宏观经济学英文版复习提纲

1、Definition of Terms (5×4, 20 points) Chapter 1

1.Macroeconomics

Macroeconomics is the study of the economy as a whole, including growth in incomes, changes in prices, and the rate of unemployment. Chapter 2

2.Gross domestic product (GDP)

Gross domestic product (GDP) measures the income of everyone in the economy and, equivalently, the total expenditure on the economy’s output of goods and services. 3.Value added

The value added of a firm equals the value of the firm’s output less the value of the intermediate goods that the firm purchases. 4.Real GDP

Real GDP is the value of goods and services measured using a constant set of prices. 5.GDP deflator

The GDP deflator is the ratio of nominal GDP to real GDP. It reflects what’s happening to the overall level of prices in the economy. 6.Consumer price index (CPI)

The consumer price index (CPI) measures the price of a fixed basket of goods and services purchased by a typical consumer. It measures the overall level of prices. 7.Unemployment rate

The unemployment rate shows what fraction of those who would like to work do not have a job. Unemployment Rate = Number of Unemployed/Labor Force×100％. 8.Labor-force participation rate

The labor-force participation rate shows the fraction of adults who are working or want to work. Labor-Force Participation Rate = Labor Force / Adult Population ×100％. Chapter 3

9.Disposable income

We define income after the payment of all taxes, Y ? T, to be disposable income. 10.Marginal propensity to consume(MPC)

The marginal propensity to consume (MPC) is the amount by which consumption

changes when disposable income increases by one dollar. The MPC is between zero and one. 11.Real interest rate

The real interest rate is the nominal interest rate corrected for the effects of inflation. Chapter 4 12.Inflation

The overall increase in prices is called inflation, 13.Hyperinflation

Hyperinflation is often defined as inflation that exceeds 50 percent per month, which is just over 1 percent per day. 14.Money

Money is the stock of assets that can be readily used to make transactions.

15.Fiat money

Money that has no intrinsic value is called fiat money because it is established as money by government decree, or fiat. 16.Commodity money

Most societies in the past have used a commodity with some intrinsic value for money.This type of money is called commodity money. 17.Money supply

The quantity of money available in an economy is called the money supply. 18.Quantity equation

The link between transactions and money is expressed in the following equation, called the quantity equation: Money ×Velocity = Price × Transactions M × V = P × T. 19.Income velocity of money

The income velocity of money tells us the number of times a dollar bill enters someone’s income in a given period of time. 20.Real money balances

M/P is called real money balances. Real money balances measure the purchasing power of the stock of money 21.Seigniorage

The revenue raised by the printing of money is called seigniorage. 22.Fisher equation and Fisher effect

The nominal interest rate is the sum of the real interest rate and the inflation rate: i = r +∏. The equation written in this way is called the Fisher equation

According to the quantity theory, an increase in the rate of money growth of 1 percent causes a 1 percent increase in the rate of inflation. According to the Fisher equation, a 1 percent increase in the rate of inflation in turn causes a 1 percent increase in the nominal interest rate. The one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect. 23.Shoeleather costs

The inconvenience of reducing money holding is called the shoeleather cost of inflation, because walking to the bank more often causes one’s shoes to wear out more quickly 24.Menu costs

High inflation induces firms to change their posted prices more often. These costs are called menu costs.

25.Classical dichotomy

Classical theory allows us to study how real variables are determined without any reference to the money supply. This theoretical separation of real and nominal variables is called the classical dichotomy. 26.Monetary neutrality

In classical economic theory, changes in the money supply don’t influence real variables. This irrelevance of money for real variables is called monetary neutrality. Chapter 6

27.Natural rate of unemployment

Natural rate of unemployment is the average rate of unemployment around which the economy fluctuates.

28.Frictional unemployment

The unemployment caused by the time it takes workers to search for a job is called frictional unemployment. 29.Wage rigidity

Wage rigidity is the failure of wages to adjust to a level at which labor supply equals labor demand.

30.Structural unemployment

The unemployment resulting from wage rigidity and job rationing is called structural unemployment.

31.Efficiency wages

Efficiency-wage theories propose a third cause of wage rigidity in addition to

minimum-wage laws and unionization. These theories hold that high wages make workers more productive. Chapter 7

32.Steady state

At k*, Δk = 0,so the capital stock k and output f(k) are steady over time (rather than

growing or shrinking). We therefore call k* the steady-state level of capital. The steady state represents the long-run equilibrium of the economy. 33.Golden Rule level of capital

The steady-state value of k that maximizes consumption is called the Golden Rule level of capital and is denoted k*gold. Chapter 8

34.Endogenous growth theory

Modern theories of endogenous growth attempt to explain the rate of technological progress, which the Solow model takes as exogenous. Chapter 9

35.Okun’s law

Because employed workers help to produce goods and services and unemployed workers do not, increases in the unemployment rate should be associated with decreases in real GDP. This negative relationship between unemployment and GDP is called Okun’s law, Okun’s law says that 1 percentage point of unemployment translates into 2 percentage points of GDP. 36.Aggregate demand

Aggregate demand (AD) is the relationship between the quantity of output demanded and the aggregate price level. In other words, the aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices. 37.Aggregate supply

Aggregate supply (AS) is the relationship between the quantity of goods and services supplied and the price level. 38.Demand shocks

A shock that shifts the aggregate demand curve is called a demand shock. 39.Supply shocks

A shock that shifts the aggregate supply curve is called a supply shock. 40.Stabilization policy

Economists use the term stabilization policy to refer to policy actions aimed at reducing

the severity of short-run economic fluctuations. Chapter 10 41.IS curve

IS stands for ―investment’’ and ―saving,’’ and the IS curve represents the negative

relationship between the interest rate and the level of income that arises from equilibrium in the market for goods and services. 42.LM curve

LM stands for ―liquidity’’ and ―money,’’ and the LM curve represents the positive

relationship between the interest rate and the level of income that arises from equilibrium in the market for real money balances. 43.Keynesian cross

The Keynesian cross is a basic model of income determination. It takes fiscal policy and planned investment as exogenous and then shows that there is one level of national income at which actual expenditure equals planned expenditure.

Chapter 13

44.Phillips curve

The Phillips curve in its modern form states that the inflation rate depends on three forces: ■ Expected inflation

■ The deviation of unemployment from the natural rate, called cyclical unemployment ■ Supply shocks.

These three forces are expressed in the following equation: Π = EΠ? β(u ? un) +v

Inflation= Expected Inflation ?(β×Cyclical Unemployment ) + Supply Shock,

whereβis a parameter measuring the response of inflation to cyclical unemployment. There is a minus sign before the cyclical unemployment term: other things equal, higher unemployment is associated with lower inflation 45.Adaptive expectations

A simple and often plausible assumption is that people form their expectations of inflation based on recently observed inflation. This assumption is called adaptive expectations.

