Additional Practice Questions
Chapter 6: 6
Chapter 7: 3a-b
Chapter 8: 1
Chapter 9: Q. The Federal Reserve has two mandates for stabilization policy: 1 keep inflation low with no deflation and 2 stop recessions or bubble-like growth. The European Central Bank has only one mandate: keep inflation low with no deflation. How would each respond to the same event? What would happen to GDP and P in each economic zone?
a. Growth in China and India increases the prices of global commodities like food and oil.
b. A credit crunch which lowers Investment.
c. A cultural baby boom makes stay at home moms chic.
d. Both (a) and (b) occur.
Chapter 10: 1, 3
Chapter 11: Q6a-c
Answers:
Ch. 6
Q6a: Less productive labor shifts labor demand inwards….
Q6b: If we are always in equilibrium then W/P falls, employment is unchanged.
Q6c: Sticky wages eh…
Chapter 7:
Q3a:
Q3b: This is tough… at steady state
, divide by capital and s
,
, now take both sides to the exponent -1/.7
, then
Now for consumption per worker…
, In steady state i = sf(k) =. Then
Simplify to find
=-
Chapter 8:
Q1a: In steady state
Solving for k*….
…Then placing k* into f(k)…
Q1b: Developed y* = 4, Lesser-developed y* = 1
Q1c: Discouraging population growth and/or encouraging savings through taxes/subsidies
Chapter 9:
Qa: In both cases, the VSRAS curve shifts upwards as does the SRAS curve while the LRAS remains unchanged. The Fed, worried by decreases in Y, which are more obvious in the VSR, will be more likely to increase M to shift AD outwards. The ECB may do nothing.
Qb: In both cases, AD shifts inwards. Both the Fed and the ECB will likely increase M to shift AD outwards.
Qc: In both cases, the VSRAS shifts upwards as there is less L. The LRAS won’t change or will shift outwards (hello new labor!). Each central bank will want to reach the new equilibrium more quickly. The central banks will need to increase M (and AD) in the VSR but decrease them again in the LR.
Qd: Welcome to the real world! The VSRAS shifts up at the same time that AD and the SRAS shifts inwards. The Fed will raise M and shift AD out. The ECB will lower M and shift AD in.
Chapter 10:
Answers. Q1a-c
Q3a: Oh boy this is fun. Now E(planned) = + I + G + MPC(Y-T)
But T = . So then E(planned) = + I + G - MPC+ MPC(Y) – tMPC(Y).
In equilibrium Y = E(planned). Thus, Y = .
Q3b: The gov’t spending multiplier was . Now the gov’t spending multiplier = .
Q3c: This should lead to a much flatter E(planned) curve and much steeper IS curve. This is a toughy.
Chapter 11: Q6a:
Q6b:
Q6c: