productivity affect the U.S. standard of living?

(Growth and the PPF) Use the production possibilities frontier (PPD

to demonstrate economic growth.

a. With consumption goods on one axis and capital goods on the

other, show how the combination of goods selected this period

affects the PPF in the next period.

b. Extend this comparison by choosing a different point on this period's PPF and determining whether that combination leads to

more or less growth over the next period.

(Shifts in the PPflferrorist attacks foster instability and may affect

productivity over the short and long term. Do you think the

September 1 l, 2001, terrorist attacks on the World Trade Center and the Pentagon affected short- and/or longterm productivity in

the United States? Explain your response and show any move-

ments in the PPF.

o o o o o .Ei o c c oz

33O PROBLEMS APPENDIX

8-2 Summarize the history of U.S.labor productivity changes since World War II and explain why these changes matter

(Labor Productivity) ldentify at least four definable periods of labor

productivity growth beginning right after World War ll. During which

periods was productivity growth lowest and why? (Refer to Exhibit 6

inthe chapter.)

(Long-Term Productivity Growfhl Suppose that two nations start

out in 201 3 with identical levels of output per work hour-say,

$100 per hour. ln the first nation, labor productivity grows by

1 percent per year. ln the second, it grows by 2 percent per

year. Use a calculator or a spreadsheet to determine how much

output per hour each nation will be producing 20 years later, as-

suming that labor productivity growth rates do not change. Then,

determine how much eacll will be producing per hour 100 years

later. What do your results tell you about the effects of small

differences in productivity growth rates?

8-3 Evaluate the evidence that technological change increases the unemployment rate

a. (Technological Change) Does technological change create unemployment? What's the evidence?

t. (lechnological Change and Unemployment)What are some examples, other than those given in the chapter, of technologi-

cal change that has caused unemploymen? And what are some

examples of new technologies that have created jobs? How do you

think you might measure the net impact of technological change on

overall employment and GDP in the United States?

CHAPTER 9 9-1 Explain what a consumPtion function illustrates and interpret its slope

(Consumption)Use the following data to answer the questions

below:

Consumption

Real Disposable lncome (billions)

$1 00

$200

$3oo

$400

a. Graph the consumption function, with consumption spending on

the vefiical axis and disposable income on the horizontal axis.

b. lf the consumption function is a straight line, what is its slope?

c. Fill in the saving column at each level of income. lf the saving

function is a straight line, what is its slope?

(MPC and MPS)lf consumption increases by $12 billion when

disposable income increases by $t S billion, what is the value of

the MPC? What is the relationship between the MPC and the MPS?

lf the MPC increases; what must happen to the MPS? How is the

MPC related t0 the consumption function? How is the MPS related

to the saving function?

Expenditures (billions)

$1 50

$200

$250

$300

Saving (billions)

3. (Consumption and Saving)Suppose that consumption equals $500 billion when disposable income is $0 and that each increase

of $100 billion in disposable income causes consumption to

increase by $70 hillion. Draw a graph of the consumption func-

tion using this information. What is the slope of the consumption

function?

9-2 Describe what can shift the consumption function up or down

Consumption Function How would an increase in each of the fol-

lowing affect the consumption function?

a. Net taxes b. The interest rate

c. Consumer optimism, or confidence d. The price level

e. Consumers' net wealth

f. Disposable income

9-3 Explain why investnrent varies more than consumption from year to year 5. (lnvestmenfl Why does investment vary more than consumption

from year to year?

a, (lnvestmen| Why would the following investment expenditures increase as the interest rate declines?

a. Purchases of a new plant and equipment

b. Construction of new housing

c. lncrease of inventories

9-4 Describe how the aggregate expendiftrre line determines the quantity of aggregate output demanded t. (Aggregate Expenditure)What are the components of aggregate

expenditure? ln the model developed in this chapter, which compo-

nents vary with changes in the level of real GDP? What determines

the slope of ths aggregate expenditure line?

a. (GDP Demanded)How is the aggregate expenditure line used to identify real GDP demanded assuming a given price level?

9-5 Determine the simple spending multiplier and explain its relevance

(Simple Spending Multiplier)For each of the following values for

the MPC, determine the size of the simple spending multiplier and

the total change in real GDP demanded following a $10 billion

decrease in spending:

a. MPC -- 0.9 b, MPC: 0.75 c. MPC: 0.6 (Simple Spending Multiplie] Suppose that the MPC is 0.8 and that

$14 trillion of real GDP is currently being demanded. The govern-

ment wants to increase real GDP demanded to $15 trillion at the given price level. By how much would it have to increase govern-

ment purchases to achieve this goal?

(lnvestnent and the Multiplier)Ihis chapter assumes that

investment is autonomous. What would happen to the size of the

multiplier if investment increases as real GDP increases? Explain,

9-6 Summarize the relationship between the aggregate expendiarre line and the aggregate demand cunre 12. (Shifts of Aggregate Demand)Assume the simple spending multi"

plier equals 3. Determine the size and direction of any changes of

the aggregate expenditure line, real GDP demanded, and the aggre-

Ete demand curve for each of the following changes in spending: a. Spending rises by $8 billion at each income level.

b. Spending falls by $5 billion at each income level.

c. Spending rises by $20 billion at each income level.