46.Demand-pull inflation

The second term, β(u ? un), shows that cyclical unemployment—the deviation of

unemployment from its natural rate—exerts upward or downward pressure on inflation. Low unemployment pulls the inflation rate up. This is called demand-pull inflation because high aggregate demand is responsible for this type of inflation. 47.Cost-push inflation

The third term, v, shows that inflation also rises and falls because of supply shocks. An adverse supply shock, such as the rise in world oil prices in the 1970s, implies a positive value of v and causes inflation to rise. This is called cost-push inflation because adverse supply shocks are typically events that push up the costs of production. 48.Sacrifice ratio

The sacrifice ratio is the percentage of a year’s real GDP that must be forgone to reduce inflation by 1 percentage point. Although estimates of the sacrifice ratio vary substantially, a typical estimate is about 5: for every percentage point that inflation is to fall, 5 percent of one year’s GDP must be sacrificed. 49.Rational expectations

An alternative approach is to assume that people have rational expectations. That is, we might assume that people optimally use all the available information, including information about current government policies, to forecast the future. 50.Natural-rate hypothesis

The natural-rate hypothesis is summarized in the following statement: Fluctuations in aggregate demand affect output and employment only in the short run. In the long run, the economy returns to the levels of output, employment, and unemployment described by the classical mode 51.Hysteresis

Some economists have pointed out a number of mechanisms through which recessions might leave permanent scars on the economy by altering the natural rate of unemployment. Hysteresis is the term used to describe the long-lasting influence of history on the natural rate.

2、Gap Filling(20×1, 20 points)

Summary in all chapters that we already studied

NOTE: I will give you a word list, you choose the word from the list and fill out Chapter 1

1. Macroeconomics is the study of the economy as a whole, including growth in incomes, changes in prices, and the rate of unemployment. Macroeconomists attempt both to explain economic events and to devise policies to improve economic performance.

2. To understand the economy, economists use models—theories that simplify reality in order to reveal how exogenous variables influence endogenous variables. The art in the science of economics is in judging whether a model captures the important economic relationships for the matter at hand. Because no single model can answer all questions, macroeconomists use different models to look at different issues.

3. A key feature of a macroeconomic model is whether it assumes that prices are flexible or sticky. According to most macroeconomists, models with flexible prices describe the

economy in the long run, whereas models with sticky prices offer a better description of the

economy in the short run.

4. Microeconomics is the study of how firms and individuals make decisions and how these decisionmakers interact. Because macroeconomic events arise from many microeconomic interactions, all macroeconomic models must be consistent with microeconomic foundations, even if those foundations are only implicit. Chapter 2

1. Gross domestic product (GDP) measures the income of everyone in the economy and, equivalently, the total expenditure on the economy’s output of goods and services.

2. Nominal GDP values goods and services at current prices. Real GDP values goods and services at constant prices. Real GDP rises only when the amount of goods and services has increased, whereas nominal GDP can rise either because output has increased or because prices have increased.

3. GDP is the sum of four categories of expenditure: consumption, investment, government purchases, and net exports.

4. The consumer price index (CPI) measures the price of a fixed basket of goods and services purchased by a typical consumer. Like the GDP deflator, which is the ratio of nominal GDP to real GDP, the CPI measures the overall level of prices.

5. The labor-force participation rate shows the fraction of adults who are working or want to work. The unemployment rate shows what fraction of those who would like to work do not have a job. Chapter 3

1. The factors of production and the production technology determine the economy’s output of goods and services. An increase in one of the factors of production or a technological advance raises output.

2. Competitive, profit-maximizing firms hire labor until the marginal product of labor equals the real wage. Similarly, these firms rent capital until the marginal product of capital equals the real rental price. Therefore, each factor of production is paid its marginal product. If the production function has constant returns to scale, then according to Euler’s theorem, all output is used to compensate the inputs.

3. The economy’s output is used for consumption, investment, and government purchases. Consumption depends positively on disposable income. Investment depends negatively on the real interest rate. Government purchases and taxes are the exogenous variables of fiscal policy.

4. The real interest rate adjusts to equilibrate the supply and demand for the economy’s output—or, equivalently, the supply of loanable funds (saving) and the demand for loanable funds (investment). A decrease in national saving, perhaps because of an increase in

government purchases or a decrease in taxes, reduces the equilibrium amount of investment and raises the interest rate. An increase in investment demand, perhaps because of a

technological innovation or a tax incentive for investment, also raises the interest rate. An increase in investment demand increases the quantity of investment only if higher interest rates stimulate additional saving. Chapter 4

1. Money is the stock of assets used for transactions. It serves as a store of value, a unit of account, and a medium of exchange. Different sorts of assets are used as money: commodity

money systems use an asset with intrinsic value, whereas fiat money systems use an asset whose sole function is to serve as money. In modern economies, a central bank such as the Federal Reserve is responsible for controlling the supply of money.

2. The quantity theory of money assumes that the velocity of money is stable and concludes that nominal GDP is proportional to the stock of money. Because the factors of production and the production function determine real GDP, the quantity theory implies that the price level is proportional to the quantity of money. Therefore, the rate of growth in the quantity of money determines the inflation rate.

3. Seigniorage is the revenue that the government raises by printing money. It is a tax on money holding. Although seigniorage is quantitatively small in most economies, it is often a major source of government revenue in economies experiencing hyperinflation.

4. The nominal interest rate is the sum of the real interest rate and the inflation rate. The Fisher effect says that the nominal interest rate moves one-for-one with expected inflation. 5. The nominal interest rate is the opportunity cost of holding money. Thus, one might expect the demand for money to depend on the nominal interest rate. If it does, then the price level depends on both the current quantity of money and the quantities of money expected in the future.

6. The costs of expected inflation include shoeleather costs, menu costs, the cost of relative price variability, tax distortions, and the inconvenience of making inflation corrections. In addition, unexpected inflation causes arbitrary redistributions of wealth between debtors and creditors. One possible benefit of inflation is that it improves the functioning of labor markets by allowing real wages to reach equilibrium levels without cuts in nominal wages.

7. During hyperinflations, most of the costs of inflation become severe. Hyperinflations

typically begin when governments finance large budget deficits by printing money. They end when fiscal reforms eliminate the need for seigniorage.

8. According to classical economic theory, money is neutral: the money supply does not affect real variables. Therefore, classical theory allows us to study how real variables are determined without any reference to the money supply. The equilibrium in the money market then determines the price level and, as a result, all other nominal variables. This theoretical separation of real and nominal variables is called the classical dichotomy. Chapter 6

1. The natural rate of unemployment is the steady-state rate of unemployment. It depends on the rate of job separation and the rate of job finding.

2. Because it takes time for workers to search for the job that best suits their individual skills and tastes, some frictional unemployment is inevitable. Various government policies, such as unemployment insurance, alter the amount of frictional unemployment.

3. Structural unemployment results when the real wage remains above the level that

equilibrates labor supply and labor demand. Minimum-wage legislation is one cause of wage rigidity. Unions and the threat of unionization are another. Finally, efficiency-wage theories suggest that, for various reasons, firms may find it profitable to keep wages high despite an excess supply of labor.

4. Whether we conclude that most unemployment is short-term or long-term depends on how we look at the data. Most spells of unemployment are short. Yet most weeks of unemployment are attributable to the small number of long-term unemployed.

5. The unemployment rates among demographic groups differ substantially. In particular, the unemployment rates for younger workers are much higher than for older workers. This results from a difference in the rate of job separation rather than from a difference in the rate of job finding.

6. The natural rate of unemployment in the United States has exhibited longterm trends. In particular, it rose from the 1950s to the 1970s and then started drifting downward again in the 1990s and early 2000s. Various explanations of the trends have been proposed, including the changing demographic composition of the labor force, changes in the prevalence of sectoral shifts, and changes in the rate of productivity growth.

7. Individuals who have recently entered the labor force, including both new entrants and reentrants, make up about one-third of the unemployed. Transitions into and out of the labor force make unemployment statistics more difficult to interpret.

8. American and European labor markets exhibit some significant differences. In recent years, Europe has experienced significantly more unemployment than the United States. In addition, because of higher unemployment, shorter workweeks, more holidays, and earlier retirement, Europeans work fewer hours than Americans. Chapter 7

1. The Solow growth model shows that in the long run, an economy’s rate of saving

determines the size of its capital stock and thus its level of production. The higher the rate of saving, the higher the stock of capital and the higher the level of output.

