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1、Problems1.HA countrys rate of economic growth is determined solely by the amount of resourcesavailable to the country.H Comment on this statement.Increases in the availability of resources,that is,labor and capital used in the production ofgoods and services account for only part o f a nations econo
2、mic growth.The efficiency withwhich these factors o f production are used also affects economic growth.Increases in theefficiency of production result from increases in the education and skill levels of the labor forceand from newer and more efficient technology.In addition,the factors of production
3、 are not fullyemployed all the time.During an expansion or recovery,the use of the factors of productionincreases,which leads to an increase in production and output.2.In the 1960s,increases in the rate of unemployment were generally associated with decreasesin the inflation rate and vice versa.But
4、in the 1970s and 1980s unemployment and inflationoften moved in the same direction.How can you explain this?A shift in aggregate demand causes the unemployment rate and the inflation rate to move inopposite directions,whereas a shift in aggregate supply causes unemployment and inflationto move in th
5、e same direction.Most disturbances in the 1960s came from the demand side,while many o f the disturbances in the 1970s and 1980s came from the supply side.3.nSince the long-run AS-curve is vertical,vve can conclude that the total real output of a nationcannot grow in the long run.Comment on this sta
6、tement.The AD-AS framework is a static framework that assumes that the level of potential GDP is fixed.However,the potential GDP of a nation grows over time as the amount of available resources or theefficiency with which these resources are used increases.Figure 1-4 in the text clearly indicates th
7、atthe long-run(vertical)AS-curve moves to the right by a small percentage each year.4.Long-run growth can best be studied by focussing on the reasons for business cycles.0Comment on this statement.Growth theory focuses primarily on the accumulation of inputs and improvements in technology thatallow
8、for an increased standard of living over time.Since growth theory tries to explain the averagegrowth rate of an economy over many years,it ignores the short-run fluctuations(recessions and booms)that occur over the course of business cycles.5.In the very short run real output is fixed and therefore
9、any increase in aggregate demandwill simply increase the price level but not affect how many goods and services are produced inan economy.*Comment on this statement.The short-run AS-curve is completely horizontal,based on the assumption that prices areconstant.An increase in aggregate demand will th
10、erefore increase the level of output but will notaffect the price level.It follows therefore that in the short run the level of output is solelydetermined by aggregate demand.6.“There is always a clear tradeoff between unemployment and inflation.”Comment.The short-run Phillips curve describes an emp
11、irical relationship between wage and price inflationand the rate of unemployment.This curve shows that the higher the rate of unemployment,thelower the rate of inflation and vice versa(at least in the short run).However,in the long runthere is no clear-cut tradeoff between inflation and unemployment
12、.The economic events of the1970s and 1980s showed us that unemployment and inflation can increase or decreasesimultaneously.7.The index of leading economic indicators is supposed to signal f uture developments in theeconomy and is calculated from variables in different sectors of the economy.Pick on
13、e leadingeconomic indicator from each of the following sectors and brief ly state the rationale forincluding this indicator in the calculation of the index:(1)the labor sector,(2)business activity,(3)the financial sector,and(4)residentialconstruction.The answer to this question is student specific.H
14、ere is a sample answer.The labor sector:Employment figures as well as the unemployment rate should be used to look for changes in thelabor sector.The unemployment rate is more often discussed in the media,but the employmentfigures have smaller cyclical variations and are thus a better indicator of l
15、abor market conditions.Business activity:New orders,changes in inventories,capacity utilization,and industrial production are often usedto interpret business activity.When using inventory changes it is important to distinguishbetween desired inventory changes,which may reflect changes in business ex
16、pectations,andundesired inventory changes that reflect changes in the demand for the product.The financial sector:Stock market activity,changes in money supply,or credit conditions can be used to show trendsin financial markets.While the relationship between changes in stock values and the economy i
17、snot as close as it used to be,a continued increase in stock prices generally reflects increasedoptimism about future economic conditions.It also means an increase in wealth for stockholdersand easier access to funds for firms wishing to make new investments.Residential construction:A change in new
