Problems for Macroeconomics, 2/e

Blanchard Macroeconomia 3 edio

Answers to end-of-chapter problems

Chapter 1

Quick Check

1. a.True.

b.True.

c. True/Uncertain. Average growth is lower since 1973. However, since the mid-1990s, output per worker has growth at about the pre-1973 rate. It's too soon to tell whether this marks a return to pre-1973 growth rates or simply a few lucky years.

d.True.

e.False.

f.False.

2. a.

1960-2000 2001-2002

US

3.5% 0.9%

EU

3.1% 1.6%

Japan

5.5% -0.9%

b. Probably closer to long-run average, because averages over short time periods reflect business cycles. However, Japan was growing exceptionally fast in the early postwar period as it caught up to the United States. Even if Japan recovers from its current slump over the next decade, it may not resume growth as high as its previous average.

3. a.Low unemployment might lead to an increase in inflation.

b. Although measurement error may contribute to the measured slowdown in growth, there are other relevant issues, including the productivity of new research and the accumulation of new capital. c. Although labor market rigidities may be important, it is also important to consider that these rigidities may not be excessive, and that high unemployment may arise from flawed macroeconomic policies.

d.Although poor regulation of the financial system may be contributing to the length of Japan's slump, most economists believe that the collapse in Japanese asset prices triggered the economic downturn. Moreover, tightening regulation would likely involve more pain in the short run since some banks and firms would be forced to close.

e.Although the Euro will remove obstacles to free trade between European countries, each country will be forced to give up its own monetary policy.

Dig Deeper

4. Discussion question.

5.a.10 years: (1.01)10=1.10 or 10 % higher; 20 years: 22% higher;

50 years: 64% higher

b.29%; 67%; 261% higher

c. Take output per worker as a measure of the standard of living.

10 years: 1.29/1.1=1.17, so the standard of living would be about 17% higher;

20 years: 37% higher; 50 years: 120% higher

d. No. Labor productivity growth fluctuates a lot from year to year. The last few years may represent good luck. It is too soon to tell whether there has been a change in the trend observed since 1973.

6. 9.9(1.03)t=1.1(1.08)t

9=(1.049)t

t = ln(9)/ln(1.049) 46 yrs

Explore Further

7. a-c. As of June 2002, there have been 8 recessions. The numbers are seasonally-

adjusted annual percentage growth rates of GDP in chained 1996 dollars.

1949:1

-5.5

1974:3

-4.4

1949:2

-1.1

1974:4

-2.2

1975:1

-5.0

1953:3

-2.5

1953:4

-6.3

1980:2

-7.9

1954:1

-2.0

1980:3

-0.6

1957:4

-4.1

1981:4

-4.6

1958:1

-10.3

1982:1

-6.5

1969:4

-7.9

1990:3

-0.7

1970:1

-0.6

1990:4

-3.2

1991:1

-2.0

d. No. Growth rates for 2001:

2001:1 1.3%

2001:2

0.3%

2001:3

-1.3%

2001:4

1.7%

8. a-b.% point increase in unemployment rate for the 8 recessions

1949

1.9

1974-753.1

1953-54

3.1

1980

0.6

1957-58

2.2

1981-821.1

1969-70

0.7

1990-911.3

The unemployment rate increased by 1.4 percentage points between January 2001 and

January 2002.

Chapter 2Quick Check

1.a. False.

b. Uncertain: real or nominal GDP.

c. True.

d. True.

e. False. The level of the CPI means nothing. Its rate of change tells us about inflation.

f. Uncertain. Which index is better depends on what we are trying to measureinflation faced by consumers or by the economy as a whole.

2.a. +$100; Personal Consumption Expenditures

b.no change: intermediate good

c. +$200 million; Gross Private Domestic Fixed Investment

d.+$200 million; Net Exports

e.no change: the jet was already counted when it was produced, i.e., presumably when Delta (or some other airline) bought it new as an investment.

3.a. $1,000,000 the value of the silver necklaces.

b.1st Stage: $300,000. 2nd Stage: $1,000,00-$300,000=$700,000.

GDP: $300,000+$700,000=$1,000,000.

c.Wages: $200,000 + $250,000=$450,000.

Profits: ($300,000-$200,000)+($1,000,000-$250,000-300,000)

=$100,000+$450,000=$550,000.