2. In the Solow model, an increase in the rate of saving has a level effect on income per

person: it causes a period of rapid growth, but eventually that growth slows as the new steady state is reached. Thus, although a high saving rate yields a high steady-state level of output, saving by itself cannot generate persistent economic growth.

3. The level of capital that maximizes steady-state consumption is called the Golden Rule level. If an economy has more capital than in the Golden Rule steady state, then reducing saving will increase consumption at all points in time. By contrast, if the economy has less capital than in the Golden Rule steady state, then reaching the Golden Rule requires increased investment and thus lower consumption for current generations.

4. The Solow model shows that an economy’s rate of population growth is another long-run determinant of the standard of living. According to the Solow model, the higher the rate of population growth, the lower the steady-state levels of capital per worker and output per worker. Other theories highlight other effects of population growth. Malthus suggested that population growth will strain the natural resources necessary to produce food; Kremer suggested that a large population may promote technological progress. Chapter 8

1. In the steady state of the Solow growth model, the growth rate of income per person is determined solely by the exogenous rate of technological progress.

2. Many empirical studies have examined to what extent the Solow model can help explain long-run economic growth. The model can explain much of what we see in the data, such as balanced growth and conditional convergence. Recent studies have also found that international variation in standards of living is attributable to a combination of capital accumulation and the efficiency with which capital is used.

3. In the Solow model with population growth and technological progress, the Golden Rule

(consumption-maximizing) steady state is characterized by equality between the net marginal product of capital (MPK ? d) and the steady-state growth rate of total income (n + g). In the U.S. economy, the net marginal product of capital is well in excess of the growth rate, indicating that the U.S. economy has a lower saving rate and less capital than it would have in the Golden Rule steady state.

4. Policymakers in the United States and other countries often claim that their nations should devote a larger percentage of their output to saving and investment. Increased public saving and tax incentives for private saving are two ways to encourage capital accumulation.

Policymakers can also promote economic growth by setting up the right legal and financial institutions so that resources are allocated efficiently and by ensuring proper incentives to encourage research and technological progress.

5. In the early 1970s, the rate of growth of income per person fell substantially in most

industrialized countries, including the United States. The cause of this slowdown is not well understood. In the mid-1990s, the U.S. growth rate increased, most likely because of advances in information technology.

6. Modern theories of endogenous growth attempt to explain the rate of technological progress, which the Solow model takes as exogenous. These models try to explain the decisions that determine the creation of knowledge through research and development. Chapter 9

1. Economies experience short-run fluctuations in economic activity, measured most broadly by real GDP. These fluctuations are associated with movement in many macroeconomic variables. In particular, when GDP growth declines, consumption growth falls (typically by a smaller amount), investment growth falls (typically by a larger amount), and unemployment rises. Although economists look at various leading indicators to forecast movements in the economy, these short-run fluctuations are largely unpredictable.

2. The crucial difference between how the economy works in the long run and how it works in the short run is that prices are flexible in the long run but sticky in the short run. The model of aggregate supply and aggregate demand provides a framework to analyze economic

fluctuations and see how the impact of policies and events varies over different time horizons. 3. The aggregate demand curve slopes downward. It tells us that the lower the price level, the greater the aggregate quantity of goods and services demanded.

4. In the long run, the aggregate supply curve is vertical because output is determined by the amounts of capital and labor and by the available technology but not by the level of prices. Therefore, shifts in aggregate demand affect the price level but not output or employment. 5. In the short run, the aggregate supply curve is horizontal, because wages and prices are sticky at predetermined levels. Therefore, shifts in aggregate demand affect output and employment.

6. Shocks to aggregate demand and aggregate supply cause economic fluctuations. Because the Fed can shift the aggregate demand curve, it can attempt to offset these shocks to maintain output and employment at their natural levels. Chapter 10

1. The Keynesian cross is a basic model of income determination. It takes fiscal policy and planned investment as exogenous and then shows that there is one level of national income at which actual expenditure equals planned expenditure. It shows that changes in fiscal policy

have a multiplied impact on income.

2. Once we allow planned investment to depend on the interest rate, the Keynesian cross yields a relationship between the interest rate and national income. A higher interest rate

lowers planned investment, and this in turn lowers national income. The downward-sloping IS curve summarizes this negative relationship between the interest rate and income.

3. The theory of liquidity preference is a basic model of the determination of the interest rate. It takes the money supply and the price level as exogenous and assumes that the interest rate adjusts to equilibrate the supply and demand for real money balances. The theory implies that increases in the money supply lower the interest rate.

4. Once we allow the demand for real money balances to depend on national income, the theory of liquidity preference yields a relationship between income and the interest rate. A higher level of income raises the demand for real money balances, and this in turn raises the interest rate. The upward-sloping LM curve summarizes this positive relationship between income and the interest rate.

5. The IS–LM model combines the elements of the Keynesian cross and the elements of the theory of liquidity preference. The IS curve shows the points that satisfy equilibrium in the goods market, and the LM curve shows the points that satisfy equilibrium in the money market. The intersection of the IS and LM curves shows the interest rate and income that satisfy equilibrium in both markets for a given price level. Chapter 11

1. The IS–LM model is a general theory of the aggregate demand for goods and services. The exogenous variables in the model are fiscal policy, monetary policy, and the price level. The model explains two endogenous variables: the interest rate and the level of national income. 2. The IS curve represents the negative relationship between the interest rate and the level of income that arises from equilibrium in the market for goods and services. The LM curve represents the positive relationship between the interest rate and the level of income that arises from equilibrium in the market for real money balances. Equilibrium in the IS–LM model—the intersection of the IS and LM curves—represents simultaneous equilibrium in the market for goods and services and in the market for real money balances.

3. The aggregate demand curve summarizes the results from the IS–LM model by showing equilibrium income at any given price level. The aggregate demand curve slopes downward because a lower price level increases real money balances, lowers the interest rate, stimulates investment spending, and thereby raises equilibrium income.

4. Expansionary fiscal policy—an increase in government purchases or a decrease in

taxes—shifts the IS curve to the right. This shift in the IS curve increases the interest rate and income. The increase in income represents a rightward shift in the aggregate demand curve. Similarly, contractionary fiscal policy shifts the IS curve to the left, lowers the interest rate and income, and shifts the aggregate demand curve to the left.

5. Expansionary monetary policy shifts the LM curve downward. This shift in the LM curve lowers the interest rate and raises income. The increase in income represents a rightward shift of the aggregate demand curve. Similarly, contractionary monetary policy shifts the LM curve upward, raises the interest rate, lowers income, and shifts the aggregate demand curve to the left. Chapter 13

1. The two theories of aggregate supply—the sticky-price and imperfect-information

models—attribute deviations of output and employment from their natural levels to various market imperfections. According to both theories, output rises above its natural level when the price level exceeds the expected price level, and output falls below its natural level when the price level is less than the expected price level.

2. Economists often express aggregate supply in a relationship called the Phillips curve. The Phillips curve says that inflation depends on expected inflation, the deviation of

unemployment from its natural rate, and supply shocks. According to the Phillips curve, policymakers who control aggregate demand face a short-run tradeoff between inflation and unemployment.

3. If expected inflation depends on recently observed inflation, then inflation has inertia, which means that reducing inflation requires either a beneficial supply shock or a period of high unemployment and reduced output. If people have rational expectations, however, then a credible announcement of a change in policy might be able to influence expectations directly and, therefore, reduce inflation without causing a recession.