18、building permits or housing starts may be the first sign of changing economicconditions.The housing sector is very sensitive to interest rate changes and tends to be indicativeof other sectors of the economy,which often react in a similar way although to a lesser degreeand with a time lag.Briefly di
19、scuss the usefulness of each of the following as leading economic indicators:(i)inventory changes,(ii)the GDP-deflator,(iii)the unemployment rate,(iv)the DowJones Industrial Average.Desired inventory changes reflect changes in business expectations and can be used as a leadingeconomic indicator.But
20、undesired inventory changes reflect changes in demand for the product and aretherefore a lagging economic indicator.Only if one can separate out desired from undesired inventorychanges,will it be possible to spot more clearly signs of an upcoming boom or recession.The GDP-deflator is the most comple
21、te price index,since it measures price changes of all final goodsand services currently produced in a country.But the GDP-deflator is a lagging indicator,showing whathas happened over the last quarter.In addition,initial GDP data tend to be fairly unreliable and have to befrequently revised.The unem
22、ployment rate has fairly small cyclical variations and is used as a measure for variations inthe demand for labor.Changes in the unemployment rate also correspond well with changes in GDP.Butthe unemployment rate is a concurrent indicator.Changes in stock values generally reflect changes in expectat
23、ions of financial investors aboutdividends.If stock values go up people may feel wealthier and thus consumer spending may increase.Firms may have an easier time issuing new stock and thus they may invest more.In this case,we canexpect an economic upswing.However,changes in stock values often may sim
24、ply be due to speculativebehavior and may not be related to real economic activity.9.In each of the three pairs below,which variable would you choose(and why)as a leading economicindicator:(i)labor productivity or the unemployment rate(ii)the CPI or the PPI(iii)stock market changes or housing starts
25、Labor productivity generally shows long run trends in the labor market and will determine wages andtherefore living standards.It is a leading indicator,but cannot be easily used for forecasting.The unemployment rate has fairly small cyclical variations and is used as a measure for variations inthe d
26、emand for labor.It is a very accurate measure of economic performance at least as far as the laborsector is concerned.However,the unemployment rate is a concurrent and not a leading indicator.The CPI measures the price increase of a fixed market basket of 386 goods and services purchased byan averag
27、e urban family.The CPI is easily available and is supposed to measure cost of living increases.However,the CPI is a concurrent indicator.The PPI measures average price changes of a market basket of over 1,00()intermediate goods up tothe retail stage.It is relatively easily available and shows future
28、 price trends with relative accuracy.ThePPI is a leading indicator and does not always correspond exactly with the CPI.Stock market changes reflect changes in expectations of financial investors about dividends arisingfrom a perceived change in economic conditions.If stock values increase consumers
29、may feel wealthier(and thus spend more),and firms have an easier time issuing new stock(and thus invest more).But whilea change in stock values may indicate an upcoming change in economic conditions,it also could simplyhave been caused by speculative behavior.Thus,it is a leading indicator that is,h
30、owever,not alwaysreliable.The demand for housing is very interest sensitive,since mortgage interest payments are a large parthousing costs.Housing starts tend to increase sharply when interest rates drop to low levels,that is,whenthe economy is at the bottom of a recession.A change in housing starts
31、 thus is often seen as a turningpoint in the economy,since other sectors in the economy are expected to react similarly to changes ininterest rates but with a lag and to a lesser degree.The increase in construction work naturally alsostimulates economic activity in other sectors of the economy.Thus
32、housing starts is seen as a fairlyreliable leading economic indicator.CHAPTER 2Solutions to Problems in the Textbook:Conceptual Problems:1.Government transfer payments(TR)do not arise out of any production activityand are thus not counted in the value of GDP.If the government hired thepeople who cur
33、rently receive transfer payments,then their wages would becounted as part of government purchases(G),which is counted in GDP.Therefore GDP would rise.2.a.If the firm buys a car for an executives use,the purchase counts as investment(I).But if the firm pays the executive a higher salary and she then
