MacroEcon: Chapter 11 Homework

1) According to the graph, the change in exports demand produces ______ level of real GDP and ______ real interest rate. 2) Given the relationship between net capital outflows and the domestic real interest​ rate, it can be determined that net capital outflows will ______.

1) higher, higher 2) decrease

Which of the following were shocks that the US economy experienced during 2007-2009 period?

A decrease in real estate​ values, which affected the IS curve. A financial​ crisis, which increased the risk premium investors required before making loans. A surge in oil​ prices, which affected only the Phillips curve.

Why does the article argue that a flatter Phillips curve may be bad news if there is high​ inflation? With a relatively flat Phillips​ curve, it would require _____ in unemployment to significantly reduce inflation

a large increase

According to the Phillips curve​ equation, it is possible to have a high inflation rate even if the unemployment rate is high if

a negative supply shock occurs expected inflation is high

Based on the experience of countries leaving the gold standard and devaluing their currencies during the Great​ Depression, the ultimate effect on the Greek economy of abandoning the euro may be

a reversal of its economic decline.

What is the effect on real GDP and inflation Real GDP ______ and the inflation rate ______.

decreases, changes in an indeterminate way

What policy should the Fed pursue to attempt to prevent​ deflation?

decreasing the target interest rate

What causes a movement along the Phillips curve with the output gap on the horizontal​ axis?

demand shocks

what couses the phillips curve to shift?

supply shocks changes in expected inflation

a postive supply shock will cause

a downwards shift on the output gap phillips curve

A column published in the New York Times in 2012 observes that​ "Greece suffers from a crippling competitiveness gap and is locked into the​ euro." 1) What is a "competitiveness gap"? 2) Was​ Greece's competitiveness gap connected to its use of the​ euro?

1) A divergence between rates of change in productivity among trading partners. A divergence between the inflation rates among trading partners. A divergence between production costs among trading partners. 2)In​ part, yes, since​ Greece's participation in the monetary union prevented it from using monetary policy to reduce domestic inflation.

ome economists were concerned that the financial crisis of 2007 minus −2009 would lead to problems with deflation. The Federal Reserve Bank of San​ Francisco's Economic Letter​ stated: ​"A popular version of the​ well-known Phillips curve model of inflation predicts that we are on the cusp of a deflationary spiral in which prices will fall at​ ever-increasing rates over the next several​ years." Source​: ​"The Risk of​ Deflation," FRBSF Economic Letter​, March​ 27, 2009. *How might a deflationary spiral occur in the Phillips curve​ model? 1)Falling prices can cause the expectation that prices will _____. This in turn shifts the Phillips curve toward _____ inflation rates, and as prices ____, inflation expectations _____ again, and so forth. 2) a deflationary spiral did not happen because inflation expectations________.

1) fall further, lower, fall, fall 2) were well-anchored

Explain how the equilibrium real interest​ rate, net capital​ outflows, and the level of net exports are determined in an open economy. 1) In an open exonomy the equilibrium real interest rate is set by _____. 2) Given the real interest rate, the relative attrectiveness of domestic assets is determined, and this sets the level of _____. 3) Finally, net exports become determined since they are, by definition, equal to_____.

1) the intersection of the IS and MP curves 2) net capital outflows 3) net capital outflows

The Greek unemployment rate rose from​ 7.5% during the first quarter of 2008 to​ 21.7% during the second quarter of 2012. Because Greece uses the euro rather than its own​ currency, the country is not able to devalue its currency in an attempt to stimulate the economy. Suppose Greece abandoned the euro as its currency and reintroduced its former​ currency, the​ drachma, with an exchange rate of 1 euro​ = 1 drachma. In the open economy version of the IS-MP model given to the​ right, show the effect on​ Greece's output gap and inflation rate if the country then devalued the drachma to 1 euro​ = 2 drachma. 2) According to the​ graph, the devaluation will result in an output gap that is _____ and an inflation rate that is ________.

Graph: higher interest rates 2) larger, higher

Recent evidence suggests that the Phillips curve has flattened. An article in the Economist​ states: ​"A flatter Phillips curve is good news when unemployment is falling. But it also implies bad news if inflation rises​ significantly." ​Source: "Curve​ Ball," Economist​, September​ 28, 2006. If firms find it difficult to raise​ prices, why might the result be a flatter Phillips​ curve?

If firms cannot easily raise​ prices, then unemployment can fall without a significant rise in​ inflation, and the Phillips curve is relatively flat.

What effect would an increase in productivity have on the Phillips curve? What effect would the productivity increase have on inflation?

PC1 down to PC 2 the productivity increase would decrease inflation

What is different about the MP curve in a fixed exchange rate system as compared to a floating exchange rate​ system?

With both systems the MP curve is​ horizontal, but in the fixed exchange rate system a lower limit exists to its downward shifts.

How would the effect of a demand shock be different if the Phillips curve is relatively​ flat? A given increaes in demand would result in a relatively _______ increse in inflation

smaller

What is the equation for the output gap Phillips​ curve?

πt=πet+bYt−st

The Phillips curve equation is given​ (in the​ textbook) by

πt=πet-a(Ut-Un) −st

The output gap can be difficult to measure because potential GDP must be​ estimated, and​ economists' estimates differ. In​ 2012, the Congressional Budget Office​ (CBO) estimated that potential GDP was about​ $1 trillion lower than the​ CBO's 2007 forecast had predicted. 1) Was the output gap larger or smaller​ (in absolute​ value) in 2012 than it would have been if the​ CBO's 2007 forecast had been​ correct? 2) If the​ CBO's 2007 forecast had been​ correct, is it likely that the inflation rate in 2012 would have been higher or lower than it actually​ was?

​1) Smaller, since output would have been even farther below potential had the 2007 forecast been correct. 2) ​Lower, since a larger negative persistent output gap translates into even more slack in resource markets and hence less pressure on costs and prices.