4. Most economists accept the natural-rate hypothesis, according to which fluctuations in aggregate demand have only short-run effects on output and unemployment. Yet some economists have suggested ways in which recessions can leave permanent scars on the economy by raising the natural rate of unemployment.

3、Short Answer Questions(4×10, 40 points) Chapter 1

QUESTIONS FOR REVIEW:1,3

1.Explain the difference between macroeconomics and microeconomics. How are these two fields related?

Microeconomics is the study of how individual firms and households make decisions,and how they

interact with one another. Microeconomic models of firms and households are based on principles of optimization—firms and households do the best they can given the constraints they face. For example, households choose which goods to purchase in order to maximize their utility, whereas firms decide how much to produce in order to maximize profits. In contrast, macroeconomics is the study of the economy as a whole; it focuses on issues such as how total output, total employment, and the overall price level are determined. These economy-wide variables are based on the interaction of many households and many firms; therefore, microeconomics forms the basis for macroeconomics.

3.What is a market-clearing model? When is it appropriate to assume that markets clear? A market-clearing model is one in which prices adjust to equilibrate supply and demand.

Market-clearing models are useful in situations where prices are flexible. Yet in many situations, flexible prices may not be a realistic assumption. For example, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four years. Most macroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues. Over the long run, prices respond to changes in demand or supply, even though in the short run they may be slow to adjust.

Chapter 2

QUESTIONS FOR REVIEW:1

PROBLEMS AND APPLICATIONS:3,4

1.List the two things that GDP measures. How can GDP measure two things at once?

GDP measures the total income earned from the production of the new final goods and services in the economy, and it measures the total expenditures on the new final goods and services produced in the economy. GDP can measure two things at once because the total expenditures on the new final goods and services by the buyers must be equal to the income earned by the sellers of the new final goods and services. As the circular flow diagram in the text illustrates, these are alternative, equivalent ways of measuring the flow of dollars in the economy.

3.Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?

When a woman marries her butler, GDP falls by the amount of the butler’s salary. This happens because measured total income, and therefore measured GDP, falls by the amount of the butler’s loss in salary. If GDP truly measured the value of all goods and services, then the marriage would not affect GDP since the total amount of economic activity is unchanged. Actual GDP, however, is an imperfect measure of economic activity because the value of some goods and services is left out. Once the butler’s work becomes part of his household chores, his services are no longer counted in GDP. As this example illustrates, GDP does not include the value of any output produced in the home. Similarly, GDP does not include other goods and services, such as the imputed rent on durable goods (e.g., cars and refrigerators) and any illegal trade.

4.Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports. a. Boeing sells an airplane to the Air Force.

b. Boeing sells an airplane to American Airlines. c. Boeing sells an airplane to Air France. d. Boeing sells an airplane to Amelia Earhart. e. Boeing builds an airplane to be sold next year.

a. The airplane sold to the Air Force counts as government purchases because the Air Force is part of the government.

b. The airplane sold to American Airlines counts as investment because it is a capital good sold to a private firm.

c. The airplane sold to Air France counts as an export because it is sold to a foreigner.

d. The airplane sold to Amelia Earhart counts as consumption because it is sold to a private individual. e. The airplane built to be sold next year counts as investment. In particular, the airplane is counted as inventory investment, which is where goods that are produced in one year and sold in another year are counted.

Chapter 3

QUESTIONS FOR REVIEW:1

1.What determines the amount of output an economy produces?

The factors of production and the production technology determine the amount of output an economy can produce. The factors of production are the inputs used to produce goods and services: the most important factors are capital and labor. The production technology determines how much output can be produced from any given amounts of these inputs. An increase in one of the factors of production or an improvement in technology leads to an increase in the economy’s output.

Chapter 4

QUESTIONS FOR REVIEW:1,4,8 1.Describe the functions of money.

Money has three functions: it is a store of value, a unit of account, and a medium of exchange. As a store of value, money provides a way to transfer purchasing power from the present to the future. As a unit of account, money provides the terms in which prices are quoted and debts are recorded. As a medium of exchange, money is what we use to buy goods and services.

4.Write the quantity equation and explain it.

The quantity equation is an identity that expresses the link between the number of transactions that people make and how much money they hold. We write it as Money ??Velocity = Price ??Transactions

M ??V = P ??T.

The right-hand side of the quantity equation tells us about the total number of transactions that occur during a given period of time, say, a year. T represents the total number of transactions. P represents the price of a typical transaction. Hence, the product P ??T represents the number of dollars exchanged in a year.

The left-hand side of the quantity equation tells us about the money used to make these transactions.

M represents the quantity of money in the economy. V represents the transactions velocity of

money—the rate at which money circulates in the economy.

Because the number of transactions is difficult to measure, economists usually use a slightly different version of the quantity equation, in which the total output of the economy Y replaces the number of transactions T: Money ??Velocity = Price ??Output

M ??V = P ??Y.

P now represents the price of one unit of output, so that P ??Y is the dollar value of output—

nominal GDP. V represents the income velocity of money—the number of times a dollar bill becomes a

part of someone’s income.

8.List all the costs of inflation you can think of,and rank them according to how important you think they are.

The costs of expected inflation include the following:

a. Shoeleather costs. Higher inflation means higher nominal interest rates, which mean that people want to hold lower real money balances. If people hold lower money balances, they must make more frequent trips to the bank to withdraw money. This is inconvenient (and it causes shoes to wear out more quickly).

b. Menu costs. Higher inflation induces firms to change their posted prices more often. This may be costly if they must reprint their menus and catalogs.

c. Greater variability in relative prices. If firms change their prices infrequently, then inflation causes greater variability in relative prices. Since free-market economies rely on relative prices to allocate resources efficiently, inflation leads to microeconomic inefficiencies.

d. Altered tax liabilities. Many provisions of the tax code do not take into account the effect of inflation. Hence, inflation can alter individuals’ and firms’ tax liabilities, often in ways that lawmakers did not intend.

e. The inconvenience of a changing price level. It is inconvenient to live in a world with a changing price level. Money is the yardstick with which we measure economic transactions. Money is a less

useful measure when its value is always changing. There is an additional cost to unexpected inflation:

f. Arbitrary redistributions of wealth. Unexpected inflation arbitrarily redistributes wealth among individuals. For example, if inflation is higher than expected, debtors gain and creditors lose. Also, people with fixed pensions are hurt because their dollars buy fewer goods.

Chapter 6

QUESTIONS FOR REVIEW:2,3

2. Describe the difference between frictional unemployment and structural unemployment.

Frictional unemployment is the unemployment caused by the time it takes to match workers and jobs. Finding an appropriate job takes time because the flow of information about job candidates and job vacancies is not instantaneous. Because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive.

In contrast, structural unemployment is the unemployment resulting from wage rigidity and job rationing. These workers are unemployed not because they are actively searching for a job that best suits their skills (as in the case of frictional unemployment), but because at the prevailing real wage the supply of labor exceeds the demand.

If the wage does not adjust to clear the labor market, then these workers must wait for jobs to become available. Structural unemployment thus arises because firms fail to reduce wages despite an excess supply of labor.

3. Give three explanations the real wage may remain above the level that equilibrates labor supply and labor demand.

The real wage may remain above the level that equilibrates labor supply and labor demand because of

minimum wage laws, the monopoly power of unions, and efficiency wages.

