D.False. the Balanced Budget Multiplier Is Positive (It Equals One), So the IS Curve Shifts

Chapter 5

1.a.True.

b.True.

c.False.

d.False. The balanced budget multiplier is positive (it equals one), so the IS curve shifts right.

e.False.

f.Uncertain. An increase in G leads to an increase in Y (which tends to increase investment), but also to an increase in the interest rate (which tends to reduce investment).

g.True.

2.a.Y=[1/(1-c1)]*[c0-c1T+I+G]

The multiplier is 1/(1-c1).

b.Y=[1/(1-c1-b1)]*[c0-c1T+ b0-b2i +G]

The multiplier is 1/(1-c1-b1). Since the multiplier is larger than the multiplier in part (a), the effect of a change in autonomous spending is bigger than in part (a). An increase in autonomous spending now leads to an increase in investment as well as consumption.

c.Substituting for the interest rate in the answer to part (b):

Y=[1/(1-c1-b1+ b2d1/d2)]*[c0-c1T+ b0+(b2*M/P)/d2 +G]

The multiplier is 1/(1-c1-b1+ b2d1/d2).

d.The multiplier is greater (less) than the multiplier in part (a) if (b1- b2d1/d2) is greater (less) than zero. The multiplier is big if b1 is big, b2 is small, d1 is small, and/or d2 is big, i.e., if investment is very sensitive to Y, investment is not very sensitive to i, money demand is not very sensitive to Y, money demand is very sensitive to i.

4.a.Y=C+I+G=200+.25*(Y-200)+150+.25Y-1000i+250

Y=1100-2000i

b.M/P=1600=2Y-8000i

i=Y/4000-1/5

c.Substituting b into a: Y=1000

d. Substituting c into b: i=1/20=5%

e.C=400; I=350; G=250; C+I+G=1000

f.Y=1040; i=3%; C=410; I=380. A monetary expansion reduces the interest rate and increases output. The increase in output increases consumption. The increase in output and the fall in the interest rate increase investment.

g.Y=1200; i=10%; C=450; I=350. A fiscal expansion increases output and the interest rate. The increase in output increases consumption.

9.a.The IS curve shifts left and the LM curve shifts right. The interest rate falls and

investment rises.

b.From the 2005 Economic Report of the President (ERP):

Receipts OutlaysSurplus

(all numbers as % of GDP)

199217.522.1-4.7

200020.918.4 2.4

c.The Fed kept the target federal funds rate at 3% from September 1992 until February

1994. Then, the Fed increased the target rate steadily until February 1995, reduced the target rate (more or less steadily) until June 1999, and increased the target rate after that.

d.From the 2005 ERP, investment rose from 12.1% of GDP in 1992 to 17.7% of GDP in

2000.

e.From the 2005 ERP, the average growth rate (GDP per capita) over 1992-2000

was 2.5%.

CHAPTER 6

2.a. Putting aside the 3.5 million who move from job to job, the average flow is

(1.5+1.7+1.8+1.5)/127=5.1%

b.1.8/7.0=25.7%

c.(1.8+1.3)/7.0=44.3%. Duration is 1/.443 or 2.3 months.

d.(1.5+1.1+1.7+1.3)/66.7=5.6=8.4%.

e.As a percentage of flows into the labor force, new workers account for

0.4/(1.5+1.8)=12%. As a percentage of flows into and out of the labor force, new workers account for 0.4/5.6=7%.

5.a.The computer network administrator has more bargaining power. She is much harder to replace.

b.The rate of unemployment is a key statistic. For example, when there are many unemployed workers it becomes easier for firms to find replacements. This reduces the bargaining power of workers.

c.Given the constant returns to labor assumption, the real wage is always determined by the

price setting relation alone. Worker bargaining power has no effect.

7.a.EatInEatOut

employment70 95

unemployment 5 5

labor force75100

unemployment rate6.7%5%

participation rate75%100%

Measured GDP is higher in EatOut.

b.Measured employment, the measured labor force, the measured participation rate, and

measured GDP increasae in EatIn. Unemployment is unchanged, but the measured unemployment rate falls.

c.It is difficult to measure the value of work at home. In this case, you could attempt to

value food preparation at home by using the market price of food preparation in restaurants (assuming that eating at home has the same value for a given meal as eating out). This would be difficult in EatIn before there are restaurants. Likewise, you could count workers involved in food preparation at home as employed.

d.If food preparation at home is counted in GDP and workers involved in food preparation

at home are counted as employed, then the labor market statistics and measured GDP would be the same in the two economies and the experiment in part (b) would have no effect.

8. a.2/3=67%; (2/3)2= 44%; (2/3)6 = 9%

b.2/3

c.second month: (2/3)2=44%; sixth month: (2/3)6 = 9%

d.Average proportion 27 weeks or more over 1990-1999= 16.1%

2000:11.4%2003:22.1%

2001:11.8%2004:21.8%

2002:18.3%

Long-term unemployed exit unemployment less frequently than the average.

9.a-b. Answers will depend on when the page is accessed.

c.The decline in unemployment does not equal the increase in employment, because the labor force is not constant.

CHAPTER 7

2.a.IS right, AD right, AS up, LM up, Y same, i up, P up

b.IS left, AD left, AS down, LM down, Y same, i down, P down

4.a.Money is neutral in the sense that the nominal money supply has no effect on output or the interest rate in the medium run. Output returns to its natural level. The interest rate is determined by the position of the IS curve and the natural level of output. Despite the neutrality of money in the medium run, an increase in money can increase output and reduce the interest rate in the short run. In particular, expansionary monetary policy can be used to speed up the economy's return to the natural level of output when output is low.

b.In the medium run, investment and the interest rate both change with fiscal policy.

c.False. Labor market policies, such as unemployment insurance, can affect the natural level of output.

6.a. The LM curve is flat.

b.No effect.

c. The AD curve is vertical. A change in P, which affects M/P, has no effect on the interest rate or output.

d. There is no effect on output in the short run or the medium run. Since the money stock does not affect the interest rate, it does not affect output.

11.a.1959:IV – 1969:IV 52.9%

1969:IV – 1979:IV38.2%

1979:IV – 1989:IV35.1%

1989:IV – 1999:IV37.6%

b.The 70s, 80s, and 90s look remarkably similar. The 60s look most unusual.

Note, although the problem did not ask for the growth rates of per capita real GDP, the results

would be similar. The growth rates of per capita GDP are:

1959:IV – 1969:IV 33.9%

1969:IV – 1979:IV24.4%

1979:IV – 1989:IV23.0%

1989:IV – 1999:IV21.8%