GHAPTER 10 10-1 Explain what dptermines the shape and position of the short- run aggregate suPPly curye

(Natural Rate of Unemploymentl What is the relationship between

potential output and the natural rate of unemployment?

a. lf the economy currently has a frictional unemployment rate of 2 percent, structural unemployment of 2 percent, seasonal

unemployment of 0.5 percent, and cyclical unemployment of

2 percent, what is the natural rate of unemployment? Where is

the economy operating relative to its potential GDP?

b. What happens to the natural rate of unemployment and poten-

tial GDP if cyclical unemployment rises to 3 percent with other

types of unemployment unchanged from paft (a)?

c. What happens t0 the natural rate of unemployment and poten-

tial GDP if structural unemployment falls to 1 .5 percent with

other types of unemployment unchanged from part (a)?

(Real Wages) In the accompanying exhibit, how does the real wage

rate at point c compare with the real wage rate at point a? How

do nominal wage rates compare at those two points? Explain your

answers.

Long-Run Adjustment When the Price Level Exceeds Expectations

Potential output LRAS

14.O 14-2 Real G'DP '--- -- (trillionsofdollars)

Expansionary gap

PROBLEMS APPENDIX 331

10-2 Describe the market forces that push the economY toward its potential output in the long run

(Expansionary and Recessionary Gaps,)Answer questions a through

f on the basis of the following graph:

Potential output

13.7 14.0 14.2 Real GDP (trillions)

a. If the actual price level exceeds the expected price level

reflected in longterm contracts, real GDP equals

-

and

the actual price level equals

-

in the short run.

b. The situation described in part (a) results in a(n)

-

gap

equal to

-. c. lf the actual price level is lower than the expected price level

reflected in longterm contracts, real GDP equals

-

and

the actual price level equals

-

in the short run.

d. The situation described in part (c) results in a(n)

-

gap

eoual to

e. lf the actual price level equals the expected price level reflected

in long-term contracts, real GDP equals

-

and the

actual price level equals in the shod run. f. The situation described in paft (e) results in a(n)

-

gap

equal to

-. t. (Long-Bun Adiustment)Ihe ability of the economy to eliminate

any imbalances between actual and potential output is sometimes

called self-conection, Using an aggregate supply and aggregate

demand diagram, show why this self-correction process involves

only temporary periods of inflation or deflation.

10-3 Explain why shifts of the aggregate demand curue change the price level in the long run but do not change potential outPut

(7 OOunnu in Aggregatesupp4, List three factors that can change \-/ ths economy's potential output. What is the impact of shifts of

the aggregate demand curve 0n potential output? lllustrate your

answers with a diagram.

10-4 Summarize what can shift an economy's potential output in the long run

() Or*,r tnocksl Give an example of an adverse supply shock and V illustrate graphically. Now do the same for a beneficial supply shock.

3,32 PROBLEMS APPENDIX

GHAPTER 11 11-1 Describe the discretionary fiscal policies to close a recessionary gap and an exPansionary gap

(Fiscal Policy)DeIine fiscal policy. Determine whether each of the

followmg, other factors held constant, would lead to an increase, a

decrease, or no change in the level of real GDP demanded:

a, A decrease in government purchases

b. An increase in net taxes

c. A reduction in transfer payments

d. A decrease in the marginal propensity t0 consume

(Recessionary Gap)What is a recessionary gap? What fiscal policy

might close that gap? Show with a graph.

(Expansionary Gap)What is anpxpansionary gap? What fiscal

policy might close that gap? Show with a graph'

(Changes in Government Purchases) Assume that government pur-

chases decrease by $1 0 billion, with other factors held constant,

including the price level. Calculate the change in the level of real

GDP demanded for each of the following values of the MPC. Then,

calculate the change if the government, instead of reducing its

purchases, increased autonomous net taxes by $1 0 billion.

a. 0.9

b. 0,8

c. 0.75 d. 0.6 (Fiscal Multipliers)Explain the difference between the government

purchases multiplier and the net tax multiplier, lf the MPC falls,

what happens to the tax multiPlier?

(Muttipliers)Suppose investment, in addition to having an autono-

mous component, also has a component that varies directly with

the level of real GDP How would this affect the size of the spending

multiplier?

(Fiscat Poticy) Chapterl 1 shows that increased government pur-

chases, with taxes held constant, can eliminate a recessionary gap,

How could a tax cut achieve the same result?

(Fiscat Policy with an Expansionary 6apl Using the aggregate

demand-aggregate supply model, illustrate an economy with an

expansionary gap. lf the government is to close the gap by chang-

ing government purchases, should it increase or decrease those

purchases? ln the long run, what happens to the level of real GDP

as a result of government intervention? What happens to the price

level? lllustrate this 0n an AD-AS diagram, assuming that the gov-

ernment changes its purchases by exactly the amount necessary t0

close the gap.

11-2 Summarize fiscal policy from the Great Depression to stagflation

9. (Evolution of Fiscal Policy)What did classical economists assume about the flexibility of prices, wages, and interest rates? What did

this assumption imply about the self-correcting tendencies in an

economy in recession? What disagreements did Keynes have with

classical economists?