Minimum-wage laws cause wage rigidity when they prevent wages from falling to equilibrium levels. Although most workers are paid a wage above the minimum level, for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above the equilibrium level. It therefore reduces the quantity of their labor that firms demand, and an excess supply of workers—that is, unemployment—results.

The monopoly power of unions causes wage rigidity because the wages of unionized workers are determined not by the equilibrium of supply and demand but by collective bargaining between union leaders and firm management. The wage agreement often raises the wage above the equilibrium level and allows the firm to decide how many workers to employ. These high wages cause firms to hire fewer workers than at the market-clearing wage, so structural unemployment increases.

Efficiency-wage theories suggest that high wages make workers more productive. The influence of wages on worker efficiency may explain why firms do not cut wages despite an excess supply of labor. Even though a wage reduction decreases the firm’s wage bill, it may also lower worker productivity and therefore the firm’s profits.

Chapter 7

QUESTIONS FOR REVIEW:1,4

1.In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?

In the Solow growth model, a high saving rate leads to a large steady-state capital stock and a high level of steady-state output. A low saving rate leads to a small steadystate capital stock and a low level of steady-state output. Higher saving leads to faster economic growth only in the short run. An increase

in the saving rate raises growth until the economy reaches the new steady state. That is, if the economy maintains a high saving rate, it will also maintain a large capital stock and a high level of output, but it will not maintain a high rate of growth forever. In the steady state, the growth rate of output (or income) is independent of the saving rate.

4.In the Solow model, how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?

Chapter 8

QUESTIONS FOR REVIEW:1,2,6

1. In the Solow model, what determines the steady-state rate of growth of income per worker?

In the Solow model, we find that only technological progress can affect the steady-state rate of growth in income per worker. Growth in the capital stock (through high saving) has no effect on the steady-state growth rate of income per worker; neither does population growth. But technological progress can lead to sustained growth.

2.In the steady state of the Solow model, at what rate does output per person grow? At what rate does capital per person grow? How does this compare with the U.S. experience?

In the steady state, output per person in the Solow model grows at the rate of technological progress g. Capital per person also grows at rate g. Note that this implies that output and capital per effective worker are constant in steady state. In the U.S. data, output and capital per worker have both grown at about 2 percent per year for the past half-century.

6.How does endogenous growth theory explain persistent growth without the assumption of exogenous technological progress? How does this differ from the Solow model?

Endogenous growth theories attempt to explain the rate of technological progress by explaining the decisions that determine the creation of knowledge through research and development. By contrast, the

Solow model simply took this rate as exogenous. In the Solow model, the saving rate affects growth temporarily, but diminishing returns to capital eventually force the economy to approach a steady state in which growth depends only on exogenous technological progress. By contrast, many endogenous growth models in essence assume that there are constant (rather than diminishing) returns to capital, interpreted to include knowledge. Hence, changes in the saving rate can lead to persistent growth.

Chapter 9

QUESTIONS FOR REVIEW:3,4

3.Why does the aggregate demand curve slope downward?

Aggregate demand is the relation between the quantity of output demanded and the aggregate price level. To understand why the aggregate demand curve slopes downward, we need to develop a theory of aggregate demand. One simple theory of aggregate demand is based on the quantity theory of money. Write the quantity equation in terms of the supply and demand for real money balances as

M/P = (M/P)d = kY,

where k = 1/V. This equation tells us that for any fixed money supply M, a negative relationship exists between the price level P and output Y, assuming that velocity V is fixed: the higher the price level, the

lower the level of real balances and, therefore, the lower the quantity of goods and services demanded

Y. In other words, the aggregate demand curve slopes downward, as in Figure 9–1.

One way to understand this negative relationship between the price level and output is to note the link between money and transactions. If we assume that V is constant, then the money supply determines the dollar value of all transactions:

MV = PY.

An increase in the price level implies that each transaction requires more dollars. For the above identity to hold with constant velocity, the quantity of transactions and thus the quantity of goods and services purchased Y must fall.

4.Explain the impact of an increase in the money supply in the short run and in the long run.

If the Fed increases the money supply, then the aggregate demand curve shifts outward, as in Figure 9–2. In the short run, prices are sticky, so the economy moves along the short-run aggregate supply curve from point A to point B. Output rises above its natural rate level Y: the economy is in a boom.

The high demand, however, eventually causes wages and prices to increase. This gradual increase in prices moves the economy along the new aggregate demand curve AD2 to point C. At the new long-run equilibrium, output is at its natural-rate level, but prices are higher than they were in the initial equilibrium at point A.

Chapter 10

QUESTIONS FOR REVIEW:2, 3,4

2.Use the theory of liquidity preference to explain why an increase in the money supply lowers the interest rate. What does this explanation assume about the price level?

The theory of liquidity preference explains how the supply and demand for real money balances

determine the interest rate. A simple version of this theory assumes that there is a fixed supply of money, which the Fed chooses. The price level P is also fixed in this model, so that the supply of real balances is fixed. The demand for real money balances depends on the interest rate, which is the opportunity cost of holding money. At a high interest rate, people hold less money because the opportunity cost is high. By holding money, they forgo the interest on interest-bearing deposits. In contrast, at a low interest rate, people hold more money because the opportunity cost is low. Figure 10–1 graphs the supply and demand for real money balances. Based on this theory of liquid ity preference, the interest rate adjusts to equilibrate the supply and demand for real money balances.

Why does an increase in the money supply lower the interest rate? Consider what happens when the Fed increases the money supply from M1 to M2. Because the price level P is fixed, this increase in the money supply shifts the supply of real money balances M/P to the right, as in Figure 10–2.

The interest rate must adjust to equilibrate supply and demand. At the old interest rate r1, supply exceeds demand. People holding the excess supply of money try to convert some of it into

interest-bearing bank deposits or bonds. Banks and bond issuers, who prefer to pay lower interest rates, respond to this excess supply of money by lowering the interest rate. The interest rate falls until a new

equilibrium is reached at r2.

3.Why does the IS curve slope downward?

The IS curve summarizes the relationship between the interest rate and the level of income that arises

from equilibrium in the market for goods and services. Investment is negatively related to the interest rate. As illustrated in Figure 10–3, if the interest rate rises from r1 to r2, the level of planned investment falls from I1 to I2.

The Keynesian cross tells us that a reduction in planned investment shifts the expenditure function downward and reduces national income, as in Figure 10–4(A).

Thus, as shown in Figure 10–4(B), a higher interest rate results in a lower level of national income: the

IS curve slopes downward.

4.Why does the LM curve slope upward?

The LM curve summarizes the relationship between the level of income and the interest rate that arises

from equilibrium in the market for real money balances. It tells us the interest rate that equilibrates the money market for any given level of income. The theory of liquidity preference explains why the LM curve slopes upward. This theory assumes that the demand for real money balances L(r, Y) depends negatively on the interest rate (because the interest rate is the opportunity cost of holding money) and positively on the level of income. The price level is fixed in the short run, so the Fed determines the fixed supply of real money balances M/P. As illustrated in Figure 10–5(A), the interest rate equilibrates the supply and demand for real money balances for a given level of income.

Now consider what happens to the interest rate when the level of income increases from Y1 to Y2. The increase in income shifts the money demand curve upward. At the old interest rate r1, the demand for real money balances now exceeds the supply. The interest rate must rise to equilibrate supply and demand. Therefore, as shown in Figure 10–5(B), a higher level of income leads to a higher interest rate: The LM curve slopes upward.

Chapter 11

QUESTIONS FOR REVIEW:1

1.Explain why the aggregate demand curve slopes downward.