34、buys a car,the purchase is counted as consumption(C).2.b.The services that a homemaker provides are not counted in GDP(regardless oftheir value).However,if an individual officially hires his or her spouse toperform household duties at a certain wage rate,then the wages earned will becounted in GDP a
35、nd GDP will increase.2.c.If you buy a German car,consumption(C)will increase but net exports(NX=X-Q)will decrease.Overall GDP will increase by the value added at theforeign car dealership,since the import price is likely to be less than the salesprice.If you buy an American car,consumption and thus
36、GDP will increase.(Note:If the car you buy comes out of the car dealers inventory,then theincrease in C will be partially offset be a decline in I,and GDP will again onlyincrease by the value added.)3.GDP is the market value of all final goods and services currently producedwithin the country.(The U
37、.S.GDP includes the value of the Hondas producedby a Japanese-owned assembly plant that is located in the U.S.,but it does notinclude the value of Nike shoes that are produced by an American-owned shoefactory located in Malaysia.)GNP is the market value of all final goods and services currently prod
38、ucedusing assets owned by domestic residents.(Here the value of the Hondasproduced by a Japanese-owned Honda plant is not counted but the value of theNikes by the American-owned shoe plant is.)Neither is necessarily a better measure of the output of a nation.The actualvalue of the GDP and GNP for th
39、e U.S.is fairly close.4.The NDP(net domestic product)is defined as GDP minus depreciation.Depreciation measures the value of the capital that wears out during theproduction process and has to be replaced.Therefore NDP comes closer tomeasuring the net amount of goods produced in this country.If this
40、is what youwant to measure,then NDP should be used.5.Increases in real GDP do not necessarily mean increases in welfare.Forexample,if the population of a country increases by more than real GDP,thenthe population of the country is on average worse off.Also some increases inoutput come from welfare r
41、educing events.For example,increased pollutionmay cause more lung cancer,and the treatment of the lung cancer willcontribute to GDP.Similarly,an increase in crime may lead to overtime workfor police officers,whose increased salary will increase GDP.But the welfareof the people in the country may not
42、 have increased in either case.On the otherhand,GDP does not always accurately measure quality improvements in goodsor services(faster computers or improved health care)that improve peopleswelfare.6.The CPI(consumer price index)and the PPI(producer price index)are bothmeasured by looking at a certai
43、n market basket.The CPIs basket containsmostly finished goods and services that consumers tend to buy regularly in theirdaily lives.The PPFs basket contains raw materials and semi-finished goods,that is,it measures costs to the producer of a product and its first user.The CPIis a concurrent economic
44、 indicator,whereas the PPI is a leading economicindicator.7.The GDP-deflator is a price index that covers the average price increase of allfinal goods and services currently produced within an economy.It is defined asthe ratio of current nominal GDP to current real GDP.Nominal GDP ismeasured in curr
45、ent dollars,while real GDP is measured in so-called base-yeardollars.Even though early estimates of the GDP-deflator tend to be unreliable,the GDP-deflator can be a more useful price index than the CPI or PPI(both ofwhich are fixed market baskets).This is true for two reasons:first it measures amuch
46、 wider cross-section of goods and services;second,a fixed market basketcannot account for people substituting away from goods whose relative priceshave changed,while the GDP-deflator,which includes all goods and servicesproduced within the country,can.8.If nominal GDP has suddenly doubled,it is most
47、 likely due to an increase inthe average price level.Therefore,the first thing you would want to check is byhow much the GDP-deflator has changed,to calculate by how much real output(GDP)has changed.If nominal GDP and the GDP-deflator have both doubled,then real GDP should be the same.9.Assume the l
48、oan you made yields you an annual nominal return of 7%.If therate of inflation is 4%,then your rate of return in real terms is only 3%.If,onthe other hand,if inflation rate is 10%,then you will actually get a negative realrate of return,that is,you will lose 3%of your purchasing power.One way toprot
49、ect yourself against such a loss of purchasing power is to adjust the interestrate for inflation,that is,to index the loan.In other words,you can require that,in addition to the specified interest rate of the loan of,lets say,3%,theborrower also has to pay an inflation premium equal to the percentag
50、e change inthe CPI.In this case,a real rate of return of 3%would be guaranteed.Technical Problems:1.The text calculates the change in real GDP in 1992 prices in the following way:RGDPoi-RGDP92/RGDP92=3.50-1.50/1.50=1.33=133%.To calculate the change in real GDP in 2001 prices,we first have to calcula