GDP: $450,000+$550,000=$1,000,000.

4. a.2001 GDP: 10*$2,000+4*$1,000+1000*$1=$25,000

2002 GDP: 12*$3,000+6*$500+1000*$1=$40,000

Nominal GDP has increased by 60%.

b.2001 real (2001) GDP: $25,000

2002 real (2001) GDP: 12*$2,000+6*$1,000+1000*$1=$31,000

Real (2001) GDP has increased by 24%.

c.2001 real (2002) GDP: 10*$3,000+4*$500+1,000*$1=$33,000

2002 real (2002) GDP: $40,000.

Real (20021) GDP has increased by 21.2%.

d.The answers measure real GDP growth in different units. Neither answer is incorrect, just as measurement in inches is not more or less correct than measurement in centimeters.

5.a. 2001 base year:

Deflator(2001)=1; Deflator(2002)=$40,000/$31,000=1.29

Inflation=29%

b. 2001 base year:

Deflator(2001)=$25,000/$33,000=0.76; Deflator(2002)=1

Inflation=(1-0.76)/0.76=.32=32%

c. Analogous to 4d.

6.a. 2001 real GDP = 10*$2,500 + 4*$750 + 1000*$1 = $29,000

2002 real GDP = 12*$2,500 + 6*$750 + 1000*$1 = $35,500

b.(35,500-29,000)/29,000 = .224 = 22.4%

c.Deflator in 2001=$25,000/$29,000=.86

Deflator in 2002=$40,000/$35,500=1.13

Inflation = (1.13 -.86)/.86 = .314 = 31.4%.

d.Yes, see appendix for further discussion.

Dig Deeper

7.a.The quality of a routine checkup improves over time. Checkups now may include EKGs, for example. Medical services are particularly affected by this problem due to constant improvements in medical technology.

b. You need to know how the market values pregnancy checkups with and without ultra-sounds in that year.

c. This information is not available since all doctors adopted the new technology simultaneously. Still, you can tell that the quality-adjusted increase will be lower than 20%.

8. a. Measured GDP increases by $10+$12=$22. (Strictly, this involves mixing the final goods and income approaches to GDP. Assume here that the $12 per hour of work creates a final good worth $12.)

b. True GDP should increase by much less than $22 because by working for an extra hour, you are no longer producing the work of cooking within the house. Since cooking within the house is a final service, it should count as part of GDP. Unfortunately, it is hard to measure the value of work within the home, which is why measured GDP does not include it.

9. Answers will vary depending on the website is accessed.

Chapter 3Quick Check

1.a.True.

b.False. Government spending without transfers was 18% of GDP without transfers.

c.False. The propensity to consume must be less than one for our model to be well defined.

d.True.

e.False.

f.False. The increase in output is one times the multiplier.

g.True.

2.a. Y=160+0.6*(Y-100)+150+150

Y=1000

b. YD=Y-T=1000-100=900

c.C=160+0.6*(900)=700

3. a.Equilibrium output is 1000. Total demand=C+I+G=700+150+150=1000. Total demand equals production. That is the equilibrium condition used to solve for output.

b.Output falls by: 40*multiplier = 40/.4=100. So equilibrium output is now 900. Total demand=C+I+G=160+0.6*(800)+150+110=900. Again, total demand equals production.

c.Private saving=Y-C-T=900-160-0.6*(800)-100=160. Public saving =T-G=-10. National saving (or in short, saving) equals private plus public saving, or 150. National saving equals investment. This statement is mathematically equivalent to the equilibrium condition that total demand equals production. Thus, national saving equals investment is an alternative statement of the equilibrium condition.

Dig Deeper

4.a.Y increases by 1/(1-c1)

b.Y decreases by c1/(1- c1)

c.The answers differ because spending affects demand directly, but taxes affect demand

through consumption, and the propensity to consume is less than one.

d.The change in Y equals 1/(1-c1) - c1/(1- c1) = 1. Balanced budget changes in G and T are

not macroeconomically neutral.

e. The propensity to consume has no effect because the balanced budget tax increase aborts the multiplier process. Y and T both increase by on unit, so disposable income, and hence consumption, do not change.

5. a. Y=c0+c1YD+I+G implies

Y=[1/(1-c1+c1t1)]*[c0-c1t0+I+G]

b.The multiplier = 1/(1-c1+c1t1)