The aggregate demand curve represents the negative relationship between the price level and the level of national income. In Chapter 9, we looked at a simplified theory of aggregate demand based on the quantity theory. In this chapter, we explore how the IS–LM model provides a more complete theory of aggregate demand. We can see why the aggregate demand curve slopes downward by considering what happens in the IS–LM model when the price level changes. As Figure 11–1(A) illustrates, for a given money supply, an increase in the price level from P1 to P2 shifts the LM curve upward because real balances decline; this reduces income from Y1 to Y2. The aggregate demand curve in Figure 11–1(B) summarizes this relationship between the price level and income that results from the IS–LM model.

Chapter 13

QUESTIONS FOR REVIEW:4,5,6

4.Explain the differences between demand-pull inflation and cost-push inflation.

Demand-pull inflation results from high aggregate demand: the increase in demand ―pulls‖ prices and output up. Cost-push inflation comes from adverse supply shocks that push up the cost of

production—for example, the increases in oil prices in the midand late-1970s. The Phillips curve tells us that inflation depends on expected inflation, the difference between unemployment and its natural rate, and a shock v:

Π= EΠ?–?(u – un) + v.

n

The term ― –?(u –u)‖ is the demand-pull inflation, since if unemployment is below its

n

natural rate (u < u), inflation rises. The supply shock v is the cost-push inflation.

5.Under what circumstances might it be possible to reduce inflation without causing a recession?

The Phillips curve relates the inflation rate to the expected inflation rate and to the difference between unemployment and its natural rate. So one way to reduce inflation is to have a recession, raising unemployment above its natural rate. It is possible to bring inflation down without a recession, however, if we can costlessly reduce expected inflation.

According to the rational-expectations approach, people optimally use all of the information available to them in forming their expectations. So to reduce expected inflation, we require, first, that the plan to reduce inflation be announced before people form expectations (e.g., before they form wage agreements and price contracts); and second, that those setting wages and prices believe that the announced plan will be carried out. If both requirements are met, then expected inflation will fall immediately and without cost, and this in turn will bring down actual inflation.

6.Explain two ways in which a recession might raise the natural rate of unemployment.

One way in which a recession might raise the natural rate of unemployment is by affecting the process of job search, increasing the amount of frictional unemployment. For example, workers who are unemployed lose valuable job skills. This reduces their ability to find jobs after the recession ends because they are less desirable to firms. Also, after a long period of unemployment, individuals may lose some of their desire to work, and hence search less hard.

Second, a recession may affect the process that determines wages, increasing wait unemployment. Wage negotiations may give a greater voice to ―insiders,‖ those who actually have jobs. Those who become unemployed become ―outsiders.‖ If the smaller group of insiders cares more about high real wages and less about high employment, then the recession may permanently push real wages above the equilibrium level and raise the amount of wait unemployment.

This permanent impact of a recession on the natural rate of unemployment is called hysteresis.

4、Calculation Questions (2×10, 20 points) Chapter 2

PROBLEMS AND APPLICATION:2

2.A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is GDP?

Value added by each person is the value of the good produced minus the amount the person paid for the materials needed to make the good. Therefore, the value added by the farmer is $1.00 ($1 – 0 = $1). The value added by the miller is $2: she sells the flour to the baker for $3 but paid $1 for the flour. The value added by the baker is $3: she sells the bread to the engineer for $6 but paid the miller $3 for the flour. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread).

Chapter 3

PROBLEMS AND APPLICATION:7,9

7.The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving. b. Private saving. c. National saving. d. Investment.

The effect of a government tax increase of $100 billion on (a) public saving, (b) private saving, and (c)

national saving can be analyzed by using the following relationships: National Saving = [Private Saving] + [Public Saving] = [Y – T – C(Y – T)] + [T – G] = Y – C(Y – T) – G.

a. Public Saving—The tax increase causes a 1-for-1 increase in public saving. T increases by $100 billion and, therefore, public saving increases by $100 billion. b. Private Saving—The increase in taxes decreases disposable income, Y – T, by $100 billion. Since the marginal propensity to consume (MPC) is 0.6, consumption falls by 0.6 ??$100 billion, or $60 billion. Hence, ?Private Saving = – $100b – 0.6 ( – $100b) = – $40b. Private saving falls $40 billion. c. National Saving—Because national saving is the sum of private and public saving, we can conclude that the $100 billion tax increase leads to a $60 billion increase in national saving. Another way to see this is by using the third equation for national saving expressed above, that national saving equals Y –

C(Y – T) – G. The $100 billion tax increase reduces disposable income and causes consumption to fall by $60 billion. Since neither G nor Y changes, national saving thus rises by $60 billion.

d. Investment—To determine the effect of the tax increase on investment, recall the national accounts identity:

Y = C(Y – T) + I(r) + G.

Rearranging, we find

Y – C(Y – T) – G = I(r).

The left-hand side of this equation is national saving, so the equation just says that national saving equals investment. Since national saving increases by $60 billion, investment must also increase by $60 billion.

How does this increase in investment take place? We know that investment depends on the real interest rate. For investment to rise, the real interest rate must fall. Figure 3–1 illustrates saving and investment as a function of the real interest rate.

The tax increase causes national saving to rise, so the supply curve for loanable funds shifts to the right. The equilibrium real interest rate falls, and investment rises.

9.Consider an economy described by the following equations: Y = C + I + G Y = 5,000 G = 1,000 T = 1,000

C = 250 + 0.75(Y ? T) I = 1,000 ? 50 r.

a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate.

c. Now suppose that G rises to 1,250. Compute private saving, public saving, and national saving.

d. Find the new equilibrium interest rate.

a. Private saving is the amount of disposable income, Y – T, that is not consumed: Sprivate = Y – T – C = 5,000 – 1,000 – (250 + 0.75(5,000 – 1,000)) = 750.

Public saving is the amount of taxes the government has left over after it makes its purchases:

Spublic = T – G = 1,000 – 1,000 = 0.

Total saving is the sum of private saving and public saving:

S = Sprivate + Spublic

= 750 + 0 = 750.

b. The equilibrium interest rate is the value of r that clears the market for loanable funds. We already

know that national saving is 750, so we just need to set it equal to investment:

S = I 750 = 1,000 – 50r Solving this equation for r, we find:

r = 5%.

c. When the government increases its spending, private saving remains the same as before (notice that

G does not appear in the Sprivate above) while government saving decreases. Putting the new G into the

equations above:

Sprivate= 750 Spublic = T – G = 1,000 – 1,250= –250. Thus,

S = Sprivate + Spublic

= 750 + (–250) = 500.

d. Once again the equilibrium interest rate clears the market for loanable funds:

S = I 500 = 1,000 – 50r Solving this equation for r, we find: r = 10%.

Chapter 4

PROBLEMSAND APPLICATION:2

2.In the country of Wiknam, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent. What is the real interest rate?

The real interest rate is the difference between the nominal interest rate and the inflation rate. The

nominal interest rate is 11 percent, but we need to solve for the inflation rate. We do this with the quantity equation expressed in percentage-change form:

% Change in M + % Change in V = % Change in P + % Change in Y. Rearranging this equation tells us that the inflation rate is given by: % Change in P = % Change in M + % Change in V – % Change in Y. Substituting the numbers given in the problem, we thus find: % Change in P = 14% + 0% – 5%= 9%.

Thus, the real interest rate is 2 percent: the nominal interest rate of 11 percent minus the inflation rate of 9 percent.

Chapter 7

PROBLEMS AND APPLICATION:1（a,b,c）,3(a,b)

1.Country A and country B both have the production function Y = F(K, L) = K1/2L1/2. a. Does this production function have constant returns to scale? Explain. b. What is the per-worker production function, y = f(k)?

c. Assume that neither country experiences population growth or technological progress and that 5 percent of capital depreciates each year. Assume further that country A saves 10 percent of output each year and country B saves 20 percent of output each year. Using

your answer from part (b) and the steady-state condition that investment equals depreciation, find the steady-state level of capital per worker for each country. Then find the steady-state

levels of income per worker and consumption per worker.

3.Consider an economy described by the production function: Y = F(K, L) = K0.3L0.7. a. What is the per-worker production function?

b. Assuming no population growth or technological progress, find the steady-state capital stock per worker, output per worker, and consumption per worker as a function of the saving rate and the depreciation rate.

Chapter 8

PROBLEMS AND APPLICATION:1

1.An economy described by the Solow growth model has the following production function:

y =√k.

a. Solve for the steady-state value of y as a function of s, n, g, and d.

b. A developed country has a saving rate of 28 percent and a population growth rate of 1 percent per year. A less developed country has a saving rate of 10 percent and a population growth rate of 4 percent per year. In both countries, g = 0.02 and d = 0.04. Find the steady-state value of y for each country.

c. What policies might the less developed country pursue to raise its level of income?

Chapter 10

PROBLEMS AND APPLICATION:2,5

2.In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y ? T ).

Planned investment is 100; government purchases and taxes are both 100. a. Graph planned expenditure as a function of income. b. What is the equilibrium level of income?

c. If government purchases increase to 125, what is the new equilibrium income? d. What level of government purchases is needed to achieve an income of 1,600?

a. Total planned expenditure is PE = C(Y – T) + I + G.

Plugging in the consumption function and the values for investment I, government purchases G, and taxes T given in the question, total planned expenditure PE is

PE = 200 + 0.75(Y – 100) + 100 + 100 = 0.75Y + 325.

This equation is graphed in Figure 10–8.

b. To find the equilibrium level of income, combine the planned-expenditure equation derived in part (a) with the equilibrium condition Y = PE:

Y = 0.75Y + 325 Y = 1,300.

The equilibrium level of income is 1,300, as indicated in Figure 10–8.

c. If government purchases increase to 125, then planned expenditure changes to PE = 0.75Y + 350. Equilibrium income increases to Y = 1,400. Therefore, an increase in government purchases of 25 (i.e., 125 – 100 = 25) increases income by 100. This is what we expect to find, because the formula for the government-purchases multiplier is 1/(1 – MPC), the MPC is 0.75, and the government-purchases multiplier therefore has a numerical value of 4.

d. An income level of 1,600 represents an increase of 300 over the original level of income. The government-purchases multiplier is 1/(1 – MPC): the MPC in this example equals 0.75, so the government-purchases multiplier is 4. This means that government purchases must increase by 75 (to a level of 175) for income to increase by 300.

5.Suppose that the money demand function is (M/P)d = 1,000 – 100r, where r is the interest rate in percent. The money supply M is 1,000 and the price level P is 2. a. Graph the supply and demand for real money balances. b. What is the equilibrium interest rate?

c. Assume that the price level is fixed. What happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200?

d. If the Fed wishes to raise the interest rate to 7 percent, what money supply should it set?

a. The downward sloping line in Figure 10–11 represents the money demand function

(M/P)= 1,000 – 100r. With M = 1,000 and P = 2, the real money supply (M/P)= 500. The real

d

s

money supply is independent of the interest rate and is, therefore, represented by the vertical line in Figure 10–11.

b. We can solve for the equilibrium interest rate by setting the supply and demand for real balances equal to each other: 500= 1,000 – 100r r = 5.

Therefore, the equilibrium real interest rate equals 5 percent.

c. If the price level remains fixed at 2 and the supply of money is raised from 1,000 to 1,200, then the new supply of real balances (M/P)s equals 600. We can solve for the new equilibrium interest rate by setting the new (M/P) equal to (M/P): 600 = 1,000 – 100r 100r = 400 r = 4. Thus, increasing the money supply from 1,000 to 1,200 causes the equilibrium interest rate to fall from 5 percent to 4 percent.

d. To determine at what level the Fed should set the money supply to raise the interest rate to 7 percent, set (M/P) equal to (M/P): M/P = 1,000 – 100r. Setting the price level at 2 and substituting r = 7, we find:

s

ds

d

M/2 = 1,000 – 100 ??7 M = 600.

For the Fed to raise the interest rate from 5 percent to 7 percent, it must reduce the nominal money supply from 1,000 to 600.

Chapter 11

PROBLEMS AND APPLICATION:3 3.Consider the economy of Hicksonia.

a. The consumption function is given by C = 200 + 0.75(Y ? T ). The investment function is I = 200 ? 25r. Government purchases and taxes are both 100. For this economy, graph the IS curve for r ranging from 0 to 8.

b. The money demand function in Hicksonia is (M/P)d = Y ? 100r.The money supply M is 1,000 and the price level P is 2. For this economy, graph the LM curve for r ranging from 0 to 8.

c. Find the equilibrium interest rate r and the equilibrium level of income Y.

d. Suppose that government purchases are raised from 100 to 150. How much does the IS curve shift? What are the new equilibrium interest rate and level of income?

e. Suppose instead that the money supply is raised from 1,000 to 1,200. How much does the LM curve shift? What are the new equilibrium interest rate and level of income? f. With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of income?

g. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?

a. The IS curve is given by: Y = C(Y – T) + I(r) + G.

We can plug in the consumption and investment functions and values for G and T as given in the question and then rearrange to solve for the IS curve for this economy: Y = 200 + 0.75(Y – 100) + 200 – 25r + 100 Y – 0.75Y = 425 – 25r (1 – 0.75)Y = 425 – 25r Y = (1/0.25) (425 – 25r) Y = 1,700 – 100r. This IS equation is graphed in Figure 11–11 for r ranging from 0 to 8.

b. The LM curve is determined by equating the demand for and supply of real money balances. The supply of real balances is 1,000/2 = 500. Setting this equal to money demand, we find: 500 = Y – 100r.

Y = 500 + 100r.

This LM curve is graphed in Figure 11–11 for r ranging from 0 to 8.

c. If we take the price level as given, then the IS and the LM equations give us two equations in two unknowns, Y and r. We found the following equations in parts (a) and (b):

IS : Y = 1,700 – 100r. LM : Y = 500 + 100r.

Equating these, we can solve for r: 1,700 – 100r = 500 + 100r 1,200 = 200r r = 6.

Now that we know r, we can solve for Y by substituting it into either the IS or the LM equation. We find

Y = 1,100.

Therefore, the equilibrium interest rate is 6 percent and the equilibrium level of output is 1,100, as depicted in Figure 11–11.

d. If government purchases increase from 100 to 150, then the IS equation becomes:

Y = 200 + 0.75(Y – 100) + 200 – 25r + 150.

Simplifying, we find:

Y = 1,900 – 100r.

This IS curve is graphed as IS2 in Figure 11–12. We see that the IS curve shifts to the right by 200.

By equating the new IS curve with the LM curve derived in part (b), we can solve for the new equilibrium interest rate: 1,900 – 100r = 500 + 100r 1,400 = 200r 7 = r.

We can now substitute r into either the IS or the LM equation to find the new level of output. We find

Y = 1,200.

Therefore, the increase in government purchases causes the equilibrium interest rate to rise from 6 percent to 7 percent, while output increases from 1,100 to 1,200. This is depicted in Figure 11–12.

e. If the money supply increases from 1,000 to 1,200, then the LM equation becomes: (1,200/2) = Y – 100r, or Y = 600 + 100r.

This LM curve is graphed as LM2 in Figure 11–13. We see that the LM curve shifts to the right by 100 because of the increase in real money balances.

To determine the new equilibrium interest rate and level of output, equate the IS curve from part (a) with the new LM curve derived above: 1,700 – 100r = 600 + 100r 1,100 = 200r 5.5 = r.

Substituting this into either the IS or the LM equation, we find Y = 1,150.

Therefore, the increase in the money supply causes the interest rate to fall from 6 percent to 5.5 percent, while output increases from 1,100 to 1,150. This is depicted in Figure 11–13.

f. If the price level rises from 2 to 4, then real money balances fall from 500 to 1,000/4 = 250. The LM equation becomes:

Y = 250 + 100r.

As shown in Figure 11–14, the LM curve shifts to the left by 250 because the increase in the price level reduces real money balances.

To determine the new equilibrium interest rate, equate the IS curve from part (a) with the new LM curve from above: 1,700 – 100r = 250 + 100r 1,450 = 200r 7.25 = r.

Substituting this interest rate into either the IS or the LM equation, we find Y = 975.

Therefore, the new equilibrium interest rate is 7.25, and the new equilibrium level of output is 975, as depicted in Figure 11–14.

g. The aggregate demand curve is a relationship between the price level and the level of income. To derive the aggregate demand curve, we want to solve the IS and the LM equations for Y as a function of

P. That is, we want to substitute out for the interest rate. We can do this by solving the IS and the LM equations for the interest rate:

IS: Y = 1,700 – 100r 100r = 1,700 – Y.

LM: (M/P) = Y – 100r 100r = Y – (M/P).

Combining these two equations, we find 1,700 – Y = Y – (M/P) 2Y = 1,700 + M/P Y = 850 + M/2P.

Since the nominal money supply M equals 1,000, this becomes

Y = 850 + 500/P.

This aggregate demand equation is graphed in Figure 11–15.

How does the increase in fiscal policy of part (d) affect the aggregate demand curve? We can see this by deriving the aggregate demand curve using the IS equation from part (d) and the LM curve from part (b):

IS: Y = 1,900 – 100r 100r = 1,900 – Y.

LM: (1,000/P) = Y – 100r 100r = Y – (1,000/P).

Combining and solving for Y: 1,900 – Y = Y – (1,000/P), or

Y = 950 + 500/P.

By comparing this new aggregate demand equation to the one previously derived, we can see that the increase in government purchases by 50 shifts the aggregate demand curve to the right by 100. How does the increase in the money supply of part (e) affect the aggregate demand curve? Because the

AD curve is Y = 850 + M/2P, the increase in the money supply from 1,000 to 1,200 causes it to become Y = 850 + 600/P.

By comparing this new aggregate demand curve to the one originally derived, we see that the increase in the money supply shifts the aggregate demand curve to the right.

Chapter 13

PROBLEMS AND APPLICATION:3,6

3.According to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions. Why might this be true? How might credibility be achieved?

The cost of reducing inflation comes from the cost of changing people’s expectations

about inflation. If expectations can be changed costlessly, then reducing inflation is also costless. Algebraically, the Phillips curve tells us that

Π= EΠ?–?(u – un) + v..

If the government can lower expected inflation EΠto the desired level of inflation, then there is no need for unemployment to rise above its natural rate.

According to the rational-expectations approach, people form expectations about inflation using all of the information that is available to them. This includes information about current policies in effect. If everyone believes that the government is committed to reducing inflation, then expected inflation will immediately fall. In terms of the Phillips curve, EΠfalls immediately with little or no cost to the economy. That is, the sacrifice ratio will be very small.

On the other hand, if people do not believe that the government will carry out its

intentions, then EΠ?remains high. Expectations will not adjust because people are skeptical that the government will follow through on its plans.

Thus, according to the rational-expectations approach, the cost of reducing inflation depends on how resolute and credible the government is. An important issue is how the government can make its commitment to reducing inflation more credible. One possibility, for example, is to appoint people who have a reputation as inflation fighters. A second possibility is to have Congress pass a law requiring the Federal Reserve to lower inflation. Of course, people might expect the Fed to ignore this law, or expect Congress to change the law later. A third possibility is to pass a constitutional amendment limiting monetary growth. People might rationally believe that a constitutional amendment is relatively difficult to change.

6. Suppose that an economy has the Phillips curve

Π ??Π-1– 0.5(u – u),

n

and that the natural rate of unemployment is given by an average of the past two years’ unemployment:

un ??0.5(u-1??u-2).

a. Why might the natural rate of unemployment depend on recent unemployment (as is assumed in the preceding equation)?

b. Suppose that the Fed follows a policy to reduce permanently the inflation rate by 1 percentage point. What effect will that policy have on the unemployment rate over time? c. What is the sacrifice ratio in this economy? Explain.

d. What do these equations imply about the short-run and long-run tradeoffs between inflation and unemployment?

In this model, the natural rate of unemployment is an average of the unemployment rates in the past two years. Hence, if a recession raises the unemployment rate in some year, then the natural rate of unemployment rises as well. This means that the model exhibits hysteresis: short-term cyclical unemployment affects the long-term natural rate of unemployment.

a. The natural rate of unemployment might depend on recent unemployment for at least two reasons, suggested by the theory of hysteresis. First, recent unemployment rates might affect the level of frictional unemployment. Unemployed workers lose job skills and find it harder to get jobs; also,

unemployed workers might lose some of their desire to work, and hence search less hard for a job. Second, recent unemployment rates might affect the level of structural unemployment. If labor negotiations give a greater voice to ―insiders‖ than ―outsiders,‖ then the insiders might push for high wages at the expense of jobs. This will be especially true in industries in which negotiations take place between firms and unions.

b. If the Fed seeks to reduce inflation permanently by 1 percentage point, then the Phillips curve tells us that in the first period we require ?1 –?0 = –1 = –0.5(u1 – un1), or

(u1 –un1) = 2.

That is, we require an unemployment rate 2 percentage points above the original natural rate u . Next period, however, the natural rate will rise as a result of the cyclical unemployment. The new natural rate u will be

u = 0.5[u1 + u0]

= 0.5[(un1 + 2) + un1] = un1 + 1.

Hence, the natural rate of unemployment rises by 1 percentage point. If the Fed wants to keep inflation at its new level, then unemployment in period 2 must equal the new natural rate u . Hence,

u2 = un1+ 1.

In every subsequent period, it remains true that the unemployment rate must equal the natural rate. This natural rate never returns to its original level: we can show this by deriving the sequence of unemployment rates:

u3 = (1/2)u2 + (1/2)u1 = u + 1.5 u4 = (1/2)u3 + (1/2)u2 = u + 1.25 u5 = (1/2)u4 + (1/2)u3 = u + 1.375.

Unemployment always remains above its original natural rate. In fact, we can show that it is always at least 1 percent above its original natural rate. Thus, to reduce inflation by 1 percentage point,

unemployment rises above its original level by 2 percentage points in the first year, and by 1 or more percentage points in every year after that.

c. Because unemployment is always higher than it started, output is always lower than it would have been. Hence, the sacrifice ratio is infinite.

d. Without hysteresis, we found that there was a short-run tradeoff but no long-run tradeoff between inflation and unemployment. With hysteresis, we find that there is a long-run tradeoff between inflation and unemployment: to reduce inflation, unemployment must rise permanently.

本文来源：https://www.bwwdw.com/article/wuga.html